UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 2006
Commission File Number 0-2525
Huntington Bancshares Incorporated
     
Maryland   31-0724920
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
There were 237,531,790 shares of Registrant’s without par value common stock outstanding on July 31, 2006.
 
 


Huntington Bancshares Incorporated
INDEX
         
Part I.  
Financial Information
   
   
 
   
Item 1.  
Financial Statements (Unaudited)
   
   
 
   
      3
   
 
   
      4
   
 
   
      5
   
 
   
      6
   
 
   
      7
   
 
   
Item 2.     27
   
 
   
Item 3.     97
   
 
   
Item 4.     97
   
 
   
Part II.      
   
 
   
Item 2.     97
   
 
   
Item 4.     97
   
 
   
Item 6.     98
   
 
   
Signatures  
 
  99
  EX-10(E)
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2

2


Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
                         
    June 30,     December 31,     June 30,  
(in thousands, except number of shares)   2006     2005     2005  
    (Unaudited)             (Unaudited)  
Assets
                       
Cash and due from banks
  $ 876,121     $ 966,445     $ 976,432  
Federal funds sold and securities purchased under resale agreements
    365,592       74,331       121,310  
Interest bearing deposits in banks
    37,576       22,391       22,758  
Trading account securities
    113,376       8,619       328,715  
Loans held for sale
    298,871       294,344       395,053  
Investment securities
    5,124,682       4,526,520       3,849,955  
Loans and leases:
                       
Commercial and industrial loans
    7,473,158       6,809,208       6,206,393  
Commercial real estate loans
    4,558,610       4,036,171       4,518,875  
Automobile loans
    2,059,836       1,985,304       2,045,771  
Automobile leases
    2,042,215       2,289,015       2,458,432  
Home equity loans
    4,888,958       4,638,841       4,683,577  
Residential mortgage loans
    4,739,814       4,193,139       4,152,203  
Other consumer loans
    591,990       520,488       501,897  
 
Total loans and leases
    26,354,581       24,472,166       24,567,148  
Allowance for loan and lease losses
    (287,517 )     (268,347 )     (254,784 )
 
Net loans and leases
    26,067,064       24,203,819       24,312,364  
 
Operating lease assets
    131,943       229,077       353,678  
Bank owned life insurance
    1,070,909       1,001,542       983,302  
Premises and equipment
    365,763       360,677       356,697  
Goodwill
    571,697       212,530       212,200  
Other intangible assets
    64,141       4,956       5,376  
Accrued income and other assets
    1,178,042       859,554       1,071,134  
 
Total assets
  $ 36,265,777     $ 32,764,805     $ 32,988,974  
 
 
                       
Liabilities and shareholders’ equity Liabilities
                       
Deposits in domestic offices
                       
Demand deposits — non-interest bearing
  $ 3,530,828     $ 3,390,044     $ 3,221,352  
Interest bearing
    20,585,420       18,548,943       18,677,408  
Deposits in foreign offices
    476,684       470,688       431,816  
 
Total deposits
    24,592,932       22,409,675       22,330,576  
Short-term borrowings
    2,125,932       1,889,260       1,266,535  
Federal Home Loan Bank advances
    1,271,678       1,155,647       903,864  
Other long-term debt
    2,716,784       2,418,419       3,034,154  
Subordinated notes
    1,255,278       1,023,371       1,046,283  
Allowance for unfunded loan commitments and letters of credit
    38,914       36,957       37,511  
Deferred income tax liability
    615,543       743,655       784,504  
Accrued expenses and other liabilities
    709,560       530,320       954,772  
 
Total liabilities
    33,326,621       30,207,304       30,358,199  
 
 
                       
Shareholders’ equity
                       
Preferred stock — authorized 6,617,808 shares; none outstanding
                 
Common stock — without par value; authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 237,361,333; 224,106,172 and 230,842,020 shares, respectively
    2,552,094       2,491,326       2,487,981  
Less 20,504,922; 33,760,083 and 27,024,235 treasury shares respectively.
    (457,758 )     (693,576 )     (526,814 )
Accumulated other comprehensive loss
    (44,091 )     (22,093 )     (720 )
Retained earnings
    888,911       781,844       670,328  
 
Total shareholders’ equity
    2,939,156       2,557,501       2,630,775  
 
Total liabilities and shareholders’ equity
  $ 36,265,777     $ 32,764,805     $ 32,988,974  
 
      See notes to unaudited condensed consolidated financial statements

3


Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
(in thousands, except per share amounts)   2006   2005   2006   2005
 
Interest and fee income
                               
Loans and leases
                               
Taxable
  $ 445,924     $ 352,341     $ 845,270     $ 677,936  
Tax-exempt
    520       383       1,029       695  
Investment securities
                               
Taxable
    60,517       37,355       112,960       75,590  
Tax-exempt
    5,894       4,341       11,606       8,648  
Other
    9,048       7,906       15,825       15,562  
 
Total interest income
    521,903       402,326       986,690       778,431  
 
Interest expense
    173,032       104,559       321,346       193,727  
Deposits
                               
Short-term borrowings
    20,969       7,086       35,634       11,914  
Federal Home Loan Bank advances
    17,077       8,663       31,565       17,346  
Subordinated notes and other long-term debt
    48,630       40,118       92,270       78,346  
 
Total interest expense
    259,708       160,426       480,815       301,333  
 
Net interest income
    262,195       241,900       505,875       477,098  
Provision for credit losses
    15,745       12,895       35,285       32,769  
 
Net interest income after provision for credit losses
    246,450       229,005       470,590       444,329  
 
Operating lease income
    14,851       38,097       34,241       84,829  
Service charges on deposit accounts
    47,225       41,516       88,447       80,934  
Trust services
    22,676       19,113       43,954       37,309  
Brokerage and insurance income
    14,345       13,544       29,538       26,570  
Bank owned life insurance income
    10,604       10,139       20,846       20,243  
Other service charges and fees
    13,072       11,252       24,581       21,411  
Mortgage banking income
    20,355       (2,376 )     38,187       9,685  
Securities gains (losses), net
    (35 )     (343 )     (55 )     614  
Gains on sales of automobile loans
    532       254       980       254  
Other income
    19,394       24,974       41,834       42,371  
 
Total non-interest income
    163,019       156,170       322,553       324,220  
 
Operating lease expense
    10,804       28,879       25,411       66,827  
Personnel costs
    137,904       124,090       269,461       248,071  
Net occupancy
    17,927       17,257       35,893       36,499  
Outside data processing and other services
    19,569       18,113       39,420       36,883  
Equipment
    18,009       15,637       34,512       31,500  
Professional services
    6,292       9,347       11,657       18,806  
Marketing
    10,374       6,934       17,675       12,770  
Telecommunications
    4,990       4,801       9,815       9,683  
Printing and supplies
    3,764       3,293       6,838       6,387  
Amortization of intangibles
    2,992       204       4,067       408  
Other expense
    19,734       19,581       36,025       38,579  
 
Total non-interest expense
    252,359       248,136       490,774       506,413  
 
Income before income taxes
    157,110       137,039       302,369       262,136  
Provision for income taxes
    45,506       30,614       86,309       59,192  
 
Net income
  $ 111,604     $ 106,425     $ 216,060     $ 202,944  
 
 
                               
Average common shares — basic
    241,729       232,217       236,349       232,021  
Average common shares — diluted
    244,538       235,671       239,451       235,362  
 
                               
Per common share
                               
Net income — basic
  $ 0.46     $ 0.46     $ 0.91     $ 0.87  
Net income — diluted
    0.46       0.45       0.90       0.86  
Cash dividends declared
    0.250       0.215       0.500       0.415  
      See notes to unaudited condensed consolidated financial statements

4


Condensed Consolidated Statements of Changes in Shareholders’ Equity
                                                         
                                    Accumulated        
                                    Other        
    Common Stock   Treasury Shares   Comprehensive   Retained    
(in thousands)   Shares   Amount   Shares   Amount   Income (Loss)   Earnings   Total
 
Six Months Ended June 30, 2005 (Unaudited):
                                                       
Balance, beginning of period
    257,866     $ 2,484,204       (26,261 )   $ (499,259 )   $ (10,903 )   $ 563,596     $ 2,537,638  
Comprehensive Income:
                                                       
Net income
                                            202,944       202,944  
Unrealized net gains on investment securities arising during the period, net of reclassification of net realized gains
                                    5,248               5,248  
Unrealized gains on cash flow hedging derivatives
                                    4,935               4,935  
 
                                                       
Total comprehensive income
                                                    213,127  
 
                                                       
Cash dividends declared ($0.415 per share)
                                            (96,212 )     (96,212 )
Treasury shares purchased
                    (1,818 )     (44,178 )                     (44,178 )
Stock options exercised
            1,882       852       16,159                       18,041  
Other
            1,895       203       464                       2,359  
 
 
                                                       
Balance, end of period (Unaudited)
    257,866     $ 2,487,981       (27,024 )   $ (526,814 )   $ (720 )   $ 670,328     $ 2,630,775  
 
 
                                                       
Six Months Ended June 30, 2006 (Unaudited):
                                                       
Balance, beginning of period
    257,866     $ 2,491,326       (33,760 )   $ (693,576 )   $ (22,093 )   $ 781,844     $ 2,557,501  
Comprehensive Income:
                                                       
Net income
                                            216,060       216,060  
Cumulative effect of change in accounting principle for servicing financial assets, net of tax of $6,521
                                            12,110       12,110  
Unrealized net losses on investment securities arising during the period, net of reclassification of net realized gains
                                    (35,707 )             (35,707 )
Unrealized gains on cash flow hedging derivatives
                                    13,709               13,709  
 
                                                       
Total comprehensive income
                                                    206,172  
 
                                                       
Cash dividends declared ($0.50 per share)
                                            (121,103 )     (121,103 )
Shares issued pursuant to acquisition
            53,366       25,350       522,390                       575,756  
Stock based compensation expense
            8,547                                       8,547  
Treasury shares purchased
                    (12,931 )     (303,943 )                     (303,943 )
Stock options exercised, net of related tax effects
            (1,196 )     880       18,445                       17,249  
Other
            51       (44 )     (1,074 )                     (1,023 )
 
 
                                                       
Balance, end of period (Unaudited)
    257,866     $ 2,552,094       (20,505 )   $ (457,758 )   $ (44,091 )   $ 888,911     $ 2,939,156  
 
See notes to unaudited condensed consolidated financial statements.

5


Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    Six Months Ended
    June 30,
(in thousands of dollars)   2006   2005
 
Operating activities
               
Net income
  $ 216,060     $ 202,944  
Adjustments to reconcile net income to net cash provided by operating activites:
               
Provision for credit losses
    35,285       32,769  
Depreciation on operating lease assets
    23,666       61,263  
Amortization of mortgage servicing rights
          9,948  
Other depreciation and amortization
    37,679       39,153  
Mortgage servicing rights impairment charges
          6,471  
Mortgage servicing rights valuation adjustment
    (10,669 )      
Stock-based compensation expense
    8,547        
Deferred income tax (benefit) expense
    (123,830 )     4,305  
Increase in trading account securities
    (27,290 )     (19,085 )
Originations of loans held for sale
    (1,318,453 )     (1,065,372 )
Principal payments on and proceeds from loans held for sale
    1,313,926       893,788  
Losses (gains) on sales of investment securities
    55       (614 )
Gains on sales/securitizations of loans
    (980 )     (254 )
Increase of cash surrender value of bank owned life insurance
    (20,846 )     (20,243 )
Increase (decrease) in payable to investors in sold loans
    4,498       (134,561 )
Other, net
    (235,146 )     (113,052 )
 
Net cash used for operating activities
    (97,498 )     (102,540 )
 
 
               
Investing activities
               
Increase in interest bearing deposits in banks
    (12,089 )     (360 )
Net cash received for acquisition
    66,507        
Proceeds from:
               
Maturities and calls of investment securities
    241,871       207,874  
Sales of investment securities
    376,263       1,476,685  
Purchases of investment securities
    (1,024,048 )     (1,273,933 )
Net loan and lease originations, excluding sales
    (246,265 )     (1,056,834 )
Purchases of equipment for operating lease assets
    (10,934 )     (8,353 )
Proceeds from sale of operating lease assets
    82,139       174,427  
Proceeds from sale of premises and equipment
    4,100       989  
Purchases of premises and equipment
    (12,645 )     (28,500 )
Proceeds from sales of other real estate
    6,767       41,899  
 
Net cash used for investing activities
    (528,334 )     (466,106 )
 
 
               
Financing activities
               
Increase in deposits
    495,827       1,562,607  
Increase in short-term borrowings
    157,532       59,302  
Proceeds from issuance of subordinated notes
    250,000        
Proceeds from Federal Home Loan Bank advances
    2,162,050       557,789  
Maturity of Federal Home Loan Bank advances
    (2,148,969 )     (925,013 )
Proceeds from issuance of long-term debt
    935,000        
Maturity of long-term debt
    (635,549 )     (975,000 )
Tax benefits in excess of recognized compensation cost for share-based payments
    668        
Dividends paid on common stock
    (103,096 )     (92,520 )
Repurchases of common stock
    (303,943 )     (44,178 )
Net proceeds from issuance of common stock
    17,249       18,041  
 
Net cash provided by financing activities
    826,769       161,028  
 
Change in cash and cash equivalents
    200,937       (407,618 )
Cash and cash equivalents at beginning of period
    1,040,776       1,505,360  
 
Cash and cash equivalents at end of period
  $ 1,241,713     $ 1,097,742  
 
 
               
Supplemental disclosures:
               
Income taxes paid
  $ 194,505     $ 95,611  
Interest paid
    463,979       279,823  
Non-cash activities
               
Common stock dividends accrued, paid in subsequent quarter
    46,884       39,613  
Stock issued for purchase acquisition
    575,756        
See notes to unaudited condensed consolidated financial statements.

6


Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 — Basis of Presentation
     The accompanying unaudited condensed consolidated financial statements of Huntington Bancshares Incorporated (Huntington or the Company) reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC or Commission) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington’s 2005 Annual Report on Form 10-K (2005 Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.
     Certain amounts in the prior-year’s financial statements have been reclassified to conform to the 2006 presentation.
     For statement of cash flows purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” and “Federal funds sold and securities purchased under resale agreements.”
Note 2 — New Accounting Pronouncements
Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment (Statement No. 123R) — Statement No. 123R was issued in December 2004, requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement No. 123R replaces FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement No.123) , and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Statement No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. Effective January 1, 2006, Huntington has adopted Statement No. 123R. The impact of adoption to Huntington’s results of operations is presented in Note 10.
FASB Statement No. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154) — In May 2005, the FASB issued Statement No. 154, which replaces APB Opinion No. 20, Accounting Changes , and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements . Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this new pronouncement was not material to Huntington’s financial condition, results of operations, or cash flows.
FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 (Statement No. 155) — On February 16, 2006, the FASB issued Statement No. 155, which amends Statement No. 133 to simplify the accounting for certain derivatives embedded in other financial instruments (hybrid financial instruments) by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise required bifurcation, provided that the entire hybrid financial instrument is accounted for on a fair value basis. Statement No. 155 also establishes the requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, which replaces the interim guidance in Derivative Instrument Group Issue D1, Recognition and Measurement of Derivatives: Application of Statement No. 133 to Beneficial Interests in Securitized Financial Assets . Statement No. 155 amends Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities—a replacement of FASB Statement No. 125 (Statement No. 140), to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interests other than another derivative financial instrument. Statement No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006, with earlier adoption allowed. Huntington adopted Statement No. 155 effective January 1, 2006, with no impact to reported financial results.

7


FASB Statement No. 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140 ( Statement No. 156) — In March 2006, the FASB issued Statement No. 156, an amendment of Statement No. 140. This Statement requires all separately recognized servicing rights be initially measured at fair value, if practicable. For each class of separately recognized servicing assets and liabilities, this statement permits Huntington to choose either to report servicing assets and liabilities at fair value or at amortized cost. Under the fair value approach, servicing assets and liabilities are recorded at fair value at each reporting date with changes in fair value recorded in earnings in the period in which the changes occur. Under the amortized cost method, servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are assessed for impairment based on fair value at each reporting date. The statement is effective for fiscal years beginning after September 15, 2006, and allows early adoption as of the beginning of a fiscal year for which the entity has not previously issued interim financial statements. Huntington elected to adopt the provisions of Statement No. 156 for mortgage servicing rights effective January 1, 2006, and has recorded mortgage servicing right assets using the fair value provision of the standard. The adoption of Statement No. 156 resulted in an $18.6 million increase in the carrying value of mortgage servicing right assets as of January 1, 2006. The cumulative effect of this change was $12.1 million, net of taxes, which is reflected as an increase in retained earnings in the Condensed Consolidated Statement of Shareholders’ Equity. (See Note 5.)
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes — In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes . This Interpretation of FASB Statement No. 109, Accounting for Income Taxes , contains guidance on the recognition and measurement of uncertain tax positions. The Company will be required to recognize the impact of a tax position if it is more likely than not that it will be sustained upon examination, based upon the technical merits of the position. The effective date for application of this interpretation is for periods beginning after December 15, 2006. The cumulative effect of applying the provisions of this Interpretation must be reported as an adjustment to the opening balance of retained earnings for that fiscal period. Huntington is currently evaluating the impact this Interpretation will have on its consolidated financial statements.
Proposed FASB amendment to FAS 132, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132R — In March 2006, the FASB issued an Exposure Draft, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. This Exposure Draft would amend the FASB Statements No. 87, 88, 106 and 132R. The intent of the Exposure Draft is to require an employer to recognize in its statement of financial position the overfunded or underfunded status of its defined benefit plans and to recognize as a component of other comprehensive income, net of tax, the actuarial gains and losses and prior service costs and credits that arise during the period. A final statement is expected in the third quarter of 2006. The Company is reviewing the Exposure Draft and evaluating the impact on its consolidated financial statements. Management estimates that, based on the carrying value of its net pension asset at December 31, 2005, the proposed standard would result in a write-down of its pension asset by $155.7 million pre-tax, which would decrease other comprehensive income by $101.2 million in the period that the standard is adopted.
Note 3 — Formal Regulatory Supervisory Agreements
     On March 1, 2005, Huntington announced that it had entered into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), and The Huntington National Bank (Bank) had entered into a formal written agreement with the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreements called for independent third-party reviews, as well as the submission of written plans and progress reports by Management and would remain in effect until terminated by the banking regulators.
     On October 6, 2005, Huntington announced that the OCC had lifted its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. Huntington was verbally advised that it was in full compliance with the financial holding company and financial subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This notification reflected that Huntington and the Bank met both the “well-capitalized” and “well-managed” criteria under the GLB Act.
     On May 10, 2006, Huntington announced that the FRBC notified Huntington’s board of directors that Huntington had satisfied the provisions of the written agreement dated February 28, 2005, and that the FRBC, under delegated authority of the Board of Governors of the Federal Reserve System, had terminated the written agreement.

8


Note 4 — Business Combination
     On March 1, 2006, Huntington completed its merger with Canton, Ohio-based Unizan Financial Corp. (Unizan). Unizan operated 42 banking offices in five metropolitan markets in Ohio: Canton, Columbus, Dayton, Newark, and Zanesville.
     Under the terms of the merger agreement announced January 27, 2004, and amended November 11, 2004, Unizan shareholders of record as of the close of trading on February 28, 2006, received 1.1424 shares of Huntington common stock for each share of Unizan. The assets and liabilities of the acquired entity were recorded on the Company’s balance sheet at their fair values as of the acquisition date. Unizan’s results of operations have been included in the Company’s consolidated statement of income since the acquisition date.
     The following table shows the excess purchase price over carrying value of net assets acquired, preliminary purchase price allocation, and resulting goodwill:
         
(in thousands)   March 1, 2006
 
Purchase price
  $ 575,793  
Carrying value of net assets acquired
    (194,996 )
 
Excess of purchase price over carrying value of net assets acquired
    380,797  
 
Purchase accounting adjustments:
       
Loans and leases
    17,466  
Premises and equipment
    421  
Accrued income and other assets
    257  
Deposits
    748  
Subordinated notes
    2,845  
Deferred federal income tax liability
    11,838  
Accrued expenses and other liabilities
    8,047  
 
Goodwill and other intangible assets
    422,419  
Less other intangible assets:
       
Core deposit intangible
    (45,000 )
Other identifiable intangible assets
    (18,252 )
 
Other intangible assets
    (63,252 )
 
Goodwill
  $ 359,167  
 
     Of the $63.3 million of acquired intangible assets, $45.0 million was assigned to core deposit intangible, and $18.3 million was assigned to customer relationship intangibles. The core deposit and customer relationship intangibles have useful lives ranging from 10 to 15 years.
     Goodwill resulting from the transaction totaled $359.2 million and was assigned to Regional Banking and the Private Financial and Capital Markets Group in the amount of $341.2 million and $18.0 million, respectively.

9


     The following table summarizes the estimated fair value of the net assets acquired on March 1, 2006 related to the acquisition of Unizan:
         
(in thousands)   March 1, 2006
 
Assets
       
Cash and due from banks
  $ 66,544  
Interest bearing deposits in banks
    3,096  
Investment securities
    300,416  
Loans and leases
    1,665,006  
Allowance for loan and lease losses
    (22,187 )
 
Net loans and leases
    1,642,819  
 
Bank owned life insurance
    48,521  
Premises and equipment
    20,980  
Goodwill
    359,167  
Other intangible assets
    63,252  
Accrued income and other assets
    22,012  
 
Total assets
    2,526,807  
 
       
Liabilities
       
Deposits
    1,696,124  
Short-term borrowings
    79,140  
Federal Home Loan Bank advances
    102,950  
Subordinated notes
    23,464  
Deferred federal income tax liability
    11,838  
Accrued expenses and other liabilities
    37,498  
 
Total liabilities
    1,951,014  
 
Purchase price
  $ 575,793  
 
     Huntington’s consolidated financial statements include the results of operations of Unizan only since March 1, 2006, the date of acquisition. The following unaudited summary information presents the consolidated results of operations of Huntington on a pro forma basis, as if the Unizan acquisition had occurred at the beginning of 2006 and 2005.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands, except per share amounts)   2006     2005     2006     2005  
Net interest income
  $ 262,195     $ 259,317     $ 517,487     $ 511,932  
Provision for credit losses
    (15,745 )     (14,561 )     (36,395 )     (36,101 )
 
                       
Net interest income after provision for credit losses
    246,450       244,756       481,092       475,831  
 
                       
Non-interest income
    163,019       163,347       327,337       338,574  
Non-interest expense
    (252,359 )     (266,091 )     (502,620 )     (542,323 )
 
                       
Income before income taxes
    157,110       142,012       305,809       272,082  
Provision for income taxes
    (45,506 )     (32,029 )     (88,306 )     (62,021 )
 
                       
Net income
  $ 111,604     $ 109,983     $ 217,503     $ 210,061  
 
                       
Net income per common share
                               
Basic
  $ 0.46     $ 0.43     $ 0.89     $ 0.82  
Diluted
    0.46       0.42       0.88       0.81  
 
                               
Average common shares outstanding
                               
Basic
    241,729       257,451       244,799       257,255  
Diluted
    244,538       261,032       247,901       260,723  
     The pro forma results include amortization of fair value adjustments on loans, deposits, and debt, and amortization of newly created intangibles and post-merger acquisition related charges. The pro forma number of average common shares outstanding includes adjustments for shares issued for the acquisition and the impact of additional dilutive securities but does not assume any incremental share repurchases. The pro forma results presented do not reflect cost savings, or revenue enhancements anticipated from the acquisition, and are not necessarily indicative of what actually would have occurred if

10


the acquisition had been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
Note 5 — Goodwill and Other Intangible Assets
     Changes to the carrying amount of goodwill by line of business for the six months ended June 30, 2006, were as follows:
                                         
    Regional   Dealer           Treasury/   Huntington
(in thousands)   Banking   Sales   PFCMG   Other   Consolidated
 
Balance, January 1, 2006
  $ 199,970     $     $ 12,560     $     $ 212,530  
Goodwill acquired during the period
    341,200             17,967             359,167  
Impairment losses recognized
                             
 
Balance, June 30, 2006
  $ 541,170     $     $ 30,527     $     $ 571,697  
 
     As further described in Note 4, goodwill acquired during 2006 was a result of the completion of the merger with Unizan. In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is evaluated for impairment on an annual basis at September 30 th of each year.
     At June 30, 2006, Huntington’s other intangible assets consisted of the following:
                         
    June 30, 2006
    Gross   Accumulated   Net
(in thousands)   Carrying Amount   Amortization   Carrying Value
Other intangible assets:
                       
Leasehold purchased
  $ 23,655     $ (19,224 )   $ 4,431  
Core deposit intangible
    45,000       (3,010 )     41,990  
Borrower relationship
    6,570       (182 )     6,388  
Trust customers
    11,430       (327 )     11,103  
Other
    382       (153 )     229  
 
Total other intangible assets
  $ 87,037     $ (22,896 )   $ 64,141  
 
     Amortization expense of other intangible assets for the three months ended June 30, 2006, and 2005, was $3 million and $0.2 million, respectively. Amortization expense of other intangible assets for the six months ended June 30, 2006 and 2005 was $4.0 million and $0.4 million, respectively.
     The estimated amortization expense of other intangible assets for the next five annual fiscal years are as follows:
           
    Amortization  
Fiscal year:   Expense  
   
2007
    9,815    
2008
    8,653     
2009
    7,748     
2010
    6,949     
2011
    6,229     
Note 6 — Loan Sales and Securitizations
Automobile loans
     Huntington sold $218.4 million and $53.4 million of automobile loans in the second quarter of 2006 and 2005, resulting in pre-tax gains of $0.5 million and $0.3 million, respectively. For the six-month periods ended June 30, 2006 and 2005, sales of automobile loans totaled $388.2 million and $53.4 million, resulting in pre-tax gains of $1.0 million and $0.3 million, respectively.

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     Huntington adopted Statement No. 156 as of January 1, 2006. Automobile loan servicing rights are acccounted for under the amortization provision of that statement. A servicing asset is established at an initial carrying value based on the relative fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.
     Changes in the carrying value of automobile loan servicing rights for the three months and six months ended June 30, 2006 and 2005, and the fair value at the end of each period were as follows:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
(in thousands)   2006   2005   2006   2005
Carrying value, beginning of period
  $ 9,610     $ 17,046     $ 10,805     $ 20,286  
New servicing assets
    1,364       332       2,362       332  
Amortization
    (1,989 )     (3,050 )     (4,182 )     (6,290 )
Impairment charges
          (66 )           (66 )
                     
Carrying value, end of period
  $ 8,985     $ 14,262     $ 8,985     $ 14,262  
                     
 
                               
Fair value, end of period
  $ 10,486     $ 14,842     $ 10,486     $ 14,842  
                     
     Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees from 0.55% to 1.00% of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing assets, amounted to $3.4 million and $2.6 million for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, servicing income was $6.8 million and $5.0 million, respectively.
     During the second quarter of 2006, Huntington transferred $1.2 billion automobile loans and leases to a trust in a securitization transaction. The securitization did not qualify for sale accounting under Statement No. 140 and, therefore, is accounted for as a secured financing.
Residential Mortgage Loans
     A mortgage servicing right (MSR) is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. Effective January 1, 2006, the Company early adopted Statement No. 156. The same risk management practices are applied to all MSRs and, accordingly, MSRs were identified as a single asset class and were re-measured to fair value as of January 1, 2006, with an adjustment to retained earnings.
     At initial recognition, the MSR asset is established at its fair value using assumptions that are consistent with assumptions used at the time to estimate the fair value of the total MSR portfolio. Subsequent to initial capitalization, MSR assets are carried at fair value and are included in other assets. Any increase or decrease in fair value during the period is recorded as an increase or decrease in servicing income, which is reflected in non-interest income in the consolidated income statement.
     The following table is a summary of the changes in MSR fair value during the three months and six months ended June 30, 2006:
                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands)   2006     2006  
Carrying value, beginning of period
  $ N/A     $ 91,259  
Cumulative effect in change in accounting principle
    N/A       18,631  
 
           
Fair value, beginning of period
    123,257       109,890  
New servicing assets created
    7,434       13,211  
Servicing assets acquired
    565       2,474  
Change in fair value during the period
    4,988       10,669  
 
           
Fair value, end of period
  $ 136,244     $ 136,244  
 
           
N/A, Not applicable
               

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     MSRs 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, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.
     A summary of key assumptions and the sensitivity of the MSR value at June 30, 2006 to changes in these assumptions follows:
                         
            Decline in fair value
            due to
            10%   20%
            adverse   adverse
(in thousands)   Actual   change   change
Constant pre-payment rate
    10.44 %   $ (5,252 )   $ (10,168 )
Discount rate
    9.39       (5,344 )     (10,293 )
     MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. The Company hedges against changes in MSR fair value attributable to changes in interest rates through a combination of derivative instruments and trading securities.
     Prior to 2006, servicing rights were evaluated quarterly for impairment based on the fair value of those rights, using a disaggregated approach. The fair value of the servicing rights was determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. Temporary impairment was recognized in a valuation allowance against the mortgage servicing rights.
     Changes in the impairment allowance of mortgage servicing rights for the three and six months ended June 30, 2005, were as follows:
                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands)   2005     2005  
Balance, beginning of period
  $ (1,015 )   $ (4,775 )
Impairment charges
    (10,231 )     (11,411 )
Impairment recovery
          4,940  
 
           
Balance, end of period
  $ (11,246 )   $ (11,246 )
 
           
     Below is a summary of servicing fee income earned during the three and six months ended June 30, 2006.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
(in thousands)   2006   2005   2006   2005
Servicing fees
  $ 5,996     $ 5,464     $ 11,920     $ 10,858  
Late fees
    551       504       1,161       1,009  
Ancillary fees
    88       171       341       297  
         
Total fee income
  $ 6,635     $ 6,139     $ 13,422     $ 12,164  
         

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Note 6 — Investment Securities
     Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years and over 10 years) of investment
     securities at June 30, 2006, December 31, 2005, and June 30, 2005:
                                                 
    June 30, 2006   December 31, 2005   June 30, 2005
    Amortized           Amortized           Amortized    
(in thousands)   Cost   Fair Value   Cost   Fair Value   Cost   Fair Value
U.S. Treasury
                                               
Under 1 year
  $ 699     $ 704     $     $     $     $  
1-5 years
    21,924       21,083       23,446       22,893       23,949       23,821  
6-10 years
    504       522       753       782       248       267  
Over 10 years
                                   
 
Total U.S. Treasury
    23,127       22,309       24,199       23,675       24,197       24,088  
 
Federal agencies
                                               
Mortgage backed securities
                                               
Under 1 year
    350       347                          
1-5 years
    32,033       30,619       31,058       30,047       15,221       15,010  
6-10 years
    549       519                   19,775       19,568  
Over 10 years
    1,252,384       1,194,850       1,278,540       1,248,975       1,118,023       1,108,410  
 
Total mortgage-backed Federal agencies
    1,285,316       1,226,335       1,309,598       1,279,022       1,153,019       1,142,988  
 
Other agencies
                                               
Under 1 year
    45,000       44,284                          
1-5 years
    249,604       237,742       296,945       286,754       410,298       403,883  
6-10 years
    50,000       45,922       52,440       49,712       198,210       193,763  
Over 10 years
                                   
 
Total other Federal agencies
    344,604       327,948       349,385       336,466       608,508       597,646  
 
Total Federal agencies
    1,629,920       1,554,283       1,658,983       1,615,488       1,761,527       1,740,634  
 
Municipal securities
                                               
Under 1 year
    42       42       65       65       65       65  
1-5 years
    103       103       145       145       166       165  
6-10 years
    154,360       150,215       144,415       143,597       102,460       103,599  
Over 10 years
    430,118       421,243       400,156       401,043       393,905       402,053  
 
Total municipal securities
    584,623       571,603       544,781       544,850       496,596       505,882  
 
Private label CMO
                                               
Under 1 year
                                   
1-5 years
                                   
6-10 years
                                   
Over 10 years
    749,019       731,031       402,959       393,569       424,521       420,103  
 
Total private label CMO
    749,019       731,031       402,959       393,569       424,521       420,103  
 
Asset backed securities
                                               
Under 1 year
                                   
1-5 years
    30,000       30,000       31,663       31,659       34,625       34,636  
6-10 years
                                   
Over 10 years
    1,949,008       1,948,538       1,757,031       1,757,121       1,011,868       1,015,621  
 
Total asset backed securities
    1,979,008       1,978,538       1,788,694       1,788,780       1,046,493       1,050,257  
 
Other
                                               
Under 1 year
    1,900       1,900       1,700       1,700       1,200       1,200  
1-5 years
    8,795       8,780       10,997       11,051       12,109       12,382  
6-10 years
    1,050       985       2,062       2,063       1,555       1,573  
Over 10 years
    44       43       44       43       87,657       87,939  
Non-marketable equity securities
    146,957       146,957       89,661       89,661              
Marketable equity securities
    108,025       108,253       55,058       55,640       5,657       5,897  
 
Total other
    266,771       266,918       159,522       160,158       108,178       108,991  
 
Total investment securities
  $ 5,232,468     $ 5,124,682     $ 4,579,138     $ 4,526,520     $ 3,861,512     $ 3,849,955  
 
Duration in years (1)
            3.0               2.8               3.0  
 
(1)   The average duration assumes a market driven pre-payment rate on securities subject to pre-payment.

14


     Based upon its assessment, Management does not believe any individual unrealized loss at June 30, 2006, represents an other-than-temporary impairment. In addition, Huntington has the ability to hold these securities for a time necessary, including to maturity, to recover the amortized cost. There were no securities classified as held to maturity at June 30, 2006.
     Other securities include Federal Home Loan Bank and Federal Reserve Bank stock, corporate debt, and marketable equity securities.
Note 8 — Other Comprehensive Income
     The components of Huntington’s other comprehensive income in the three and six months ended June 30, 2006 and 2005, were as follows:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
(in thousands)   2006   2005   2006   2005
Unrealized gains and losses on investment securities arising during the period:
                               
Unrealized net (losses) gains
  $ (26,652 )   $ 39,881     $ (55,223 )   $ 8,716  
Related tax benefit (expense)
    9,616       (14,067 )     19,480       (3,069 )
         
Net
    (17,036 )     25,814       (35,743 )     5,647  
         
Reclassification adjustment for net losses (gains) from sales of investment securities realized during the period:
                               
Realized net losses (gains)
    35       343       55       (614 )
Related tax (benefit) expense
    (12 )     (120 )     (19 )     215  
         
Net
    23       223       36       (399 )
         
 
                               
Total unrealized net (losses) gains on investment securities arising during the period, net of reclassification of net realized gains and losses
    (17,013 )     26,037       (35,707 )     5,248  
         
 
                               
Unrealized gains (losses) on cash flow hedging derivatives arising during the period:
                               
Unrealized net (losses) gains
    6,702       (12,417 )     21,091       7,592  
Related tax benefit (expense)
    (2,346 )     4,346       (7,382 )     (2,657 )
         
Net
    4,356       (8,071 )     13,709       4,935  
         
 
                               
Total other comprehensive (loss) income
  $ (12,657 )   $ 17,966     $ (21,998 )   $ 10,183  
         
     Activity in accumulated other comprehensive income for the six months ended June 30, 2006 and 2005, was as follows:
                                 
    Unrealized gains                    
    and losses on     Unrealized gains on     Minimum        
    investment     cash flow hedging     pension        
(in thousands)   securities     derivatives     liability     Total  
 
Balance, December 31, 2004
  $ (12,683 )   $ 4,252     $ (2,472 )   $ (10,903 )
Period change
    5,248       4,935             10,183  
 
Balance, June 30, 2005
  $ (7,435 )   $ 9,187     $ (2,472 )   $ (720 )
 
 
                               
Balance, December 31, 2005
  $ (34,016 )   $ 15,206     $ (3,283 )   $ (22,093 )
Period change
    (35,707 )     13,709             (21,998 )
 
Balance, June 30, 2006
  $ (69,723 )   $ 28,915     $ (3,283 )   $ (44,091 )
 

15


Note 9 — Earnings per Share
          Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for dilutive stock options. The calculation of basic and diluted earnings per share for each of the three and six months ended June 30, 2006 and 2005, is as follows:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
(in thousands, except per share amounts)   2006   2005   2006   2005
         
Net income
  $ 111,604     $ 106,425     $ 216,060     $ 202,944  
 
                               
Average common shares outstanding
    241,729       232,217       236,349       232,021  
Dilutive potential common shares
    2,809       3,454       3,102       3,341  
         
Diluted average common shares outstanding
    244,538       235,671       239,451       235,362  
         
 
                               
Earnings per share
                               
Basic
  $ 0.46     $ 0.46     $ 0.91     $ 0.87  
Diluted
    0.46       0.45       0.90       0.86  
          The average market price of Huntington’s common stock for the period was used in determining the dilutive effect of outstanding stock options. Dilutive potential common shares include stock options and options held in deferred compensation plans. Dilutive potential common shares are computed based on the number of shares subject to options that have an exercise price less than the average market price of Huntington’s common stock for the period.
          Options to purchase 5.6 million and 2.6 million shares during both the three months and six months ended June 30, 2006 and 2005, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. The weighted average exercise price for these options was $25.68 and $26.96 per share and $25.67 and $26.92 for the three months and six months ended June 30, 2006 and 2005, respectively.
Note 10 — Stock-Based Compensation
          Huntington sponsors nonqualified and incentive stock option plans. These plans provide for the granting of stock options to officers, directors, and other employees at the market price on the date of the grant. Huntington’s board of directors has approved all of the plans. Shareholders have approved each of the plans, except for the broad-based Employee Stock Incentive Plan. Of the 26.2 million options to purchase shares of common stock authorized for issuance under the plans at June 30, 2006, 20.5 million were outstanding and 5.7 million were available for future grants. Options vest ratably over three years or when other conditions are met. Options granted prior to May 2004 have a maximum term of ten years. All options granted beginning in May 2004 have a maximum term of seven years.
          On January 1, 2006, Huntington adopted the fair value recognition provisions of Statement No. 123R relating to its stock-based compensation plans. Prior to January 1, 2006, Huntington had accounted for stock-based compensation plans under the intrinsic value method promulgated by APB Opinion 25, Accounting for Stock Issued to Employees , and related interpretations. In accordance with APB 25, compensation expense for employee stock options was generally not recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.
          Under the modified prospective method of Statement No. 123R, compensation expense was recognized during the three and six months ended June 30, 2006, for all unvested stock options, based on the grant date fair value estimated in accordance with the original provisions of Statement No. 123 and for all stock based payments granted after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of Statement No. 123R. Stock-based compensation expense was recorded in personnel costs in the consolidated statements of income. Huntington’s financial results for the prior periods have not been restated.

16


          The following table presents the unfavorable impact of adoption of Statement 123R on Huntington’s income before income taxes, net income, and basic and diluted earnings per share for the three and six months ended June 30, 2006.
                 
    Stock-based compensation expense
    Three Months Ended   Six Months Ended
(in tmillions, except per share amounts)   June 30, 2006   June 30, 2006
Income before income taxes
  $ (4.3 )   $ (8.5 )
 
               
Net income
    (2.8 )     (5.6 )
 
               
Earnings per share
               
Basic
  $ (0.01 )   $ (0.02 )
Diluted
    (0.01 )     (0.02 )
          Prior to the adoption of Statement 123R, Huntington presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. Statement 123R requires the cash flows from tax benefits resulting from tax deductions in excess of compensation costs recognized for those options (excess tax benefits) to be classified as financing cash flows. As a result, the benefits of tax deductions in excess of recognized compensation cost included in net financing cash flows for the six months ended June 30, 2006 was $0.7 million.
          Consistent with the valuation method used for the disclosure only provisions of Statement No. 123, Huntington uses the Black-Scholes option-pricing model to value stock-based compensation expense. This model assumes that the estimated fair value of options is amortized over the options’ vesting periods and the compensation costs would be included in personnel costs on the consolidated statements of income. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of Huntington’s stock. The expected term of options granted is derived from historical data on employee exercises. The expected dividend yield is based on the dividend rate and stock price on the date of the grant. The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2006   2005   2006   2005
         
Assumptions
                               
Risk-free interest rate
    4.61 %     3.63 %     4.58 %     4.02 %
Expected dividend yield
    4.18       3.24       4.20       3.42  
Expected volatility of Huntington’s common stock
    22.2       26.3       22.2       26.3  
Expected option term (years)
    6.0       6.0       6.0       6.0  
 
                               
Weighted-average grant date fair value
  $ 4.20     $ 5.01     $ 4.23     $ 4.89  
          The following pro forma disclosures for net income and earnings per diluted common share for the three and six months ended June 30, 2005, are presented as if Huntington had applied the fair value method of accounting of Statement No. 123 in measuring compensation costs for stock options.
                 
    Three Months Ended   Three Months Ended
(in millions, except per share amounts)   June 30, 2005   June 30, 2005
 
Pro forma results
               
Net income, as reported
  $ 106.4     $ 202.9  
Pro forma expense, net of tax
    (2.9 )     (5.8 )
 
Pro forma net income
  $ 103.5     $ 197.1  
 
Net income per common share:
               
Basic, as reported
  $ 0.46     $ 0.87  
Basic, pro forma
    0.45       0.85  
Diluted, as reported
    0.45       0.86  
Diluted, pro forma
    0.44       0.84  

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     Huntington’s stock option activity and related information for the six months ended June 30, 2006, was as follows:
                                 
                    Weighted-        
            Weighted-     Average        
            Average     Remaining     Aggregate  
            Exercise     Contractual     Intrinsic  
(in thousands, except per share amounts)   Options     Price     Life (Years)     Value  
 
Outstanding at January 1, 2006
    21,004     $ 21.11                  
Granted
    58       23.82                  
Acquired (1)
    655       16.56                  
Exercised
    (882 )     17.37                  
Forfeited/expired
    (340 )     22.70                  
 
Outstanding at June 30, 2006
    20,495     $ 21.10       5.2     $ 62,471  
 
Exercisable at June 30, 2006
    12,882     $ 20.13       4.7     $ 52,845  
 
(1)   Relates to option plans acquired from the merger with Unizan.
          The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the option exercise price. The total intrinsic value of stock options exercised during the six months ended June 30, 2006, was $5.9 million.
          Huntington issues shares to fulfill stock option exercises from available shares held in treasury. At June 30, 2006, the Company believes there are adequate shares in treasury to satisfy anticipated stock option exercises in 2006.
          The following table summarizes the status of Huntington’s nonvested options for the six months ended June 30, 2006:
                 
            Weighted-  
            Average  
            Grant Date  
(in thousands, except per share amounts)   Options     Fair Value  
 
Nonvested at January 1, 2006
    7,956     $ 5.53  
Granted
    58       4.23  
Acquired (1)
    19       4.61  
Vested
    (112 )     5.35  
Forfeited
    (308 )     5.51  
 
Nonvested at June 30, 2006
    7,613     $ 5.52  
 
(1)   Relates to option plans acquired from the merger with Unizan.
          As of June 30, 2006, the total compensation cost related to nonvested awards not yet recognized was $21.7 million with a weighted-average expense recognition period of 2.2 years. The total fair value of options vested during the six months ended June 30, 2006, was $0.6 million.
          The following table presents additional information regarding options outstanding as of June 30, 2006.
                                         
(in thousands, except per share amounts)   Options Outstanding     Exercisable Options  
            Weighted-                      
            Average     Weighted-             Weighted-  
            Remaining     Average             Average  
Range of           Contractual     Exercise             Exercise  
Exercise Prices   Shares     Life (Years)     Price     Shares     Price  
 
$9.91 to $15.00
    773       5.1     $ 14.23       773     $ 14.23  
$15.01 to $20.00
    7,940       5.0       18.06       6,567       17.67  
$20.01 to $25.00
    9,516       5.9       22.74       3,294       21.58  
$25.01 to $28.35
    2,266       2.6       27.22       2,248       27.24  
 
Total
    20,495       5.2     $ 21.10       12,882     $ 20.13  
 

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Note 11 — Benefit Plans
          Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory defined benefit pension plan covering substantially all employees. The Plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code. In addition, Huntington has an unfunded, defined benefit post-retirement plan (Post-Retirement Benefit Plan) that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage.
          The following table shows the components of net periodic benefit expense of the Plan and the Post-Retirement Benefit Plan:
                                 
    Pension Benefits     Post Retirement Benefits  
    Three Months Ended     Three Months Ended  
    June 30,     June 30,  
(in thousands of dollars)   2006     2005     2006     2005  
         
Service cost
  $ 4,414     $ 3,547     $ 383     $ 353  
Interest cost
    5,539       4,754       565       778  
Expected return on plan assets
    (8,319 )     (6,716 )            
Amortization of transition asset
          (1 )     276       276  
Amortization of prior service cost
                95       95  
Settlements
    1,000       750              
Recognized net actuarial loss
    4,377       2,672       (181 )      
 
                       
Benefit expense
  $ 7,011     $ 5,006     $ 1,138     $ 1,502  
         
                                 
    Pension Benefits     Post Retirement Benefits  
    Six Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands of dollars)   2006     2005     2006     2005  
         
Service cost
  $ 8,723     $ 7,092     $ 720     $ 706  
Interest cost
    11,078       9,507       1,130       1,556  
Expected return on plan assets
    (16,539 )     (12,812 )            
Amortization of transition asset
          (2 )     552       552  
Amortization of prior service cost
    1       1       190       189  
Settlements
    2,000       1,500              
Recognized net actuarial loss
    8,754       5,345       (362 )      
 
                       
Benefit expense
  $ 14,017     $ 10,631     $ 2,230     $ 3,003  
         
          There is no expected minimum contribution for 2006 to the Plan. Although not required, Huntington made a contribution to the Plan of $29.8 million in June 2006.
          Huntington also sponsors other retirement plans, the most significant being the Supplemental Executive Retirement Plan and the Supplemental Retirement Income Plan. These plans are nonqualified plans that provide certain former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. The cost of providing these plans was $0.6 million and $0.5 million for the three-month periods ended June 30, 2006 and 2005, respectively. For the respective six-month periods, the cost was $1.3 million and $1.1 million.

19


          Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions dollar for dollar, up to the first 3% of base pay contributed to the plan. The match is 50 cents for each dollar on the 4th and 5th percent of base pay contributed to the plan. The cost of providing this plan was $2.6 million and $2.4 million for the three months ended June 30, 2006 and 2005, respectively. For the respective six-month periods, the cost was $5.1 million and $4.9 million.
Note 12 — Commitments and Contingent Liabilities
Commitments to extend credit :
          In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial statements. The contract amounts of these financial agreements at June 30, 2006, December 31, 2005, and June 30, 2005, were as follows:
                         
    June 30,   December 31,   June 30,
(in millions)   2006   2005   2005
 
Contract amount represents credit risk
                       
Commitments to extend credit
                       
Commercial
  $ 4,021     $ 3,316     $ 2,947  
Consumer
    3,595       3,046       2,983  
Commercial real estate
    1,764       1,567       1,480  
Standby letters of credit
    1,121       1,079       968  
Commercial letters of credit
    54       47       61  
          Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.
          Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $3.6 million, $4.0 million, and $3.2 million at June 30, 2006, December 31, 2005, and June 30, 2005, respectively.
          Commercial letters of credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The merchandise or cargo being traded normally secures these instruments.
Commitments to sell loans:
          Huntington enters into forward contracts relating to its mortgage banking business. At June 30, 2006, December 31, 2005, and June 30, 2005, Huntington had commitments to sell residential real estate loans of $341.5 million, $348.3 million, and $534.3 million, respectively. These contracts mature in less than one year.
          During the 2005 second quarter, Huntington entered into a two-year agreement to sell a portion of its monthly automobile loan production at the cost of such loans, subject to certain limitations, provided the production meets certain pricing, asset quality, and volume parameters. At June 30, 2006, approximately $62.0 million of automobile loans related to this commitment were classified as held for sale.

20


Litigation:
          In the ordinary course of business, there are various legal proceedings pending against Huntington and its subsidiaries. In the opinion of Management, the aggregate liabilities, if any, arising from such proceedings are not expected to have a material adverse effect on Huntington’s consolidated financial position.
Note 13 — Derivative Financial Instruments
          A variety of derivative financial instruments, principally interest rate swaps, are used in asset and liability management activities to protect against market risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivative financial instruments provide flexibility in adjusting the Company’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements. By using derivatives to manage interest rate risk, the effect is a smaller, more efficient balance sheet, with a lower wholesale funding requirement and a higher net interest margin. Derivatives are sold to meet customers’ financing needs. All derivatives are reflected at fair value in the consolidated balance sheet.
          Market risk, which is the possibility that economic value of net assets or net interest income will be adversely affected by changes in interest rates or other economic factors, is managed through the use of derivatives. Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that Huntington will incur a loss because a counter-party fails to meet its contractual obligations. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contractual provisions.
          Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate the credit risk associated with both the derivatives used for asset and liability management and used in trading activities. At June 30, 2006, December 31, 2005, and June 30, 2005, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $31.1 million, $26.2 million, and $26.5 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.
Asset and Liability Management
          Derivatives that are used in asset and liability management are classified as fair value hedges or cash flow hedges and are required to meet specific criteria. To qualify as a hedge, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge. This includes identifying the item and risk being hedged, the derivative being used, and how the effectiveness of the hedge is being assessed. A derivative must be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. Correlation is evaluated on a retrospective and prospective basis using quantitative measures. If a hedge relationship is found not to be effective, the derivative no longer qualifies as a hedge and any excess gains or losses attributable to ineffectiveness, as well as subsequent changes in its fair value, are recognized in other income.
          For fair value hedges, deposits, short-term borrowings, and long-term debt are effectively converted to variable-rate obligations by entering into interest rate swap contracts whereby fixed-rate interest is received in exchange for variable-rate interest without the exchange of the contract’s underlying notional amount. Forward contracts, used primarily in connection with mortgage banking activities, can be settled in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. The changes in fair value of the hedged item and the hedging instrument are reflected in current earnings.
          For cash flow hedges, the Company enters into interest rate swap contracts which require the payment of fixed-rate interest in exchange for the receipt of variable-rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its floating-rate debt to fixed-rate. This reduces the potentially adverse impact of increases in interest rates on future interest expense. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings, but are reported as a component of accumulated other comprehensive income in shareholders’ equity. These changes in fair value

21


will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in earnings.
          Derivatives used to manage interest rate risk at June 30, 2006, are shown in the table below:
                                         
            Average           Weighted-Average
    Notional   Maturity   Fair   Rate
(in thousands )   Value   (years)   Value   Receive   Pay
 
Liability conversion swaps
                                       
Receive fixed — generic
  $ 925,250       8.9     $ (35,672 )     5.12 %     5.38 %
Receive fixed — callable
    665,000       6.7       (28,776 )     4.46       5.10  
Pay fixed — generic
    490,000       3.3       6,468       5.18       5.04  
 
Total liability conversion swaps
    2,080,250       6.9       (57,980 )     4.92 %     5.21 %
 
Liability caps
                                       
Pay fixed — forwards
    300,000       N/A       3,165       N/A       N/A  
 
Total swap portfolio
  $ 2,380,250       6.9     $ (54,815 )     4.92 %     5.21 %
 
    N/A, not applicable
          During the first quarter of 2006, Huntington terminated asset and liability conversion interest rate swaps with a total notional value of $2.5 billion. The terminations generated gross gains of $34.9 million and gross losses of $34.5 million, resulting in a net deferred gain of $0.4 million. The net gain is being amortized into interest income over the remainder of the original terms of the terminated swaps as follows: 2006: ($2.2 million), 2007: $2.2 million, 2008: ($1.4 million), 2009: $0.2 million, and 2010: $1.6 million.
          As is the case with cash securities, the fair value of interest rate swaps is largely a function of financial market expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels. Management made no assumptions regarding future changes in interest rates with respect to the variable-rate information presented in the table above.
          The following table represents the gross notional value of derivatives used to manage interest rate risk at June 30, 2006, identified by the underlying interest rate-sensitive instruments. The notional amounts shown in the tables above and below should be viewed in the context of overall interest rate risk management activities to assess the impact on the net interest margin.
                         
    Fair Value   Cash Flow    
(in thousands )   Hedges   Hedges   Total
 
Instruments associated with:
                       
Deposits
  $ 790,250     $ 400,000     $ 1,190,250  
Federal Home Loan Bank advances
          325,000       325,000  
Subordinated notes
    750,000             750,000  
Other long-term debt
    50,000       65,000       115,000  
 
Total notional value at June 30, 2006
  $ 1,590,250     $ 790,000     $ 2,380,250  
 
          These derivative financial instruments were entered into for the purpose of mitigating the interest rate risk embedded in assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amount resulted in a (decrease) increase to net interest income of $(0.8) million and $6.9 million, for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, the impact to net interest income was a (decrease) increase of $(0.2) million and $14.5 million, respectively.

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Derivatives Used in Mortgage Banking Activities
          Huntington also uses derivatives, principally loan sale commitments, in the hedging of its mortgage loan commitments and its mortgage loans held for sale. For derivatives that are used in hedging mortgage loans held for sale, ineffective hedge gains and losses are reflected in mortgage banking revenue in the income statement. Mortgage loan commitments and the related hedges are carried at fair value on the consolidated balance sheet with changes in fair value reflected in mortgage banking revenue. The following is a summary of the derivative assets and liabilities that Huntington used in its mortgage banking activities as of June 30, 2006 and 2005:
                 
    At June 30,  
(in thousands)   2006     2005  
 
Derivative assets:
               
Interest rate lock agreements
  $ 232     $ 1,333  
Forward trades and options
    3,029       243  
 
Total derivative assets
    3,261       1,576  
 
Derivative liabilities:
               
Interest rate lock agreements
    (1,222 )     (861 )
Forward trades and options
    (35 )     (2,122 )
 
Total derivative liabilities
    (1,257 )     (2,983 )
 
Net derivative asset (liability)
  $ 2,004     $ (1,407 )
 
Derivatives Used in Trading Activities
          Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities consisted predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but not credit risk. Purchased options contain both credit and market risk.
          Supplying these derivatives to customers results in fee income. These instruments are carried at fair value in other assets with gains and losses reflected in other non-interest income. Total trading revenue for customer accommodation was $2.2 million and $2.0 million for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, total trading revenue for customer accommodation was $5.2 million and $3.7 million, respectively. The total notional value of derivative financial instruments used by Huntington on behalf of customers, for which the related interest rate risk is offset by third parties, was $4.6 billion, $4.2 billion, and $4.5 billion at June 30, 2006, December 31, 2005, and June 30, 2005. Huntington’s credit risk from interest rate swaps used for trading purposes was $64.4 million, $44.3 million, and $49.7 million at the same dates.
          In connection with securitization activities, Huntington purchased interest rate caps with a notional value totaling $1.8 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.8 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income.

23


Note 14 — Shareholders’ Equity
Share Repurchase Program:
          On October 18, 2005, the Company announced that the board of directors authorized a new program for the repurchase of up to 15 million shares (the 2005 Repurchase Program). The repurchase program authorized in 2004, with 3.1 million shares remaining, was cancelled and replaced by the 2005 Repurchase Program.
          On April 20, 2006, the Company announced that the board of directors authorized a new program for the repurchase of up to 15 million shares (the 2006 Repurchase Program). The 2006 Repurchase Program does not have an expiration date. The 2005 Repurchase Program, with 5 million shares remaining, was canceled and replaced by the 2006 Repurchase Program. The Company expects to repurchase the shares from time to time in the open market or through privately negotiated transactions depending on market conditions.
          On May 24, 2006, Huntington repurchased 6.0 million shares of common stock from Bear Stearns under an accelerated share repurchase program. The accelerated share repurchase program enabled Huntington to purchase the shares immediately, while Bear Stearns may purchase shares in the market over a period of up to four months (the Repurchase Term). In connection with the repurchase of these shares, Huntington entered into a variable share forward sale agreement, which provides for a settlement, reflecting a price differential based on the adjusted volume-weighted average price as defined in the agreement with Bear Stearns. The variable share forward agreement may be settled in shares or in cash, at Huntington’s discretion. Any settlement will be reflected as an adjustment to treasury shares on Huntington’s balance sheet at the end of the Repurchase Term. Based on the adjusted volume-weighted average prices through June 30, 2006, the settlement of the variable share forward agreement is not expected to have a material impact to Huntington.
          Listed below is the share repurchase activity under the 2006 Repurchase Program for the three months ended June 30, 2006:
                                 
                    Total Number of Shares   Maximum Number of
    Total Number   Average   Purchased as Part of   Shares that May Yet Be
    of Shares   Price Paid   Publicly Announced Plans   Purchased Under the
Period   Purchased   Per Share   or Programs (1)   Plans or Programs (1)
 
April 1, 2006 to April 30, 2006
        $             15,000,000  
May 1, 2006 to May 31, 2006
    8,100,000       23.53       8,100,000       6,900,000  
June 1, 2006 to June 30, 2006
                8,100,000       6,900,000  
 
Total
    8,100,000     $ 23.53       8,100,000       6,900,000  
 
(1)   Information is as of the end of the period.

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Note 15 — Segment Reporting
          Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial and Capital Markets Group (PFCMG). A fourth segment includes the Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the Company’s organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. An overview of this system is provided below, along with a description of each segment and discussion of financial results.
          The following provides a brief description of the four operating segments of Huntington:
Regional Banking: This segment provides traditional banking products and services to consumer, small business, and commercial customers located in eight operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky. It provides these services through a banking network of 370 branches, over 1,000 ATMs, plus on-line and telephone banking channels. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, small business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail Banking accounts for 59% and 79% of total Regional Banking loans and deposits, respectively. Commercial Banking serves middle market commercial banking relationships, which use a variety of banking products and services including, but not limited to, commercial loans, international trade, cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.
Dealer Sales: This segment provides a variety of banking products and services to more than 3,500 automotive dealerships within the Company’s primary banking markets, as well as in Arizona, Florida, Georgia, North Carolina, Pennsylvania, South Carolina, and Tennessee. Dealer Sales finances the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles to consumers under long-term operating or direct finance leases, finances the dealerships’ floor plan inventories, real estate, or working capital needs, and provides other banking services to the automotive dealerships and their owners. Competition from the financing divisions of automobile manufacturers and from other financial institutions is intense. Dealer Sales’ production opportunities are directly impacted by the general automotive sales business, including programs initiated by manufacturers to enhance and increase sales directly. Huntington has been in this line of business for over 50 years.
Private Financial and Capital Markets Group (PFCMG): This segment provides products and services designed to meet the needs of the Company’s higher net worth customers. Revenue is derived through the sale of trust, asset management, investment advisory, brokerage, insurance, and private banking products and services. It also focuses on financial solutions for corporate and institutional customers that include investment banking, sales and trading of securities, mezzanine capital financing, and risk management products. To serve high net worth customers, a unique distribution model is used that employs a single, unified sales force to deliver products and services mainly through Regional Banking distribution channels.
Treasury / Other: This segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or allocated to one of the other three business segments. Assets in this segment include investment securities and bank owned life insurance.
Use of Operating Earnings to Measure Segment Performance
          Management uses earnings on an operating basis, rather than on a GAAP (reported) basis, to measure underlying performance trends for each business segment. Operating earnings represent reported earnings adjusted to exclude the impact of the significant items listed in the reconciliation table below. Analyzing earnings on an operating basis is very helpful in assessing underlying performance trends, a critical factor used to determine the success of strategies and future earnings capabilities.
          Listed below is certain financial results by line of business. For the three months and six months ended June 30, 2006 and 2005, operating earnings were the same as reported earnings.

25


                                         
    Three Months Ended June 30,
Income Statements   Regional   Dealer           Treasury/   Huntington
(in thousands of dollars)   Banking   Sales   PFCMG   Other   Consolidated
 
2006
                                       
Net interest income
  $ 227,454     $ 34,803     $ 18,037     $ (18,099 )   $ 262,195  
Provision for credit losses
    (14,844 )     949       (1,850 )           (15,745 )
Non-interest income
    92,785       21,489       39,139       9,606       163,019  
Non-interest expense
    (175,524 )     (27,936 )     (37,464 )     (11,435 )     (252,359 )
Income taxes
    (45,455 )     (10,257 )     (6,252 )     16,458       (45,506 )
 
Operating / reported net income
  $ 84,416     $ 19,048     $ 11,610     $ (3,470 )   $ 111,604  
 
2005
                                       
Net interest income
  $ 193,741     $ 36,890     $ 19,555     $ (8,286 )   $ 241,900  
Provision for credit losses
    (8,717 )     (4,468 )     290             (12,895 )
Non-interest income
    76,321       46,052       33,077       720       156,170  
Non-interest expense
    (147,488 )     (47,905 )     (32,801 )     (19,942 )     (248,136 )
Income taxes
    (39,850 )     (10,699 )     (7,042 )     26,977       (30,614 )
 
Operating / reported net income
  $ 74,007     $ 19,870     $ 13,079     $ (531 )   $ 106,425  
 
                                         
    Six Months Ended June 30,
Income Statements   Regional   Dealer           Treasury/   Huntington
(in thousands of dollars)   Banking   Sales   PFCMG   Other   Consolidated
 
2006
                                       
Net interest income
  $ 435,517     $ 69,651     $ 35,606     $ (34,899 )   $ 505,875  
Provision for credit losses
    (25,234 )     (6,813 )     (3,238 )           (35,285 )
Non-Interest income
    170,594       48,465       80,033       23,461       322,553  
Non-Interest expense
    (318,225 )     (59,294 )     (68,175 )     (45,080 )     (490,774 )
Income taxes
    (91,928 )     (18,203 )     (15,479 )     39,301       (86,309 )
 
Operating / reported net income
  $ 170,724     $ 33,806     $ 28,747     $ (17,217 )   $ 216,060  
 
2005
                                       
Net interest income
  $ 378,768     $ 74,799     $ 36,400     $ (12,869 )   $ 477,098  
Provision for credit losses
    (21,035 )     (11,399 )     (335 )           (32,769 )
Non-Interest income
    147,520       99,195       65,128       12,377       324,220  
Non-Interest expense
    (297,711 )     (104,582 )     (66,250 )     (37,870 )     (506,413 )
Income taxes
    (72,640 )     (20,304 )     (12,230 )     45,982       (59,192 )
 
Operating / reported net income
  $ 134,902     $ 37,709     $ 22,713     $ 7,620     $ 202,944  
 
                                                 
    Assets at     Deposits at  
Balance Sheets   June 30,     December 31,     June 30,     June 30,     December 31,     June 30,  
(in millions of dollars)   2006     2005     2005     2006     2005     2005  
         
Regional Banking
  $ 21,035     $ 18,851     $ 18,785     $ 19,839     $ 17,957     $ 17,627  
Dealer Sales
    5,417       5,612       6,021       61       65       68  
PFCMG
    2,179       2,010       2,009       1,218       1,180       1,176  
Treasury / Other
    7,635       6,292       6,174       3,475       3,208       3,460  
         
Total
  $ 36,266     $ 32,765     $ 32,989     $ 24,593     $ 22,410     $ 22,331  
         

26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
          Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, and private mortgage insurance; reinsure credit life and disability insurance; and sell other insurance and financial products and services. Our banking offices are located in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Certain activities are also conducted in Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania, South Carolina, and Tennessee. We have a foreign office in the Cayman Islands and another in Hong Kong. The Huntington National Bank (the Bank), organized in 1866, is our only bank subsidiary.
          The following discussion and analysis provides you with information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows and should be read in conjunction with the financial statements, notes, and other information contained in this report. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) appearing in our 2005 Annual Report on Form 10-K, as amended (2005 Form 10-K), as updated by the information contained in this report, should be read in conjunction with this interim MD&A.
          You should note the following discussion is divided into key segments:
    Introduction - Provides overview comments on important matters including risk factors and bank regulatory agreements. 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 Factors Influencing Financial Performance Comparisons section that summarizes key issues helpful for understanding performance trends. Key consolidated balance sheet and income statement trends are also discussed in this section.
 
    Risk Management and Capital - Discusses credit, market, 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 – Describes our lines of business, provides an overview of financial performance for each line of business, and provides additional discussion of trends underlying consolidated financial performance.
Forward-Looking Statements
          This report, including MD&A, contains forward-looking statements. These include descriptions of products or services, plans or objectives for future operations, and forecasts of revenues, earnings, cash flows, or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.
          By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth under Risk Factors of our 2005 Form 10-K, and other factors described in this report and from time to time in our other filings with the SEC.
          You should understand forward-looking statements to be strategic objectives and not absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.

27


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 counter parties will be unable to perform their contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely affect our financial condition or results of operation, (3) liquidity risk, which is the risk that we and / or the Bank will have insufficient cash or access to cash to meet operating needs, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events . (More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2005 Form 10-K.)
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 our 2005 Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary 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.
Formal Regulatory Supervisory Agreements
          On March 1, 2005, we announced that we had entered into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), and the Bank had entered into a formal written agreement with the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance our corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreements called for independent third-party reviews, as well as the submission of written plans and progress reports by Management and would remain in effect until terminated by the banking regulators.
          On October 6, 2005, we announced that the OCC had lifted its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. We were verbally advised that we were in full compliance with the financial holding company and financial subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This notification reflected that we, and the Bank, met both the “well-capitalized” and “well-managed” criteria under the GLB Act.
          On May 10, 2006, we announced that the FRBC notified our board of directors that we had satisfied the provisions of the written agreement dated February 28, 2005, and that the FRBC, under delegated authority of the Board of Governors of the Federal Reserve System, had terminated the written agreement.

28


DISCUSSION OF RESULTS OF OPERATIONS
          This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Factors Influencing Financial Performance Comparisons section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed in this section. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, this section should be read in conjunction with the Lines of Business Discussion.
Summary
          Earnings comparisons of 2006 second quarter and first six-month performance with that of the prior periods were impacted by a number of factors, some related to changes in the economic and competitive environment, while others reflected corporate actions, specific strategies, or changes in accounting practices. The most significant item impacting performance comparisons was the Unizan merger, which closed March 1, 2006. Understanding the impact of this merger, as well as the nature and implications of other significant factors on financial results is important in understanding our income statement, balance sheet, and credit quality trends and the comparison of the current quarter performance with that of prior periods. The key factors impacting current reporting period comparisons to prior periods are more fully described in the Significant Factors Influencing Financial Performance Comparisons section, which follows this summary discussion of results.
2006 Second Quarter versus 2005 Second Quarter
          Net income for the second quarter of 2006 was $111.6 million, or $0.46 per common share, up 5% and 2%, respectively, from $106.4 million, or $0.45 per common share, in the year-ago quarter. This $5.2 million increase in net income primarily reflected the positive impacts of:
    A $20.3 million, or 8%, increase in net interest income. This reflected the benefit of $2.7 billion, or 9%, growth in average earning assets ($1.7 billion, or 7%, in average total loans and leases), partially offset by a two basis point decline in the net interest margin to 3.34% from 3.36% in the year-ago quarter. The Unizan merger added $17.4 million to net interest income with the addition of $2.0 billion of earning assets ($1.7 billion in loans and leases). (See Net Interest Income discussion for details.)
 
    A $6.8 million, or 4%, increase in total non-interest income. This reflected the benefit of higher mortgage banking income, service charges on deposit accounts, trust services income, and other service charges and fees, which was partially offset by declines in operating lease income and other income. The Unizan merger contributed $7.2 million of growth to non-interest income. (See Non-interest Income discussion for details.)
          Partially offset by:
    $14.9 million increase in provision for income taxes as the effective tax rate increased to 29.0% from 22.3%. The increase in tax provision reflected higher pre-tax income in 2006, and the recognition of the benefit of a federal tax loss carryback in 2005. (See Provision for Income Taxes discussion for details.)
 
    $4.2 million, or 2%, increase in total non-interest expense. This reflected higher personnel, marketing, amortization of intangibles, equipment, and outside data processing and other service expenses, partially offset by declines in operating lease expense and professional services costs. The Unizan merger contributed $18.0 million to the increase in total non-interest expense. (See Non-interest Expense discussion for details.)
 
    $2.9 million, or 22%, increase in provision for credit losses. (See Provision for Credit Losses and the Credit Risk discussions for details.)
          The return on average assets (ROA) and return on average equity (ROE) in the 2006 second quarter were 1.25% and 14.9%, respectively. Both were lower than in the year-ago quarter, where the ROA was 1.31% and ROE was 16.3% ( see Table 1).

29


2006 Second Quarter versus 2006 First Quarter
          Net income for the second quarter of 2006 was $111.6 million, or $0.46 per common share, up 7% and 2%, respectively, from $104.5 million, or $0.45 per common share, in the prior quarter. This $7.2 million increase in net income primarily reflected the positive impacts of:
    An $18.5 million, or 8%, increase in net interest income. This reflected the benefit of $1.8 billion, or 6%, growth in average earning assets ($1.3 billion, or 5%, in average total loans and leases), and a two basis point increase in the net interest margin to 3.34% from 3.32% in the prior quarter. The Unizan merger contributed $11.6 million to the increase in net interest income ($17.4 million over three months during the second quarter compared with $5.8 million over one month during the first quarter). Unizan added $1.3 billion to earning assets ($1.1 billion in total loans and leases) compared with the first quarter. (See Net Interest Income discussion for details.)
 
    $3.8 million, or 19%, decrease in provision for credit losses. (See Provision for Credit Losses and the Credit Risk discussions for details.)
 
    A $3.5 million, or 2%, increase in total non-interest income. This reflected the benefit of higher service charges on deposit accounts, mortgage banking income, other service charges and fees, and trust services income, which was partially offset by declines in operating lease income and other income. The Unizan merger contributed $4.8 million of growth to total non-interest income. (See Non-interest Income discussion for details.)
     Partially offset by:
    $13.9 million, or 6%, increase in total non-interest expense. This reflected higher personnel, marketing, amortization of intangibles, equipment, and professional services, partially offset by a decline in operating lease expense. The Unizan merger contributed $13.7 million to the increase in total non-interest expense. (See Non-interest Expense discussion for details.)
 
    $4.7 million, or 12%, increase in provision for income taxes, reflecting primarily higher pre-tax income as the effective tax rate increased only slightly to 29.0% from 28.1%. (See Provision for Income Taxes discussion for details.)
          The ROA and ROE in the 2006 second quarter were 1.25% and 14.9%, respectively. Both were slightly lower than in the prior quarter, where the ROA was 1.26% and ROE was 15.5% ( see Table 1).
2006 First Six Months versus 2005 First Six Months
          Net income for the 2006 first six-month period was $216.1 million, or $0.90 per common share, up 6% and 5%, respectively, from $202.9 million, or $0.86 per common share, in the year-ago period. This $13.1 million increase in net income primarily reflected the positive impacts of:
    A $28.8 million, or 6%, increase in net interest income. This reflected the benefit of $1.9 billion, or 7%, growth in average earning assets ($1.4 billion, or 6%, in average total loans and leases), partially offset by a one basis point decline in the net interest margin to 3.33% from 3.34% in the year-ago six-month period. The Unizan merger contributed $23.2 million to the increase in net interest income and $1.3 billion to the growth of average earning assets ($1.1 billion in average total loans and leases). (See Net Interest Income discussion for details.)
 
    $15.6 million, or 3%, decline in total non-interest expense. This reflected significant declines in operating lease expense and professional services costs, partially offset by higher personnel, marketing, amortization of intangibles, equipment, and outside data processing and other service expenses. The Unizan merger contributed $27.5 million to total non-interest expense. (See Non-interest Expense discussion for details.)
     Partially offset by:
    $27.1 million, or 46%, increase in provision for income taxes as the effective tax rate increased to 28.5% from 22.6%. The increase in tax provision reflected higher pre-tax income in 2006, and the recognition of the benefit of a federal tax loss carryback in 2005. (See Provision for Income Taxes discussion for details.)
 
    $2.5 million, or 8%, increase in provision for credit losses. (See Provision for Credit Losses and the Credit Risk discussions for details.)

30


    $1.7 million, or 1%, decline in total non-interest income. This reflected a significant decline in operating lease income, partially offset by the benefit of higher mortgage banking income, service charges on deposit accounts, trust services income, other service charges and fees, and brokerage and insurance income. The Unizan merger contributed $9.6 million to total non-interest income. (See Non-interest Income discussion for details.)
          The ROA and ROE in the 2006 first six-month period were 1.26% and 15.2%, respectively. While the ROA was unchanged between periods, the ROE decline slightly from 15.9% in the year-ago six-month period (see Table 2).

31


INSERT Table 1 — Selected Quarterly Income Statement Data.
                                         
    2006     2005  
(in thousands, except per share amounts)   Second     First     Fourth     Third     Second  
         
Interest income
  $ 521,903     $ 464,787     $ 442,476     $ 420,858     $ 402,326  
Interest expense
    259,708       221,107       198,800       179,221       160,426  
         
Net interest income
    262,195       243,680       243,676       241,637       241,900  
Provision for credit losses
    15,745       19,540       30,831       17,699       12,895  
         
Net interest income after provision for credit losses
    246,450       224,140       212,845       223,938       229,005  
         
Service charges on deposit accounts
    47,225       41,222       42,083       44,817       41,516  
Trust services
    22,676       21,278       20,425       19,671       19,113  
Brokerage and insurance income
    14,345       15,193       13,101       13,948       13,544  
Bank owned life insurance income
    10,604       10,242       10,389       10,104       10,139  
Other service charges and fees
    13,072       11,509       11,488       11,449       11,252  
Mortgage banking income (loss)
    20,355       17,832       10,909       21,116       (2,376 )
Securities gains (losses)
    (35 )     (20 )     (8,770 )     101       (343 )
Gains on sales of automobile loans
    532       448       455       502       254  
Other income
    19,394       22,440       22,900       9,770       24,974  
         
Subtotal before operating lease income
    148,168       140,144       122,980       131,478       118,073  
Operating lease income
    14,851       19,390       24,342       29,262       38,097  
         
Total noninterest income
    163,019       159,534       147,322       160,740       156,170  
         
Personnel costs
    137,904       131,557       116,111       117,476       124,090  
Net occupancy
    17,927       17,966       17,940       16,653       17,257  
Outside data processing and other services
    19,569       19,851       19,693       18,062       18,113  
Equipment
    18,009       16,503       16,093       15,531       15,637  
Professional services
    6,292       5,365       7,440       8,323       9,347  
Marketing
    10,374       7,301       7,145       6,364       6,934  
Telecommunications
    4,990       4,825       4,453       4,512       4,801  
Printing and supplies
    3,764       3,074       3,084       3,102       3,293  
Amortization of intangibles
    2,992       1,075       218       203       204  
Other expense
    19,734       16,291       19,452       20,003       19,581  
         
Subtotal before operating lease expense
    241,555       223,808       211,629       210,229       219,257  
Operating lease expense
    10,804       14,607       18,726       22,823       28,879  
         
Total noninterest expense
    252,359       238,415       230,355       233,052       248,136  
         
Income before income taxes
    157,110       145,259       129,812       151,626       137,039  
Provision for income taxes
    45,506       40,803       29,239       43,052       30,614  
         
Net income
  $ 111,604     $ 104,456     $ 100,573     $ 108,574     $ 106,425  
         
 
                                       
Average common shares - diluted
    244,538       234,363       229,718       233,456       235,671  
 
                                       
Per common share
                                       
Net income — diluted
  $ 0.46     $ 0.45     $ 0.44     $ 0.47     $ 0.45  
Cash dividends declared
    0.250       0.250       0.215       0.215       0.215  
 
                                       
Return on average total assets
    1.25 %     1.26 %     1.22 %     1.32 %     1.31 %
Return on average total shareholders’ equity
    14.9       15.5       15.5       16.5       16.3  
Net interest margin (1)
    3.34       3.32       3.34       3.31       3.36  
Efficiency ratio (2)
    58.1       58.3       57.0       57.4       61.8  
Effective tax rate
    29.0       28.1       22.5       28.4       22.3  
 
                                       
Revenue - fully taxable equivalent (FTE)
                                       
Net interest income
  $ 262,195     $ 243,680     $ 243,676     $ 241,637     $ 241,900  
FTE adjustment
    3,984       3,836       3,837       3,734       2,961  
         
Net interest income (1)
    266,179       247,516       247,513       245,371       244,861  
Non-interest income
    163,019       159,534       147,322       160,740       156,170  
         
Total revenue (1)
  $ 429,198     $ 407,050     $ 394,835     $ 406,111     $ 401,031  
         
 
(1)   On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(2)   Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses).

32


INSERT Table 2 — Selected Year to Date Income Statement Data.
                                 
    Six Months Ended June 30,     Change  
(in thousands, except per share amounts)   2006     2005     Amount     Percent  
         
Interest income
  $ 986,690     $ 778,431     $ 208,259       26.8 %
Interest expense
    480,815       301,333       179,482       59.6  
         
Net interest income
    505,875       477,098       28,777       6.0  
Provision for credit losses
    35,285       32,769       2,516       7.7  
         
Net interest income after provision for credit losses
    470,590       444,329       26,261       5.9  
         
Service charges on deposit accounts
    88,447       80,934       7,513       9.3  
Trust services
    43,954       37,309       6,645       17.8  
Brokerage and insurance income
    29,538       26,570       2,968       11.2  
Bank owned life insurance income
    20,846       20,243       603       3.0  
Other service charges and fees
    24,581       21,411       3,170       14.8  
Mortgage banking income
    38,187       9,685       28,502       N.M.  
Securities gains
    (55 )     614       (669 )     N.M.  
Gains on sales of automobile loans
    980       254       726       N.M.  
Other income
    41,834       42,371       (537 )     (1.3 )
         
Subtotal before operating lease income
    288,312       239,391       48,921       20.4  
Operating lease income
    34,241       84,829       (50,588 )     (59.6 )
         
Total non-interest income
    322,553       324,220       (1,667 )     (0.5 )
         
Personnel costs
    269,461       248,071       21,390       8.6  
Net occupancy
    35,893       36,499       (606 )     (1.7 )
Outside data processing and other services
    39,420       36,883       2,537       6.9  
Equipment
    34,512       31,500       3,012       9.6  
Professional services
    11,657       18,806       (7,149 )     (38.0 )
Marketing
    17,675       12,770       4,905       38.4  
Telecommunications
    9,815       9,683       132       1.4  
Printing and supplies
    6,838       6,387       451       7.1  
Amortization of intangibles
    4,067       408       3,659       N.M.  
Other expense
    36,025       38,579       (2,554 )     (6.6 )
         
Subtotal before operating lease expense
    465,363       439,586       25,777       5.9  
Operating lease expense
    25,411       66,827       (41,416 )     (62.0 )
         
Total non-interest expense
    490,774       506,413       (15,639 )     (3.1 )
         
Income before income taxes
    302,369       262,136       40,233       15.3  
Provision for income taxes
    86,309       59,192       27,117       45.8  
         
Net income
  $ 216,060     $ 202,944     $ 13,116       6.5 %
         
 
                               
Average common shares - diluted
    239,451       235,362       4,089       1.7 %
 
                               
Per common share
                               
Net income per common share diluted
  $ 0.90     $ 0.86     $ 0.04       4.7 %
Cash dividends declared
    0.500       0.415       0.085       20.5  
 
                               
Return on average total assets
    1.26 %     1.26 %     %     %
Return on average total shareholders’ equity
    15.2       15.9       (0.7 )     (4.4 )
Net interest margin (1)
    3.33       3.34       (0.01 )     (0.3 )
Efficiency ratio (2)
    58.2       62.7       (4.5 )     (7.2 )
Effective tax rate
    28.5       22.6       5.9       26.1  
 
                               
Revenue - fully taxable equivalent (FTE)
                               
Net interest income
  $ 505,875     $ 477,098     $ 28,777       6.0 %
FTE adjustment (1)
    7,820       5,822       1,998       34.3  
         
Net interest income
    513,695       482,920       30,775       6.4  
Non-interest income
    322,553       324,220       (1,667 )     (0.5 )
         
Total revenue
  $ 836,248     $ 807,140     $ 29,108       3.6 %
         
N.M., not a meaningful value.
                               
 
(1)   On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(2)   Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains.

33


Significant Factors Influencing Financial Performance Comparisons
          Earnings comparisons from the beginning of 2005 through the second quarter of 2006 were impacted by a number of factors, reflecting corporate actions, specific strategies, or changes in accounting practices. Those key factors are summarized below.
1.   Unizan Acquisition. The merger with Unizan Financial Corp. (Unizan) was completed on March 1, 2006. At the time of acquisition, Unizan had assets of $2.5 billion, including $1.7 billion of loans, and core deposits of $1.5 billion. This impacted 2006 first and second quarter, and year-to-date reported results compared with pre-merger reporting periods as follows:
    Increased certain reported period-end balance sheet and credit quality items (e.g., non-performing loans).
 
    Increased reported average balance sheet, revenue, expense, and credit quality results (e.g., net charge-offs).
 
    Increased reported non-interest expense items as a result of costs incurred as part of merger-integration activities, most notably employee retention bonuses, outside programming services related to systems conversions, and marketing expenses related to customer retention initiatives. These merger costs were $1.0 million in the 2006 first quarter and $2.6 million in the 2006 second quarter, resulting in $3.6 million of merger costs, year-to-date.
     Given the impact of the merger on reported 2006 results, We believe that it is helpful in better understanding certain underlying performance and trends to analyze them by quantifying the impact of the merger. As such, the following two terms relating to the impact of the Unizan merger on reported results are used in the Discussion of Results of Operations, and when comparing post-merger period results to pre-merger periods:
    “Merger-related” refers to amounts and percentage changes representing the impact attributable to the merger.
 
    “Merger costs” represent expenses associated with merger integration activities.
     Schedules, reflecting the impact of the Unizan merger on our reported average balance sheet and income statement, can be found in Table 25 – Estimated Impact of Unizan Merger.
2.   Mortgage servicing rights (MSRs) and related hedging. Interest rate levels have generally been rising throughout this period, which has impacted the valuation of MSRs.
    Since the second quarter of 2002, we have generally retained the servicing on mortgage loans we originate and sell. MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. Thus, as interest rates decline, less future income is expected and the value of MSRs is reduced. Prior to 2006, we recognized impairment when the valuation was less than the recorded book value. We recognized temporary impairment due to changes in interest rates through a valuation reserve and recorded a direct write-down of the book value of MSRs for other-than-temporary declines in valuation. Changes and fluctuations in interest rate levels between quarters resulted in some quarters reporting an MSR temporary impairment, with others reporting a recovery of previously recognized MSR temporary impairment. Such swings in MSR valuations have significantly impacted quarterly mortgage banking income trends throughout this period.
 
    Beginning in 2006, we adopted Statement No. 156, which records MSRs at fair value. Under the fair value approach, servicing assets and liabilities are recorded at fair value at each reporting date. Changes in fair value between reporting dates are recorded as an increase or decrease in mortgage banking income, which is reflected in non-interest income in the consolidated statements of income. MSR assets are included in other assets. (See Tables 3, 7, and 8.)
 
    We use trading account assets to offset MSR valuation changes. The valuations of trading securities we used generally reacted to interest rate changes in an opposite direction compared with changes in MSR valuations. As a result, changes in interest rate levels that impacted MSR valuations also resulted in trading gains or losses. As such, in quarters where an MSR impairment was recognized, changes to the fair market value of trading account assets typically resulted in a recognition of trading income, and vice versa. Trading gains or losses are a component of other non-interest income on the income statement.

34


3.   Automobile leases originated through April 2002 are accounted for as operating leases. Automobile leases originated before May 2002 are accounted for using the operating lease method of accounting because they do not qualify as direct financing leases. Operating leases are carried in other assets with the related rental income, other revenue, and credit recoveries reflected as operating lease income, a component of non-interest income. Under this accounting method, depreciation expenses, as well as other costs and charge-offs, are reflected as operating lease expense, a component of non-interest expense. With no new automobile operating leases originated since April 2002, the operating lease assets have declined rapidly. It is anticipated that the level of operating lease assets and related operating lease income and expense will decline to a point of diminished materiality sometime in 2006. However, until that point is reached, and since operating lease income and expense represented a significant percentage of total non-interest income and expense, respectively, throughout these reporting periods, their downward trend influenced total revenue, total non-interest income, and total non-interest expense trends.
 
    In contrast, automobile leases originated since April 2002 are accounted for as direct financing leases, an interest earning asset included in total loans and leases with the related income reflected as interest income and included in the calculation of the net interest margin. Credit charge-offs and recoveries are reflected in the allowance for loan and lease losses (ALLL), with related changes in the ALLL reflected in the provision for credit losses. To better understand overall trends in automobile lease exposure, it is helpful to compare trends in the combined total of direct financing leases plus automobile operating leases.
 
4.   Effective tax rate. The effective tax rate was 28.5% for the six-month period, up 5.9% from the same period in 2005. The effective tax rate in 2005 included the positive impact on net income of a federal tax loss carry-back.
 
5.   Stock option expensing. Beginning in the 2006 first quarter, we adopted Statement No. 123R, Share-based Payment, which resulted in recognizing the impact of stock-based compensation, primarily in the form of stock option grants, as personnel expense in our income statement. Adoption of stock option expensing added $4.3 million to personnel expense in the 2006 first and second quarters, and totaled $8.5 million year-to-date. (See Note 9 to the unaudited condensed consolidated financial statements.)
 
6.   Other significant items influencing earnings performance comparisons. Other significant items influencing performance comparisons included:
           2006
           Second Quarter
    $2.6 million pre-tax ($0.01 earnings per share) negative impact from current period Unizan merger costs, which consisted primarily of retention bonuses and occupancy, outside programming services, and marketing expenses.
 
    $2.3 million pre-tax ($0.01 earnings per share) positive impact from equity investment gains.
           First Quarter
    $2.4 million pre-tax ($0.01 earnings per share) negative impact, reflecting a cumulative adjustment to defer annual fees related to home equity loans.
           2005
           Second Quarter
    $3.6 million pre-tax ($0.01 earnings per share) of severance and other expenses associated with the consolidation of certain operations functions, including the closing of an item-processing center in Michigan. These expenses included $2.0 million in severance-related personnel costs, $0.8 million in net occupancy, $0.5 million in equipment expenses, and $0.3 million in other expenses.
 
    $2.1 million pre-tax ($0.01 earnings per share) negative impact from the write-off of an equity investment.
           First Quarter
    $6.4 million pre-tax ($0.02 earnings per share) negative impact from a single, commercial credit charge-off. This resulted in an increase in net charge-offs and provision expense in that quarter.

35


          Table 3 reflects the earnings impact of certain significant items for periods affected by this Discussion of Results of Operations:
Table 3 — Significant Items Influencing Earnings Performance Comparison (1)
                                                 
    Three Months Ended
    June 30, 2006   March 31, 2006   June 30, 2005
(in millions)   After-tax   EPS   After-tax   EPS   After-tax   EPS
 
Net income — reported earnings
  $ 111.6             $ 104.5             $ 106.4          
Earnings per share, after tax
          $ 0.46             $ 0.45             $ 0.45  
Change from prior quarter — $
            0.01               0.01               0.04  
Change from prior quarter — %
            2.2 %             2.3 %             9.8 %
 
                                               
Change from a year-ago — $
          $ 0.01             $ 0.04             $ (0.02 )
Change from a year-ago — %
            2.2 %             9.8 %             (4.3 )%
                                                 
Significant items - favorable (unfavorable) impact:   Earnings (2)   EPS   Earnings (2)   EPS   Earnings (2)   EPS
 
Unizan merger-related expenses
  $ (2.6 )   $ (0.01 )                                
Equity investment gains
    2.3       0.01                                  
MSR mark-to-market net of hedge-related trading activity
                4.6       0.01              
Adjustment to defer home equity annual fees (3)
                (2.4 )     (0.01 )            
Net impact of federal tax loss carry back
                            6.6       0.03  
MSR recovery of temporary impairment net of hedge-related trading activity
                            (4.0 )     (0.01 )
Severance and consolidation expenses
                                    (3.6 )     (0.01 )
Write-off of equity investment
                            (2.1 )     (0.01 )
                                 
    Six Months Ended
    June 30, 2006   June 30, 2005
(in millions)   After-tax   EPS   After-tax   EPS
 
Net income — reported earnings
  $ 216.1             $ 202.9          
Earnings per share, after tax
          $ 0.90             $ 0.86  
Change from a year-ago — $
            0.04               (0.06 )
Change from a year-ago — %
            4.7 %             6.5 %
                                 
Significant items - favorable (unfavorable) impact:   Earnings (2)   EPS   Earnings (2)   EPS
 
MSR mark-to-market net of hedge-related trading activity
  $ 6.1     $ 0.02     $     $  
Adjustment to defer home equity annual fees
    (2.4 )     (0.01 )            
Unizan merger-related expenses
    (3.6 )     (0.01 )            
Equity investment gains (3)
    3.7       0.01              
Net impact of federal tax loss carry back
                13.0       0.06  
MSR recovery of temporary impairment net of hedge-related trading activity
                (4.0 )     (0.01 )
Severance and consolidation expenses
                (3.6 )     (0.01 )
Write-off of equity investment
                (2.1 )     (0.01 )
Single C&I charge-off impact, net of allocated reserves
                (6.4 )     (0.02 )
SEC and regulatory-related expenses
                (3.7 )     (0.01 )
 
(1)   See Significant Factors Influencing Financial Performance discussion.
 
(2)   Pre-tax unless otherwise noted.
 
(3)   After-tax.
 
     

36


Net Interest Income
(This section should be read in conjunction with Significant Factors 1, 3, and 6.)
2006 Second Quarter versus 2005 Second Quarter
          Fully taxable equivalent net interest income increased $21.3 million, or 9% ($17.7 million merger-related), from the year-ago quarter, reflecting the favorable impact of a $2.7 billion, or 9%, increase in average earning assets, as the fully taxable equivalent net interest margin declined two basis points to 3.34%. Average total loans and leases increased $1.7 billion, or 7%, nearly all of which was attributable to the Unizan merger. The remaining increase in average total loans and leases was $0.1 billion, essentially unchanged from the year-ago quarter, which primarily reflected growth in commercial loans, residential mortgages, and home equity loans, mostly offset by a decline in total average automobile loans and leases as we continued a program to sell a portion of that production.
          Average total commercial loans increased $1.2 billion, or 12% ($0.8 billion merger-related). The $1.2 billion growth reflected a $0.6 billion, or 11%, increase in average middle market C&I loans, a $0.5 billion, or 13%, increase in average commercial real estate loans, and a $0.2 billion, or 10%, increase in average small business loans.
          Average residential mortgages increased $0.5 billion, or 13% ($0.4 billion merger-related). Average home equity loans increased $0.2 billion, or 5%, substantially all from the Unizan merger.
          Compared with the year-ago quarter, average total automobile loans and leases decreased $0.4 billion, or 9%, with the Unizan merger having no significant impact. The decrease reflected the combination of two factors: (1) the continuation of historically low production levels over this period from low consumer demand and competitive pricing, and (2) the sale of automobile loans as we continued a program of selling a portion of current loan production. Average operating lease assets declined $0.3 billion, or 63%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter end was 16%, down from 19% a year ago.
          Average total investment securities increased $1.1 billion from the 2005 second quarter, attributed, in part, to the securities purchased in the 2006 first quarter related to Unizan.
          Average total core deposits in the 2006 second quarter increased $1.9 billion, or 11% ($1.5 billion merger-related), from the year-ago quarter. Most of the $1.9 billion increase reflected higher average certificates of deposit less than $100,000, which increased $1.7 billion. The Unizan merger added $0.6 billion of certificates of deposit less than $100,000, with the remaining $1.1 billion of growth resulting from customer demand for higher, fixed rate deposit products. Average savings and other domestic time deposits declined $0.1 billion. Outflows from these accounts and into higher rate products, such as certificates of deposit less than $100,000, were greater than the $0.5 billion of savings account balances acquired in the Unizan merger. Average non-interest bearing and interest bearing demand deposits rose $0.2 billion and $0.1 billion, respectively. The Unizan merger added $0.2 billion of non-interest bearing demand deposits and $0.2 billion of interest bearing demand deposits.
2006 Second Quarter versus 2006 First Quarter
          Compared with the 2006 first quarter, fully taxable equivalent net interest income increased $18.7 million, or 8% ($11.8 million merger-related). This reflected a 6% increase in average total earnings assets, the benefit of one additional day in the current quarter, as well as a two basis point increase in the net interest margin to 3.34% from 3.32%. The prior quarter’s net interest margin was negatively impacted by about 3 basis points related to an adjustment for annual home equity loan fees.
          Average total loans and leases increased $1.3 billion, or 5% ($1.1 billion merger-related), from the 2006 first quarter.
          Average total commercial loans increased $0.8 billion, or 7% ($0.5 billion merger-related), from the 2006 first quarter. The $0.8 billion increase reflected a $0.3 billion, or 6%, increase in average middle market C&I loans, a $0.3 billion, or 16%, increase in average small business loans, and a $0.2 billion, or 4%, increase in average commercial real estate loans.

37


     Average residential mortgages increased $0.3 billion, or 8%, and average home equity loans increased $0.2 billion, or 4%. Substantially all of the growth in these two categories of loans was merger-related. The growth rates in average residential mortgages and home equity loans were negatively impacted by a planned decline in broker-originated production, as well as credit underwriting and pricing discipline.
     Compared with the 2006 first quarter, average total automobile loans and leases declined 2%, with the Unizan merger having no significant impact. The decline reflected a combination of factors including low demand for leases, as well as sales of a portion of automobile loan and lease production. Average direct financing leases declined $0.1 billion, or 6%. Though direct financing lease production increased 48% from the prior quarter, the absolute level of production over the last several quarters has remained at historically low levels due to continued low consumer demand and competitive pricing. In contrast, average automobile loans increased 3%. Automobile loan production increased 12% from the prior quarter and represented the second highest level of quarterly production in the last nine quarters. Average operating lease assets declined slightly as this portfolio continued to run off.
     Average investment securities increased $0.4 billion from the 2006 first quarter, primarily merger-related.
     Average total core deposits in the 2006 second quarter increased $1.0 billion, or 5%, from the prior quarter, all of which was attributable to Unizan. Average certificates of deposit less than $100,000 increased $0.6 billion, reflecting $0.4 billion merger-related and a shift of customer preferences for certificates of deposit less than $100,000 and out of savings and other time deposits. This shift reflected the same factors impacting comparisons to the year-ago quarter noted above. Average interest bearing and non-interest bearing demand deposits each increased $0.2 billion, or 3% and 5%, respectively, primarily merger-related, but also from initiatives targeted at growing these deposits.

38


Table 4 — Consolidated Quarterly Average Balance Sheets
                                                           
    Average Balances     Change
Fully taxable equivalent basis   2006     2005     2Q06 vs 2Q05
(in millions)   Second   First   Fourth   Third   Second     Amount   Percent
                 
Assets
                                                         
Interest bearing deposits in banks
  $ 62     $ 48     $ 51     $ 54     $ 54       $ 8       14.8 %
Trading account securities
    100       66       119       274       236         (136 )     (57.6 )
Federal funds sold and securities purchased under resale agreements
    285       201       103       142       225         60       26.7  
Loans held for sale
    287       274       361       427       276         11       4.0  
Investment securities:
                                                         
Taxable
    4,494       4,138       3,802       3,523       3,589         905       25.2  
Tax-exempt
    556       548       540       537       411         145       35.3  
                 
Total investment securities
    5,050       4,686       4,342       4,060       4,000         1,050       26.3  
Loans and leases: (1)
                                                         
Commercial: (2)
                                                         
Middle market commercial and industrial
    5,458       5,132       4,946       4,708       4,901         557       11.4  
Middle market commercial real estate:
                                                         
Construction
    1,243       1,454       1,675       1,720       1,678         (435 )     (25.9 )
Commercial
    2,799       2,423       1,923       1,922       1,905         894       46.9  
             
Middle market commercial real estate
    4,042       3,877       3,598       3,642       3,583         459       12.8  
Small business
    2,456       2,121       2,230       2,251       2,230         226       10.1  
             
Total commercial
    11,956       11,130       10,774       10,601       10,714         1,242       11.6  
             
Consumer:
                                                         
Automobile loans
    2,044       1,994       2,018       2,078       2,069         (25 )     (1.2 )
Automobile leases
    2,095       2,221       2,337       2,424       2,468         (373 )     (15.1 )
             
Automobile loans and leases
    4,139       4,215       4,355       4,502       4,537         (398 )     (8.8 )
Home equity
    4,872       4,694       4,653       4,681       4,636         236       5.1  
Residential mortgage
    4,629       4,306       4,165       4,157       4,080         549       13.5  
Other loans
    605       586       521       507       491         114       23.2  
             
Total consumer
    14,245       13,801       13,694       13,847       13,744         501       3.6  
             
Total loans and leases
    26,201       24,931       24,468       24,448       24,458         1,743       7.1  
Allowance for loan and lease losses
    (293 )     (283 )     (262 )     (256 )     (270 )       (23 )     (8.5 )
             
Net loans and leases
    25,908       24,648       24,206       24,192       24,188         1,720       7.1  
             
Total earning assets
    31,985       30,206       29,444       29,405       29,249         2,736       9.4  
             
Operating lease assets
    152       200       245       309       409         (257 )     (62.8 )
Cash and due from banks
    806       789       742       867       865         (59 )     (6.8 )
Intangible assets
    638       362       218       217       218         420       N.M.  
All other assets
    2,402       2,215       2,227       2,197       2,149         253       11.8  
             
Total Assets
  $ 35,690     $ 33,489     $ 32,614     $ 32,739     $ 32,620       $ 3,070       9.4 %
             
 
                                                         
Liabilities and Shareholders’ Equity
                                                         
Deposits:
                                                         
Demand deposits — non-interest bearing
  $ 3,594     $ 3,436     $ 3,444     $ 3,406     $ 3,352       $ 242       7.2 %
Demand deposits — interest bearing
    7,778       7,562       7,496       7,539       7,677         101       1.3  
Savings and other domestic time deposits
    3,106       3,095       2,984       3,095       3,230         (124 )     (3.8 )
Certificates of deposit less than $100,000
    4,430       3,849       3,421       3,157       2,720         1,710       62.9  
             
Total core deposits
    18,908       17,942       17,345       17,197       16,979         1,929       11.4  
Domestic time deposits of $100,000 or more
    1,739       1,478       1,397       1,271       1,248         491       39.3  
Brokered deposits and negotiable CDs
    3,263       3,143       3,210       3,286       3,249         14       0.4  
Deposits in foreign offices
    474       465       490       462       434         40       9.2  
             
Total deposits
    24,384       23,028       22,442       22,216       21,910         2,474       11.3  
Short-term borrowings
    2,042       1,669       1,472       1,559       1,301         741       57.0  
Federal Home Loan Bank advances
    1,557       1,453       1,156       935       1,136         421       37.1  
Subordinated notes and other long-term debt
    3,428       3,346       3,687       3,960       4,100         (672 )     (16.4 )
             
Total interest bearing liabilities
    27,817       26,060       25,313       25,264       25,095         2,722       10.8  
             
All other liabilities
    1,284       1,264       1,283       1,458       1,554         (270 )     (17.4 )
Shareholders’ equity
    2,995       2,729       2,574       2,611       2,619         376       14.4  
             
Total Liabilities and Shareholders’ Equity
  $ 35,690     $ 33,489     $ 32,614     $ 32,739     $ 32,620       $ 3,070       9.4 %
             
 
(1)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.
 
(2)   The middle market C&I and CRE loan balances in the first quarter of 2006 contain Unizan loan balances that were subject to reclassification when these loans were converted to Huntington’s loan systems.

39


Table 5 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)
    2006   2005
Fully taxable equivalent basis (1)   Second   First   Fourth   Third   Second
         
Assets
                                       
Interest bearing deposits in banks
    4.04 %     3.78 %     3.20 %     2.13 %     1.47 %
Trading account securities
    5.56       4.49       4.53       3.95       3.94  
Federal funds sold and securities purchased under resale agreements
    4.75       4.30       3.78       3.41       2.76  
Loans held for sale
    6.23       5.92       5.68       5.43       6.04  
Investment securities:
                                       
Taxable
    5.32       5.00       4.70       4.37       4.13  
Tax-exempt
    6.83       6.71       6.77       6.62       6.76  
         
Total investment securities
    5.49       5.20       4.96       4.67       4.40  
Loans and leases: (3)
                                       
Commercial:
                                       
Middle market commercial and industrial
    7.26       6.80       6.28       5.87       5.65  
Middle market commercial real estate:
                                       
Construction
    8.01       7.55       7.27       6.58       6.04  
Commercial
    7.26       6.78       6.46       5.96       5.53  
         
Middle market commercial real estate
    7.49       7.07       6.84       6.25       5.77  
Small business
    7.10       6.67       6.43       6.18       6.01  
         
Total commercial
    7.30       6.87       6.50       6.07       5.76  
         
Consumer:
                                       
Automobile loans
    6.48       6.40       6.26       6.44       6.57  
Automobile leases
    5.01       4.97       4.98       4.94       4.91  
         
Automobile loans and leases
    5.74       5.65       5.57       5.63       5.67  
Home equity
    7.72       7.10       7.03       6.60       6.24  
Residential mortgage
    5.39       5.34       5.31       5.23       5.18  
Other loans
    6.83       6.39       5.98       5.92       6.22  
         
Total consumer
    6.35       6.08       6.00       5.85       5.74  
         
Total loans and leases
    6.79       6.43       6.22       5.94       5.75  
         
Total earning assets
    6.55 %     6.21 %     6.01 %     5.72 %     5.52 %
         
 
                                       
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Demand deposits — non-interest bearing
    %     %     %     %     %
Demand deposits — interest bearing
    2.62       2.44       2.12       1.87       1.64  
Savings and other domestic time deposits
    1.59       1.49       1.44       1.39       1.34  
Certificates of deposit less than $100,000
    4.05       3.83       3.70       3.58       3.49  
         
Total core deposits
    2.83       2.61       2.36       2.15       1.94  
Domestic time deposits of $100,000 or more
    4.67       4.33       3.90       3.60       3.27  
Brokered deposits and negotiable CDs
    5.12       4.69       4.20       3.66       3.25  
Deposits in foreign offices
    2.68       2.62       2.66       2.28       1.95  
         
Total deposits
    3.34       3.07       2.79       2.52       2.26  
Short-term borrowings
    4.12       3.57       3.11       2.74       2.16  
Federal Home Loan Bank advances
    4.34       3.99       3.37       3.08       3.02  
Subordinated notes and other long-term debt
    5.67       5.22       4.72       4.20       3.91  
         
Total interest bearing liabilities
    3.74 %     3.43 %     3.12 %     2.82 %     2.56 %
         
Net interest rate spread
    2.81 %     2.78 %     2.89 %     2.90 %     2.96 %
Impact of non-interest bearing funds on margin
    0.53       0.54       0.45       0.41       0.40  
         
Net interest margin
    3.34 %     3.32 %     3.34 %     3.31 %     3.36 %
         
(1)   Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 1 for the FTE adjustment.
 
(2)   Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

40


2006 First Six Months versus 2005 First Six Months
     Fully taxable equivalent net interest income increased $30.8 million, or 6% ($23.6 million merger-related), from the year-ago six-month period. Earning assets grew $1.9 billion, or 7%, and the fully taxable equivalent net interest margin declined one basis points to 3.33%. Average total loans and leases increased $1.4 billion, or 6% ($1.1 billion merger-related). This primarily reflected growth in commercial loans, residential mortgages, and home equity loans, partly offset by a decline in total average automobile loans and leases as we continued to sell a portion of that production.
     Average total commercial loans increased $1.0 billion, or 9% ($0.5 billion merger-related), from the year-ago six-month period. The $1.0 billion growth reflected a $0.5 billion, or 10%, increase in average middle market C&I loans, a $0.4 billion, or 11%, increase in average commercial real estate loans, 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 merger-related). Average home equity loans increased $0.2 billion, or 4%, ($0.1 billion merger-related).
     Compared with the year-ago six-month period, average total automobile loans and leases decreased $0.3 billion, or 7%, with Unizan having no material impact. The decrease reflected the combination of two factors: (1) historically low production levels over this period due to low consumer demand and competitive pricing, and (2) sales of automobile loans as we continued selling a portion of current loan production. Average operating lease assets declined $0.3 billion, or 62%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter end was 16% of total loans and leases and operating lease assets, down from 19% a year ago.
     Average total investment securities increased $0.7 billion from the 2005 first six-month period, attributed in part to the securities purchased in the 2006 first quarter related to Unizan.
     Average total core deposits in the 2006 first six-month period increased $1.4 billion, or 8% ($1.0 billion merger-related), from the comparable year-ago period. Most of the $1.4 billion increase in average core deposits reflected a $1.6 billion increase ($0.4 billion merger-related) in average certificates of deposit less than $100,000, with the remaining $1.2 billion of growth resulting from customer demand for higher, fixed rate deposit products. Average savings and other domestic time deposits declined $0.2 billion, or 5%. Outflows from these accounts and into higher rate products, such as certificates of deposit less than $100,000, were greater than the $0.3 billion impact from savings account balances acquired in the Unizan merger. Average non-interest bearing demand deposits were up $0.2 billion, or 5%. Average interest-bearing demand deposits declined $0.1 billion, or 2%, despite a $0.2 billion impact of average interest-bearing demand deposits acquired in the Unizan merger.

41


Table 6 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
                                                 
    YTD Average Balances   YTD Average Rates (2)
Fully taxable equivalent basis (1)   Six Months Ending June 30,   Change   Six Months Ending June 30,
(in millions of dollars)   2006   2005   Amount   Percent   2006   2005
         
Assets
                                               
Interest bearing deposits in banks
  $ 55     $ 54     $ 1       1.9 %     3.93 %     1.67 %
Trading account securities
    83       218       (135 )     (61.9 )     5.33       4.03  
Federal funds sold and securities purchased under resale agreements
    243       349       (106 )     (30.4 )     4.56       2.49  
Loans held for sale
    281       240       41       17.1       6.08       5.83  
Investment securities:
                                               
Taxable
    4,317       3,759       558       14.8       5.17       3.99  
Tax-exempt
    552       410       142       34.6       6.77       6.75  
         
Total investment securities
    4,869       4,169       700       16.8       5.35       4.26  
Loans and leases: (3)
                                               
Commercial:
                                               
Middle market commercial and industrial
    5,300       4,806       494       10.3       7.03       5.34  
Middle market commercial real estate:
                                               
Construction
    1,348       1,659       (311 )     (18.7 )     7.76       5.79  
Commercial
    2,612       1,894       718       37.9       7.04       5.38  
         
Middle market commercial real estate
    3,960       3,553                       7.28       5.57  
Small business
    2,290       2,207       83       3.8       6.90       5.91  
         
Total commercial
    11,550       10,566       984       9.3       7.09       5.54  
         
Consumer:
                                               
Automobile loans
    2,019       2,038       (19 )     (0.9 )     6.44       6.70  
Automobile leases
    2,157       2,465       (308 )     (12.5 )     4.99       4.91  
         
Automobile loans and leases
    4,176       4,503       (327 )     (7.3 )     5.69       5.72  
Home equity
    4,784       4,603       181       3.9       7.41       6.01  
Residential mortgage
    4,468       4,000       468       11.7       5.37       5.16  
Other loans
    596       486       110       22.6       6.61       6.32  
         
Total consumer
    14,024       13,592       432       3.2       6.22       5.67  
         
Total loans and leases
    25,574       24,158       1,416       5.9       6.61       5.62  
 
                                       
Allowance for loan and lease losses
    (288 )     (276 )     (12 )     4.3                  
         
Net loans and leases
    25,286       23,882       1,404       5.9                  
         
Total earning assets
    31,105       29,188       1,917       6.6       6.38 %     5.37 %
             
Operating lease assets
    176       469       (293 )     (62.5 )                
Cash and due from banks
    798       887       (89 )     (10.0 )                
Intangible assets
    500       218       282       N.M.                  
All other assets
    2,309       2,115       194       9.2                  
                     
Total Assets
  $ 34,600     $ 32,601     $ 1,999       6.1 %                
                     
 
                                               
Liabilities and Shareholders’ Equity
                                               
Deposits:
                                               
Demand deposits — non-interest bearing
  $ 3,515     $ 3,333     $ 182       5.5 %     %     %
Demand deposits — interest bearing
    7,671       7,800       (129 )     (1.7 )     2.54       1.54  
Savings and other domestic time deposits
    3,101       3,274       (173 )     (5.3 )     1.54       1.30  
Certificates of deposit less than $100,000
    4,141       2,609       1,532       58.7       3.95       3.46  
         
Total core deposits
    18,428       17,016       1,412       8.3       2.72       1.85  
Domestic time deposits of $100,000 or more
    1,609       1,249       360       28.8       4.51       3.10  
Brokered deposits and negotiable CDs
    3,203       2,987       216       7.2       4.91       3.05  
Deposits in foreign offices
    469       438       31       7.1       2.65       1.69  
         
Total deposits
    23,709       21,690       2,019       9.3       3.21       2.13  
Short-term borrowings
    1,856       1,240       616       49.7       3.87       1.91  
Federal Home Loan Bank advances
    1,505       1,166       339       29.1       4.17       2.96  
Subordinated notes and other long-term debt
    3,392       4,308       (916 )     (21.3 )     5.44       3.64  
         
Total interest bearing liabilities
    26,947       25,071       1,876       7.5       3.59       2.42  
         
All other liabilities
    1,275       1,624       (349 )     (21.5 )                
Shareholders’ equity
    2,863       2,573       290       11.3                  
         
Total Liabilities and Shareholders’ Equity
  $ 34,600     $ 32,601     $ 1,999       6.1 %                
                     
Net interest rate spread
                                    2.79       2.95  
Impact of non-interest bearing funds on margin
                                    0.54       0.39  
                                     
Net interest margin
                                    3.33 %     3.34 %
                                     
 
(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.

42


Provision for Credit Losses
(This section should be read in conjunction with Significant Factors 1, 3, and 6, and the Credit Risk section.)
          The provision for credit losses is the expense necessary to maintain the ALLL and the allowance for unfunded loan commitments and letters of credit (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 the 2006 second quarter was $15.7 million, up $2.8 million from the year-ago quarter but down $3.8 million from the 2006 first quarter. For the first six months of 2006, the provision for credit losses was $35.3 million, up $2.5 million from the comparable year-ago period.
Non-Interest Income
(This section should be read in conjunction with Significant Factors 1, 2, 3, and 6.)
          Table 7 reflects non-interest income detail for each of the past five quarters and for the first six months of 2006 and 2005.
Table 7 — Non-Interest Income
                                                           
    2006   2005     2Q06 vs 2Q05
(in thousands)   Second   First   Fourth   Third   Second     Amount   Percent
               
Service charges on deposit accounts
  $ 47,225     $ 41,222     $ 42,083     $ 44,817     $ 41,516       $ 5,709       13.8 %
Trust services
    22,676       21,278       20,425       19,671       19,113         3,563       18.6  
Brokerage and insurance income
    14,345       15,193       13,101       13,948       13,544         801       5.9  
Bank owned life insurance income
    10,604       10,242       10,389       10,104       10,139         465       4.6  
Other service charges and fees
    13,072       11,509       11,488       11,449       11,252         1,820       16.2  
Mortgage banking income (loss)
    20,355       17,832       10,909       21,116       (2,376 )       22,731       N.M.  
Securities gains (losses)
    (35 )     (20 )     (8,770 )     101       (343 )       308       89.8  
Gains on sales of automobile loans
    532       448       455       502       254         278       N.M.  
Other income
    19,394       22,440       22,900       9,770       24,974         (5,580 )     (22.3 )
               
Sub-total before operating lease income
    148,168       140,144       122,980       131,478       118,073         30,095       25.5  
Operating lease income
    14,851       19,390       24,342       29,262       38,097         (23,246 )     (61.0 )
               
Total non-interest income
  $ 163,019     $ 159,534     $ 147,322     $ 160,740     $ 156,170       $ 6,849       4.4 %
               
                                 
    Six Months Ended June 30,   YTD 2006 vs 2005
(in thousands)   2006   2005   Amount   Percent
         
Service charges on deposit accounts
  $ 88,447     $ 80,934     $ 7,513       9.3 %
Trust services
    43,954       37,309       6,645       17.8  
Brokerage and insurance income
    29,538       26,570       2,968       11.2  
Bank owned life insurance income
    20,846       20,243       603       3.0  
Other service charges and fees
    24,581       21,411       3,170       14.8  
Mortgage banking income
    38,187       9,685       28,502       N.M.  
Securities gains (losses)
    (55 )     614       (669 )     N.M.  
Gains on sales of automobile loans
    980       254       726       N.M.  
Other income
    41,834       42,371       (537 )     (1.3 )
         
Sub-total before operating lease income
    288,312       239,391       48,921       20.4  
Operating lease income
    34,241       84,829       (50,588 )     (59.6 )
         
Total non-interest income
  $ 322,553     $ 324,220     $ (1,667 )     (0.5) %
         
N.M., not a meaningful value.
          Table 8 details mortgage banking income and the net impact of MSR hedging activity. We record MSR valuation changes in mortgage banking income, whereas MSR hedge-related trading activity was recorded in other non-interest income, as well as in net interest income. Striking a mortgage banking income sub-total before MSR valuation adjustments

43


provides a clearer understanding of the underlying trends in mortgage banking income associated with the primary business activities of origination, sales, and servicing. The net impact of MSR hedging analysis shows all of the MSR valuation changes and related hedging activity so that the net impact can be more easily seen, especially since the components are recorded in different income statement line items.
          Mortgage banking income and the net impact of MSR hedging activities for each of the past five quarters and for the first six months of 2006 and 2005, was as follows:

44


Table 8 — Mortgage Banking Income and Net Impact of MSR Hedging
                                                           
    2006   2005     2Q06 vs 2Q05
(in thousands)   Second   First   Fourth   Third   Second     Amount   Percent
               
Mortgage Banking Income
                                                         
Origination fees
  $ 2,177     $ 1,977     $ 1,979     $ 3,037     $ 3,066       $ (889 )     (29.0 )%
Secondary marketing
    4,914       2,022       3,346       3,408       1,749         3,165       N.M.  
Servicing fees
    5,995       5,925       5,791       5,532       5,464         531       9.7  
Amortization of capitalized servicing (4)
    (3,293 )     (3,532 )     (3,785 )     (4,626 )     (5,187 )       1,894       36.5  
Other mortgage banking income
    2,280       2,227       3,193       3,308       2,763         (483 )     (17.5 )
               
Sub-total
    12,073       8,619       10,524       10,659       7,855         4,218       53.7  
MSR valuation adjustment (3) (4)
    8,281       9,213       385       10,457       (10,231 )       18,512       N.M.  
               
Total mortgage banking income (loss)
  $ 20,354     $ 17,832     $ 10,909     $ 21,116     $ (2,376 )     $ 22,730       N.M. %
               
 
                                                         
Capitalized mortgage servicing rights (1)
  $ 136,244     $ 123,257     $ 91,259     $ 85,940     $ 71,150       $ 65,094       91.5 %
MSR allowance (1)
                (404 )     (789 )     (11,246 )       11,246       N.M.  
Total mortgages serviced for others (1) (3)
    7,725,000       7,585,000       7,276,000       7,081,000       6,951,000         774,000       11.1  
MSR % of investor servicing portfolio
    1.76 %     1.63 %     1.25 %     1.21 %     1.02 %       0.74 %     72.5  
 
                                                         
Net Impact of MSR Hedging
                                                         
 
                                                         
MSR valuation adjustment (3)
  $ 8,281     $ 9,213     $ 385     $ 10,457     $ (10,231 )     $ 18,512       N.M. %
Net trading gains (losses) related to MSR hedging (2)
    (6,739 )     (4,638 )     (2,091 )     (12,831 )     5,727         (12,466 )     N.M.  
Net interest income related to MSR hedging
                109       233       512         512 )     N.M.  
               
Net impact of MSR hedging
  $ 1,542     $ 4,575     $ (1,597 )   $ (2,141 )   $ (3,992 )     $ 5,534       N.M. %
               
                                 
    Six Months Ended June 30,   YTD 2006 vs 2005
(in thousands)   2006   2005   Amount   Percent
         
Mortgage Banking Income
                               
Origination fees
  $ 4,154     $ 5,765     $ (1,611 )     (27.9 )%
Secondary marketing
    6,936       4,232       2,704       63.9  
Servicing fees
    11,920       10,858       1,062       9.8  
Amortization of capitalized servicing (4)
    (6,825 )     (9,948 )     3,123       (31.4 )
Other mortgage banking income
    4,507       5,249       (742 )     (14.1 )
         
Sub-total
    20,692       16,156       4,536       28.1  
MSR valuation adjustment (3) (4)
    17,494       (6,471 )     23,965       N.M.  
         
Total mortgage banking income (loss)
  $ 38,186     $ 9,685     $ 28,501       N.M. %
         
 
                               
Capitalized mortgage servicing rights (1)
  $ 136,244     $ 71,150     $ 65,094       91.5 %
MSR allowance (1)
          (11,246 )     11,246       N.M.  
Total mortgages serviced for others (1) (3)
    7,725,000       6,951,00       0 774,000       11.1  
MSR % of investor servicing portfolio
    1.76 %     1.02 %     0.74 %     72.5  
 
                               
Net Impact of MSR Hedging
                               
 
                               
MSR valuation adjustment (3)
  $ 17,494     $ (6,471 )   $ 23,965       N.M. %
Net trading gains (losses) related to MSR hedging (2)
    (11,377 )     1,545       (12,922 )     N.M.  
Net interest income related to MSR hedging
          1,346       (1,346 )     N.M.  
         
Net impact of MSR hedging
  $ 6,117     $ (3,580 )   $ 9,697       N.M. %
         
N.M., not a meaningful value.
 
(1)   At period end.
 
(2)   Included in other non-interest income.
 
(3)   The first quarter of 2006 reflects the adoption of Statement No. 156, which records MSRs at fair value. Prior periods reflect temporary impairment or recovery, based on accounting for MSRs at the lower of cost or market.
 
(4)   The change in fair value for the period presented in footnote 5 included both the MSR valuation adjustment and amortization of capitalized servicing.

45


2006 Second Quarter versus 2005 Second Quarter
          Non-interest income increased $6.8 million, or 4%, from the year-ago quarter, despite a $23.2 million decline in operating lease income. That portfolio continued to run off since no automobile operating leases have been originated since April 2002. Non-interest income before operating lease income increased $30.1 million, or 25%, of which $7.2 million was merger-related. The drivers of the $30.1 million increase included:
    $22.7 million increase ($0.3 million merger-related) in mortgage banking income, reflecting an $18.5 million positive impact of MSR valuation adjustments as well as higher secondary marketing income in the current quarter.
 
    $5.7 million, or 14% ($1.6 million merger-related), increase in service charges on deposit accounts, reflecting a $4.7 million, or 18%, increase in personal service charges, primarily NSF/OD, and a $1.0 million, or 6%, increase in commercial service charge income.
 
    $3.6 million, or 19% ($1.7 million merger-related), increase in trust services income, reflecting (1) a $2.0 million increase in higher personal trust income, mostly merger-related, as managed assets increased 19%, (2) a $0.9 million increase in Huntington Fund fees reflecting 17% managed asset growth, and (3) a $0.6 million increase in institutional trust income due to higher servicing fees with less than one-third of the growth being merger-related.
 
    $1.8 million, or 16% ($0.3 million merger-related) increase in other service charges and fees, reflecting a $1.4 million, or 18%, increase in fees generated by higher debit card volume.
 
    $0.8 million, or 6% ($0.5 million merger-related), increase in brokerage and insurance income, reflecting higher brokerage income including a $1.3 million, or 21%, increase in annuity fee income as annuity sales volume increased 16% .
Partially offset by:
    $5.6 million, or 22%, decline in other income, reflecting a $12.5 million negative impact in MSR hedge-related trading activities as the current quarter included a $6.7 million trading loss compared with a $5.7 million trading gain in the year-ago quarter. This negative impact was partially offset by a $3.0 million positive impact from higher equity investment gains, as well as a $2.1 million merger-related increase.
2006 Second Quarter versus 2006 First Quarter
          Non-interest income increased $3.5 million, or 2%, from the 2006 first quarter. However, excluding the impact of a $4.5 million decline in operating lease income as that portfolio continued to run off, non-interest income before operating lease income increased $8.0 million, or 6% ($4.8 million merger-related). Contributing to the $8.0 million increase was:
    $6.0 million, or 15% ($1.1 million merger-related), increase in service charges on deposit accounts. This reflected a $4.7 million, or 18%, increase in personal service charges, primarily NSF/OD, and a $1.3 million, or 8%, increase in commercial service charges.
 
    $2.5 million, or 14% ($0.2 million merger-related), increase in mortgage banking income, reflecting a $2.9 million increase in secondary marketing income.
 
    $1.6 million, or 14% ($0.2 million merger-related), increase in other service charges and fees reflecting an increase in debit card fees.
 
    $1.4 million, or 7% ($1.1 million merger-related), increase in trust services income, reflecting (1) $0.8 million increase in personal trust income, all merger-related, (2) $0.3 million increase in Huntington Fund fees due to 3% growth in managed assets, and (3) $0.2 million increase in institutional trust servicing fees, primarily merger-related .
Partially offset by:
    $3.0 million, or 14%, decline in other income, primarily reflecting the negative impact of a $2.1 million increase in MSR hedge-related trading losses, $1.5 million decline in other capital market-related income, and losses from low income housing tax credit investments in the current quarter, which were only partially offset by the benefit from a $1.4 million merger-related increase.

46


    $0.8 million, or 6%, decline in brokerage and insurance income despite a $0.3 million positive merger-related impact, due primarily to lower insurance income, reflecting lower sales of an automobile loan insurance product.
2006 First Six Months versus 2005 First Six Months
          Non-interest income declined $1.7 million from the year-ago six-month period, reflecting a $50.6 million decline in operating lease income. Non-interest income before operating lease income increased $48.9 million, or 20% ($9.6 million merger-related). The drivers of the $48.9 million increase included:
    $28.5 million increase ($0.3 million merger-related) in mortgage banking income, reflecting a $17.5 million positive impact of MSR valuation adjustments for the first six months of 2006, and a $6.5 million MSR temporary impairment in the year-ago period before hedge-related trading activity, as well as the positive impact of lower amortization of capitalized servicing and higher secondary marketing income.
 
    $7.5 million, or 9% ($2.1 million merger-related), increase in service charges on deposit accounts, reflecting a $7.1 million, or 14%, increase in personal service charges, primarily NSF/OD and volume related.
 
    $6.6 million, or 18% ($2.2 million merger-related), increase in trust services income, reflecting (1) a $3.3 million increase in higher personal trust income, (2) a $1.9 million increase in Huntington Fund fees, and (3) a $1.2 million increase in institutional trust income.
 
    $3.2 million, or 15% ($0.4 million merger-related), increase in other service charges and fees, reflecting a $2.6 million, or 17%, increase in fees generated by higher debit card volume.
 
    $3.0 million, or 11% ($0.6 million merger-related), increase in brokerage and insurance income, reflecting higher brokerage income including a $2.5 million, or 13%, increase in annuity fee income .

47


Non-Interest Expense
(This section should be read in conjunction with Significant Factors 1, 3, 5, and 6.)
          Table 9 reflects non-interest expense detail for each of the last five quarters and for the first six months of 2006 and 2005.
Table 9 — Non-Interest Expense
                                                           
    2006   2005     2Q06 vs 2Q05
(in thousands)   Second   First   Fourth   Third   Second     Amount   Percent
               
Salaries
  $ 107,249     $ 101,458     $ 91,858     $ 93,209     $ 98,283       $ 8,96       6 9.1 %
Benefits
    30,655       30,099       24,253       24,267       25,807         4,84       8 18.8  
               
Personnel costs
    137,904       131,557       116,111       117,476       124,090         13,814       11.1 %
Net occupancy
    17,927       17,966       17,940       16,653       17,257         670       3.9  
Outside data processing and other services
    19,569       19,851       19,693       18,062       18,113         1,456       8.0  
Equipment
    18,009       16,503       16,093       15,531       15,637         2,372       15.2  
Professional services
    6,292       5,365       7,440       8,323       9,347         (3,055 )     (32.7 )
Marketing
    10,374       7,301       7,145       6,364       6,934         3,440       49.6  
Telecommunications
    4,990       4,825       4,453       4,512       4,801         189       3.9  
Printing and supplies
    3,764       3,074       3,084       3,102       3,293         471       14.3  
Amortization of intangibles
    2,992       1,075       218       203       204         2,788       N.M.  
Other expense
    19,734       16,291       19,452       20,003       19,581         153       0.8  
               
Sub-total before operating lease expense
    241,555       223,808       211,629       210,229       219,257         22,298       10.2  
Operating lease expense
    10,804       14,607       18,726       22,823       28,879         (18,075 )     (62.6 )
               
Total non-interest expense
  $ 252,359     $ 238,415     $ 230,355     $ 233,052     $ 248,136       $ 4,223       1.7 %
               
                                 
    Six Months Ended June 30,   YTD 2006 vs 2005
(in thousands)   2006   2005   Amount   Percent
         
Salaries
  $ 208,707     $ 194,522     $ 14,185       7.3 %
Benefits
    60,754       53,549       7,205       13.5  
         
Personnel costs
    269,461       248,071       21,390       8.6  
Net occupancy
    35,893       36,499       (606 )     (1.7 )
Outside data processing and other services
    39,420       36,883       2,537       6.9  
Equipment
    34,512       31,500       3,012       9.6  
Professional services
    11,657       18,806       (7,149 )     (38.0 )
Marketing
    17,675       12,770       4,905       38.4  
Telecommunications
    9,815       9,683       132       1.4  
Printing and supplies
    6,838       6,387       451       7.1  
Amortization of intangibles
    4,067       408       3,659       N.M.  
Other expense
    36,025       38,579       (2,554 )     (6.6 )
         
Sub-total before operating lease expense
    465,363       439,586       25,777       5.9  
Operating lease expense
    25,411       66,827       (41,416 )     (62.0 )
         
Total non-interest expense
    490,774       506,413     $ (15,639 )     (3.1 )%
         
N.M., not a meaningful value.
                               
2006 Second Quarter versus 2005 Second Quarter
          Non-interest expense increased $4.2 million, or 2%, from the year-ago quarter, despite an $18.1 million decline in operating lease expense as that portfolio continued to run off. Non-interest expense before operating lease expense increased $22.3 million, or 10%, from the year-ago quarter, with $20.6 million attributable to Unizan ($18.0 merger-related plus $2.6 million of merger costs). The primary drivers of the $22.3 million increase were:
    $13.8 million, or 11%, increase in personnel expense with Unizan contributing $8.4 million of the increase ($7.7

48


      million merger-related plus $0.7 million of merger costs). The remaining increase of $5.3 million reflected an increase of $4.3 million due to the expensing of stock options, which began in 2006, and the annual merit increases for exempt employees, partially offset by personnel expense synergies resulting from the Unizan merger.
 
    $3.4 million, or 50%, higher marketing expense with Unizan contributing $0.9 million of the increase ($0.3 million merger-related plus $0.6 million of merger costs), due primarily to television commercial advertising, including up-front development costs incurred during the quarter.
 
    $2.8 million increase in the amortization of intangibles, all merger-related.
 
    $2.4 million, or 15%, increase in equipment expense with Unizan contributing $0.6 million of the increase, primarily merger-related, reflecting higher depreciation expense.
 
    $1.5 million, or 8%, increase in outside data processing and other services with Unizan contributing $1.2 million of the increase ($0.5 million merger-related plus $0.7 million of merger costs), reflecting higher debit card processing expense.
Partially offset by:
    $3.1 million, or 33%, decline in professional services. Though Unizan added $1.6 million to current period expense ($1.5 million merger-related plus $0.1 million of merger costs), this was more than offset by lower consulting expense as the year-ago quarter included SEC and regulatory-related expenses, as well as other consulting costs.
2006 Second Quarter versus 2006 First Quarter
               Non-interest expense increased $13.9 million, or 6%, from the 2006 first quarter despite a $3.8 million decline in operating lease expense as that portfolio continued to run off. Non-interest expense before operating lease expense increased $17.7 million, or 8%, with $13.6 million attributable to Unizan ($12.0 million merger-related and $1.6 million of merger-costs). The primary drivers of the $17.7 million increase included:
    $6.3 million, or 5%, increase in personnel costs with Unizan contributing $5.7 million of the increase ($5.2 million merger-related plus $0.5 million of merger costs). The remaining increase of $0.6 million reflected an increase due to annual merit increases for exempt employees effective March 1, partially offset by personnel expense synergies resulting from the Unizan merger.
 
    $3.4 million, or 21%, increase in other expense with Unizan contributing $2.1 million of the increase, primarily merger-related.
 
    $3.1 million, or 42%, higher marketing expense with Unizan contributing $0.6 million of the increase ($0.2 million merger-related plus $0.4 million of merger costs), due to television commercial costs.
 
    $1.9 million increase in amortization of intangibles, all merger-related.
 
    $1.5 million, or 9%, increase in equipment expense with Unizan contributing $0.4 million of the increase, primarily merger-related, reflecting higher depreciation expense associated with the upgrade of a number of operating and administrative systems.
2006 First Six Months versus 2005 First Six Months
               Non-interest expense decreased $15.6 million, or 3%, from the year-ago six-month period, reflecting a $41.4 million decline in operating lease expense as that portfolio continued to run off. Non-interest expense before operating lease expense increased $25.8 million, or 6%, with $27.5 million attributable to Unizan ($23.9 million merger-related plus $3.7 million of merger costs). The primary drivers of the $25.8 million increase were:
    $21.4 million, or 9%, increase in personnel expense with Unizan contributing $11.2 million of the increase ($10.3 million merger-related plus $0.9 million of merger costs). The remaining increase of $10.2 million reflected an increase of $8.5 million due to the expensing of stock options, which began in 2006, and the annual merit increases for exempt employees, partially offset by personnel expense synergies resulting from the Unizan merger.

49


    $4.9 million, or 38%, higher marketing expense with Unizan contributing $1.1 million of the increase ($0.4 million merger-related plus $0.7 million of merger costs), due primarily to 2006 second quarter television commercial advertising, including up-front development costs incurred in the period.
 
    $3.7 million increase in the amortization of intangibles, all merger-related.
 
    $3.0 million, or 10%, increase in equipment expense with Unizan contributing $0.7 million of the increase, primarily merger-related, reflecting higher depreciation expense.
 
    $2.5 million, or 7%, increase in outside data processing and other services with Unizan contributing $2.0 million of the increase ($0.7 million merger-related plus $1.3 million of merger costs), reflecting outside contract programming and debit card processing expense.
Partially offset by:
    $7.1 million, or 38%, decline in professional services. Though Unizan added $2.1 million to 2006 six-month expense ($2.0 million merger-related plus $0.1 million of merger costs), this was more than offset by lower consulting expense as the year-ago period included $3.7 million of SEC and regulatory-related expenses, as well as a $3.6 million decline in other consulting and collections costs.
    $2.6 million, or 7%, decline in other expenses despite the addition of $4.1 million of merger-related expenses. Reductions in other expense were recorded in lease residual value insurance (due to lower volumes), minority interest expense, OREO expenses, and franchise taxes.
Operating Lease Assets
(This section should be read in conjunction with Significant Factor 3 and Lease Residual Risk section.)
               Operating lease assets primarily represent automobile leases originated before May 2002. This operating lease portfolio is running off over time since all automobile lease originations after April 2002 have been recorded as direct financing leases and are reported in the automobile loan and lease category in earning assets. As a result, the non-interest income and non-interest expense associated with the operating lease portfolio has declined.
               Operating lease assets performance for each of the last five quarters and for the first six months of 2006 and 2005 was as follows:

50


Table 10 — Operating Lease Performance
                                                           
    2006   2005     2Q06 vs 2Q05
(in thousands)   Second   First   Fourth   Third   Second     Amount   Percent
           
Balance Sheet:
                                                         
Average operating lease assets outstanding
  $ 151,527     $ 199,998     $ 245,346     $ 308,952     $ 408,798       $ (257,271 )     (62.9 )%
           
 
                                                         
Income Statement:
                                                         
Net rental income
  $ 13,386     $ 17,515     $ 21,674     $ 26,729     $ 34,562       $ (21,176 )     (61.3 )%
Fees
    669       732       1,482       1,419       1,773         (1,104 )     (62.3 )
Recoveries — early terminations
    796       1,143       1,186       1,114       1,762         (966 )     (54.8 )
           
Total operating lease income
    14,851       19,390       24,342       29,262       38,097         (23,246 )     (61.0 )
           
 
                                                         
Depreciation and residual losses at termination
    10,229       13,437       17,223       20,856       26,560         (16,331 )     (61.5 )
Losses — early terminations
    575       1,170       1,503       1,967       2,319         (1,744 )     (75.2 )
           
Total operating lease expense
    10,804       14,607       18,726       22,823       28,879         (18,075 )     (62.6 )
           
Net earnings contribution
  $ 4,047     $ 4,783     $ 5,616     $ 6,439     $ 9,218       $ (5,171 )     (56.1 )%
           
Earnings ratios (1)
                                                         
Net rental income
    35.3 %     35.0 %     35.3 %     34.6 %     33.8 %       1.5 %     4.4 %
Depreciation and residual losses at termination
    27.0       26.9       28.1       27.0       26.0         1.0       3.8  
                                 
    Six Months Ended June 30,   YTD 2006 vs 2005
(in thousands)   2006   2005   Amount   Percent
     
Balance Sheet:
                               
Average operating lease assets outstanding
  $ 175,629     $ 468,688     $ (293,059 )     (62.5 )%
     
 
                               
Income Statement:
                               
Net rental income
  $ 30,901     $ 78,116     $ (47,215 )     (60.4 )%
Fees
    1,401       3,630       (2,229 )     (61.4 )
Recoveries — early termin tions
    1,939       3,083       (1,144 )     (37.1 )
     
Total operating lease income
    34,241       84,829       (50,588 )     (59.6 )
     
 
                               
Depreciation and residual losses at termination
    23,666       61,263       (37,597 )     (61.4 )
Losses — early terminations
    1,745       5,564       (3,819 )     (68.6 )
     
Total operating lease expense
    25,411       66,827       (41,416 )     (62.0 )
     
 
                               
Net earnings contribution
  $ 8,830     $ 18,002     $ (9,172 )     (50.9 )%
     
Earnings ratios (1)
                               
Net rental income
    35.2 %     33.3 %     1.9 %     5.7 %
Depreciation and residual losses at termination
    26.9       26.1       0.8       3.1  
 
(1)   As a percent of average operating lease assets, annualized.

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2006 Second Quarter versus 2005 Second Quarter and 2006 First Quarter
     Average operating lease assets in the 2006 second quarter were $0.2 billion, down $0.3 billion, or 63%, from the year-ago quarter and down 24% from the 2006 first quarter. This reflected the continued run-off of this portfolio as no new automobile operating leases have been originated since April 2002, and operating lease asset balances will continue to decline through both depreciation and lease terminations. (For a discussion of operating lease accounting, residual value loss determination, and related residual value insurance, see Note 1, Significant Accounting Policies and the Lease Residual Risk section of the Company’s 2005 Form 10-K .)
     Reflecting the continued run-off of automobile operating lease assets, the net earnings contribution from operating lease assets was $4.0 million in the 2006 second quarter, down $5.2 million, or 56%, from the year-ago quarter and down $0.7 million, or 15%, from the 2006 first quarter.
     Operating lease income, which totaled $14.9 million in the 2006 second quarter, represented 9% of total non-interest income in the quarter. Operating lease income was down $23.2 million, or 61%, from the year-ago quarter and $4.5 million, or 23%, from the 2006 first quarter, reflecting the declines in average operating lease assets. Net rental income was down 61% and 24%, respectively, from the year-ago and 2006 first quarters. Fees declined 62% from the year-ago quarter and 9% from the prior quarter. Recoveries from early terminations decreased 55% from the year-ago quarter and 30% from the 2006 first quarter.
     Operating lease expense totaled $10.8 million and represented 4% of total non-interest expense in the current quarter. Operating lease expense was down $18.1 million, or 63%, from the year-ago quarter and down $3.8 million, or 26%, from the 2006 first quarter. Losses on early terminations, which are included in total operating lease expense, declined 75% from the year-ago quarter and 51% from the prior quarter.
2006 First Six Months versus 2005 First Six Months
     Average operating lease assets in the 2006 first six-month period were $0.2 billion, down $0.3 billion, or 62% from the comparable year-ago period as this portfolio continued to run-off. Reflecting this decline in average operating lease assets, the net earnings contribution from operating lease assets was $8.8 million in the 2006 first six-month period, down $9.2 million, or 51%, from the comparable year-ago period.
     Operating lease income, which totaled $34.2 million for the 2006 first six-month period, represented 11% of total non-interest income, and was down $50.6 million, or 60%, from the comparable year-ago period. Net rental income was down $47.2 million, or 60%. Fees declined $2.2 million, or 61%, from the comparable year-ago period. Recoveries from early terminations were down 37% from the year-ago period. Operating lease expense totaled $25.4 million, down $41.4 million, or 62%, from the comparable year-ago six-month period.
Provision for Income Taxes
(This section should be read in conjunction with Significant Factor 4.)
     The provision for income taxes in the 2006 second quarter was $45.5 million and represented an effective tax rate on income before taxes of 29.0%. The provision for income taxes increased $14.9 million from the year-ago quarter, primarily due to an increase in pre-tax earnings and the recognition of the effect of federal tax refunds on income tax expense in the 2005 second quarter. The effective tax rate in the year-ago quarter was 22.3%, and included the after tax positive impact on net income due to a federal tax loss carryback.
     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.
     The Internal Revenue Service is currently examining our federal tax returns for the years 2002 and 2003 and the 2003 federal income tax return for Unizan. In addition, we are subject to ongoing tax examinations in various jurisdictions. We believe that the resolution of these examinations will not have a significant adverse impact on our consolidated financial position or results of operations.

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RISK MANAGEMENT AND CAPITAL
     Risk identification and monitoring are key elements in overall risk management. We believe our primary risk exposures are credit, market, liquidity, and operational risk. Credit risk is the risk of loss due to adverse changes in the borrower’s ability to meet their financial obligations under agreed upon terms. Market risk represents the risk of loss due to changes in the market value of assets and liabilities due to changes in interest rates, exchange rates, residual values, and equity prices. Liquidity risk arises from the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, investor perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues. Operational risk arises from the inherent day-to-day operations of the company that could result in losses due to human error, inadequate or failed internal systems and controls, and external events.
     We follow a formal policy to identify, measure, and document the key risks facing the company, how those risks can be controlled or mitigated, and how we monitor the controls to ensure that they are effective. Our chief risk officer is responsible for ensuring that appropriate systems of controls are in place for managing and monitoring operational risk across the company. Potential risk concerns are shared with the board of directors, as appropriate. Our internal audit department performs ongoing independent reviews of the risk management process and ensures the adequacy of documentation. The results of these reviews are reported regularly to the audit committee of the board of directors.
     Some of the more significant processes used to manage and control credit, market, liquidity, and operational risks are described in the following paragraphs.
Credit Risk
     Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed upon terms. We are subject to credit risk in lending, trading, and investment activities. The nature and degree of credit risk is a function of the types of transactions, the structure of those transactions, and the parties involved. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is incidental to trading activities and represents a limited portion of the total risks associated with the investment portfolio. Credit risk is mitigated through a combination of credit policies and processes and portfolio diversification.
     The maximum level of credit exposure to individual commercial borrowers is limited by policy guidelines based on the risk of default associated with the credit facilities extended to each borrower or related group of borrowers. All authority to grant commitments is delegated through the independent credit administration function and is monitored and regularly updated in a centralized database. Concentration risk is managed via limits on loan type, geography, industry, loan quality factors, and country limits. We have focused on extending credit to commercial customers with existing or expandable relationships within our primary markets.
     The checks and balances in the credit process and the independence of the credit administration and risk management functions are designed to accurately assess the level of credit risk being accepted, facilitate the early recognition of credit problems when they do occur, and provide for effective problem asset management and resolution.
Credit Exposure Mix
(This section should be read in conjunction with Significant Factors 3 and 6.)
     An overall corporate objective is to avoid undue portfolio concentrations. As shown in Table 11, at June 30, 2006, total credit exposure was $26.5 billion. Of this amount, $14.3 billion, or 54%, represented total consumer loans and leases, $12.0 billion, or 45%, represented total commercial loans and leases, and $0.1 billion, or less than 1%, represented operating lease assets.

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Table 11 — Credit Exposure Composition
                                                                                 
    2006   2005
(in thousands)   June 30,   March 31,   December 31,   September 30,   June 30,
    (Unaudited)   (Unaudited)                   (Unaudited)   (Unaudited)
By Type
                                                                               
Commercial:
                                                                               
Middle market commercial and industrial
  $ 5,595,454       21.1 %   $ 5,288,710       20.1 %   $ 5,084,244       20.6 %   $ 4,856,608       19.6 %   $ 4,947,640       19.9 %
Middle market commercial real estate:
                                                                               
Construction
    1,173,454       4.4       1,366,890       5.2       1,521,897       6.2       1,770,543       7.1       1,692,748       6.8  
Commercial
    2,731,684       10.3       3,046,368       11.6       2,015,498       8.2       1,933,610       7.8       1,948,195       7.8  
         
Middle market commercial real estate
    3,905,138       14.7       4,413,258       16.8       3,537,395       14.4       3,704,153       14.9       3,640,943       14.6  
Small business
    2,531,176       9.6       2,116,063       8.1       2,223,740       9.1       2,112,171       8.5       2,136,685       8.7  
         
Total commercial
    12,031,768       45.4       11,818,031       45.0       10,845,379       44.1       10,672,932       43.0       10,725,268       43.2  
         
Consumer:
                                                                               
Automobile loans
    2,059,836       7.8       2,053,777       7.8       1,985,304       8.0       2,063,285       8.3       2,045,771       8.2  
Automobile leases
    2,042,215       7.7       2,154,883       8.2       2,289,015       9.3       2,381,004       9.6       2,458,432       9.9  
Home equity
    4,888,958       18.5       4,816,196       18.3       4,638,841       18.8       4,684,904       18.9       4,683,577       18.8  
Residential mortgage
    4,739,814       17.9       4,604,705       17.5       4,193,139       17.0       4,180,350       16.9       4,152,203       16.7  
Other loans
    591,990       2.2       697,997       2.5       520,488       1.9       513,812       2.2       501,897       1.8  
         
Total consumer
    14,322,813       54.1       14,327,558       54.3       13,626,787       55.0       13,823,355       55.9       13,841,880       55.4  
         
Total loans and direct financing leases
  $ 26,354,581       99.5     $ 26,145,589       99.3     $ 24,472,166       99.1     $ 24,496,287       98.9     $ 24,567,148       98.6  
         
 
                                                                               
Operating lease assets
    131,943       0.5       174,839       0.7       229,077       0.9       274,190       1.1       353,678       1.4  
         
Total credit exposure
  $ 26,486,524       100.0 %   $ 26,320,428       100.0 %   $ 24,701,243       100.0 %   $ 24,770,477       100.0 %   $ 24,920,826       100.0 %
         
 
                                                                               
         
Total automobile exposure (1)
  $ 4,233,994       16.0 %   $ 4,383,499       16.7 %   $ 4,503,396       18.2 %   $ 4,718,479       19.0 %   $ 4,857,881       19.5 %
         
 
                                                                               
By Business Segment (2)
                                                                               
Regional Banking:
                                                                               
Central Ohio
  $ 3,598,342       13.6 %   $ 3,360,201       12.8 %   $ 3,150,394       12.8 %   $ 3,233,382       13.1 %   $ 3,154,443       12.7 %
Northern Ohio
    2,660,450       10.0       2,552,570       9.7       2,522,854       10.2       2,580,925       10.4       2,533,670       10.2  
Southern Ohio / Kentucky
    2,195,013       8.3       2,121,870       8.1       2,037,190       8.2       2,059,649       8.3       2,100,446       8.4  
Eastern Ohio (4) (5)
    1,416,505       5.3       1,825,985       6.9       369,870       1.5       372,124       1.5       383,366       1.5  
West Michigan
    2,397,525       9.1       2,372,563       9.0       2,363,162       9.6       2,369,800       9.6       2,386,311       9.6  
East Michigan
    1,597,741       6.0       1,536,284       5.8       1,573,413       6.4       1,530,081       6.2       1,495,277       6.0  
West Virginia
    1,053,464       4.0       968,333       3.7       970,953       3.9       948,847       3.8       918,612       3.7  
Indiana
    953,776       3.6       977,589       3.7       1,025,807       4.2       958,119       3.9       1,037,983       4.2  
Mortgage and equipment leasing groups
    3,637,546       13.8       3,525,564       13.4       3,533,535       14.2       3,504,796       14.1       3,447,249       13.8  
         
Regional Banking
    19,510,362       73.7       19,240,959       73.1       17,547,178       71.0       17,557,723       70.9       17,457,357       70.1  
Dealer Sales (3)
    5,167,300       19.5       5,347,051       20.3       5,429,997       22.0       5,492,235       22.2       5,761,321       23.1  
Private Financial and Capital Markets Group
    1,808,862       6.8       1,732,418       6.6       1,724,068       7.0       1,720,519       6.9       1,702,148       6.8  
         
Treasury / Other
                                                           
         
Total credit exposure
  $ 26,486,524       100.0 %   $ 26,320,428       100.0 %   $ 24,701,243       100.0 %   $ 24,770,477       100.0 %   $ 24,920,826       100.0 %
         
 
(1)   Sum of automobile loans and leases and automobile operating lease assets.
 
(2)   Prior period amounts have been reclassified to conform to the current period business segment structure.
 
(3)   Includes operating lease inventory.
 
(4)   Periods prior to 2006 include certain banking offices previously reported in Northern Ohio.
 
(5)   The decline from the first quarter of 2006 is primarily the result of the Unizan system conversion and the classification of certain commercial loans.

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Commercial Credit
     Commercial credit approvals are based on the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. There are two processes for approving credit risk exposures. The first involves a centralized loan approval process for the standard products and structures utilized in small business lending. In this centralized decision environment, individual credit authority is granted to certain individuals on a regional basis to preserve our local decision-making focus. The second, and more prevalent approach, involves individual approval of exposures. These approvals are consistent with the authority delegated to officers located in the geographic regions who are experienced in the industries and loan structures over which they have responsibility.
     All C&I and CRE credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-in-event-of-default. This two-dimensional rating methodology, which has 192 individual loan grades, provides granularity in the portfolio management process. The probability-of-default is rated on a scale of 1-12 and is applied at the borrower level. The loss-in-event-of-default is rated on a 1-16 scale and is associated with each individual credit exposure based on the type of credit extension and the underlying collateral.
     In commercial lending, ongoing credit management is dependent on the type and nature of the loan. In general, quarterly monitoring is normal for all significant exposures. The internal risk ratings are revised and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis to continually update default probabilities and to estimate future losses.
     In addition to the initial credit analysis initiated by the portfolio manager during the underwriting process, the loan review group performs independent credit reviews. The loan review group reviews individual loans and credit processes and conducts a portfolio review at each of the regions on a 15-month cycle, and the loan review group validates the risk grades on a minimum of 50% of the portfolio exposure.
     Borrower exposures may be designated as “watch list” accounts when warranted by individual company performance, or by industry and environmental factors. Such accounts are subjected to additional quarterly reviews by the business line Management, the loan review group, and credit administration in order to adequately assess the borrower’s credit status and to take appropriate action.
     A specialized credit workout group manages problem credits and handles commercial recoveries, workouts, and problem loan sales, as well as the day-to-day management of relationships rated substandard or lower. The group is responsible for developing an action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual status, and the ultimate collectibility of the credits managed.
Consumer Credit
     Consumer credit approvals are based on, among other factors, the financial strength of the borrower, type of exposure, and the transaction structure. Consumer credit decisions are generally made in a centralized environment utilizing decision models. There is also individual credit authority granted to certain individuals on a regional basis to preserve our local decision-making focus. Each credit extension is assigned a specific probability-of-default and loss-in-event-of-default. The probability-of-default is generally a function of the borrower’s credit bureau score, while the loss-in-event-of-default is related to the type of collateral and the loan-to-value ratio associated with the credit extension.
     In consumer lending, credit risk is managed from a loan type and vintage performance analysis. All portfolio segments are continuously monitored for changes in delinquency trends and other asset quality indicators. We make extensive use of portfolio assessment models to continuously monitor the quality of the portfolio and identify under-performing segments. This information is then incorporated into future origination strategies. The independent risk management group has a consumer process review component to ensure the effectiveness and efficiency of the consumer credit processes.

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     Home equity loans and lines consist of both first and second position collateral with underwriting criteria based on minimum FICO credit scores, debt/income ratios, and loan-to-value ratios. We offer closed-end, home equity loans with a fixed rate and level monthly payments and a variable-rate, interest-only home equity line of credit. At June 30, 2006, we had $1.4 billion of home equity loans and $3.5 billion of home equity lines of credit. The average loan-to-value ratio of our home equity portfolio (both loans and lines) was 80% at June 30, 2006. We do not originate home equity loans or lines that (a) allow negative amortization, (b) have a loan-to-value ratio at origination greater than 100%, or (c) are “option ARMs.” Home equity loans are generally fixed-rate with periodic principal and interest payments. We originated $179 million of home equity loans in the second quarter 2006 with a weighted average loan-to-value ratio of 64% and a weighted average FICO score of 739. Home equity lines of credit generally have variable-rates of interest and do not require payment of principal during the 10-year revolving period of the line. During the second quarter of 2006, we originated $437 million of home equity lines. The lines of credit originated during the quarter had a weighted average loan-to-value ratio of 75% and a weighted average FICO score of 742.
     At June 30, 2006, we had $4.7 billion of residential real estate loans. Adjustable-rate mortgages, primarily mortgages that have a fixed-rate for the first 3 to 5 years and then adjust annually, comprised 65% of this portfolio. We do not originate residential mortgage loans that (a) allow negative amortization, (b) have a loan-to-value ratio at origination greater than 100%, or (c) are “option ARMs,” i.e., can be adjustable rate at the option of the customer. Interest-only loans comprised $0.9 billion of residential real estate loans at June 30, 2006. Interest only loans are underwritten to specific standards including minimum FICO credit scores, stressed debt-to-income ratios, and extensive collateral evaluation.
     Collection action is initiated on an “as needed” basis through a centrally managed collection and recovery function. The collection group employs a series of collection methodologies designed to maintain a high level of effectiveness while maximizing efficiency. In addition to the retained consumer loan portfolio, the collection group is responsible for collection activity on all sold and securitized consumer loans and leases. (See the Non-performing Assets section of Credit Risk, for further information regarding when consumer loans are placed on non-accrual status and when the balances are charged-off to the allowance for loan and lease losses.)
Non-Performing Assets (NPAs)
(This section should be read in conjunction with Significant Factor 1.)
     NPAs consist of loans and leases that are no longer accruing interest, loans and leases that have been renegotiated to below market rates based upon financial difficulties of the borrower, and real estate acquired through foreclosure. C&I, CRE, and small business loans are generally placed on non-accrual status when collection of principal or interest is in doubt or when the loan is 90-days past due. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior-year amounts generally charged-off as a credit loss.
     Consumer loans and leases, excluding residential mortgages and home equity lines and leases, are not placed on non-accrual status but are charged-off in accordance with regulatory statutes, which is generally no more than 120-days past due. Residential mortgages and home equity loans and lines, while highly secured, are placed on non-accrual status within 180-days past due as to principal and 210-days past due as to interest, regardless of collateral. A charge-off on a residential mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the real estate. The fair value of the collateral, less the cost to sell, is then recorded as real estate owned.
     When we believe the borrower’s ability and intent to make periodic interest and principal payments resume and collectibility is no longer in doubt, the loan is returned to accrual status.

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     Table 12 reflects period-end NPAs and past due loans and leases detail for each of the last five quarters.
Table 12 — Non-Performing Assets and Past Due Loans and Leases
                                         
    2006   2005
(in thousands)   June 30,   March 31,   December 31,   September 30,   June 30,
Non-accrual loans and leases:
                                       
Middle market commercial and industrial
  $ 45,713     $ 45,723     $ 28,888     $ 25,431     $ 26,856  
Middle market commercial real estate
    24,970       18,243       15,763       13,073       15,331  
Small business
    27,328       28,389       28,931       26,098       19,788  
Residential mortgage
    22,786       29,376       17,613       16,402       14,137  
Home equity
    14,466       13,778       10,720       8,705       7,748  
         
Total non-performing loans and leases
    135,263       135,509       101,915       89,709       83,860  
 
                                       
Other real estate, net:
                                       
Residential
    34,743       17,481       14,214       11,182       10,758  
Commercial
    1,062       1,903       1,026       909       2,800  
         
Total other real estate, net
    35,805       19,384       15,240       12,091       13,558  
         
Total non-performing assets
  $ 171,068     $ 154,893     $ 117,155     $ 101,800     $ 97,418  
         
 
                                       
Non-performing loans and leases guaranteed by the U.S. government (1)
  $ 30,710     $ 18,256     $ 7,324     $ 6,812     $ 5,892  
 
                                       
Non-performing loans and leases as a % of total loans and leases
    0.51 %     0.52 %     0.42 %     0.37 %     0.34 %
 
                                       
Non-performing assets as a % of total loans and leases and other real estate
    0.65       0.59       0.48       0.42       0.40  
 
                                       
Accruing loans and leases past due 90 days or more (1)
  $ 48,829     $ 52,297     $ 56,138     $ 50,780     $ 53,371  
 
                                       
Accruing loans and leases past due 90 days or more as a percent of total loans and leases
    0.19 %     0.20 %     0.23 %     0.21 %     0.22 %
 
(1)   Beginning in 2Q-2006, OREO includes balances for foreclosures on loans serviced for GNMA, that were reported in 90 day past due loans and leases in prior periods. These balances are fully guaranteed by the US Government.
     NPAs were $171.1 million at June 30, 2006, and represented 0.65% of related assets, up $73.7 million from $97.4 million, or 0.40% of related assets, at the end of the year-ago quarter, and up $16.2 million from $154.9 million, or 0.59% of related assets, at March 31, 2006. The increase from March 31, 2006, reflected a $16.4 million increase in other real estate owned (OREO) and included $12.6 million due to a reclassification of foreclosed mortgage loans fully guaranteed by the U.S. government from over 90-day delinquent but still accruing loans. We service mortgage loans for GNMA. When loans sold to GNMA meet delinquency parameters specified by GNMA, we may repurchase them and begin foreclosure. In accordance with Financial Accounting Standards Board Statement (FAS) No. 140, such loans that are eligible for repurchase are recorded as loans on the balance sheet. When those loans are foreclosed, such loans are then recorded as OREO. This change in the reporting for GNMA-guaranteed OREO also accounted for the $12.5 million increase in total NPAs guaranteed by the U.S. government, from $18.3 million at the end of the 2006 first quarter to $30.7 million.
     NPLs, which exclude OREO, increased $51.4 million from the year-earlier period to $135.3 million at June 30, 2006, with $33.8 million representing NPLs acquired in the Unizan merger. NPLs declined slightly from March 31, 2006. NPLs expressed as a percent of total loans and leases were 0.51% at June 30, 2006, up from 0.34% a year earlier, but down slightly from 0.52% at March 31, 2006.

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     The over 90-day delinquent, but still accruing, ratio was 0.19% at June 30, 2006, down from 0.22% at the end of the year-ago quarter, and from 0.20% at March 31, 2006, with these declines reflecting the reclassification of GNMA-guaranteed foreclosed OREO noted above. Over the last five quarters, the 90-day delinquency ratio has been relatively stable and remained at a low relative level compared with the last five-year period.
     Non-performing asset activity for each of the past five quarters ended June 30, 2006, and for the first six months of 2006 and 2005 was as follows:
Table 13 — Non-Performing Assets Activity
                                         
    2006   2005
(in thousands)   Second   First   Fourth   Third   Second
Non-performing assets, beginning of period
  $ 154,893     $ 117,155     $ 101,800     $ 97,418     $ 73,303  
New non-performing assets (1)
    52,498       53,768       52,553       37,570       47,420  
Acquired non-performing assets
          33,843                    
Returns to accruing status
    (12,143 )     (14,310 )     (3,228 )     (231 )     (250 )
Loan and lease losses
    (6,826 )     (13,314 )     (9,063 )     (5,897 )     (6,578 )
Payments
    (12,892 )     (13,195 )     (21,329 )     (21,203 )     (11,925 )
Sales
    (4,462 )     (9,054 )     (3,578 )     (5,857 )     (4,552 )
         
Non-performing assets, end of period
  $ 171,068     $ 154,893     $ 117,155     $ 101,800     $ 97,418  
         
                 
    Six Months Ended June 30,
(in thousands)   2006   2005
 
Non-performing assets, beginning of period
  $ 117,155     $ 108,568  
New non-performing assets (1)
    106,266       81,027  
Acquired non-performing assets
    33,843        
Returns to accruing status
    (26,453 )     (4,088 )
Loan and lease losses
    (20,140 )     (23,859 )
Payments
    (26,087 )     (22,329 )
Sales
    (13,516 )     (41,901 )
 
Non-performing assets, end of period
  $ 171,068     $ 97,418  
 
 
(1)   Beginning in 2Q-2006, OREO includes balances for foreclosures on loans serviced for GNMA, that were reported in 90 day past due loans and leases in prior periods. These balances are fully guaranteed by the US Government.
Allowances for Credit Losses (ACL)
(This section should be read in conjunction with Significant Factors 1 and 6.)
     We maintain two reserves, both of which are available to absorb probable credit losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). When summed together, these reserves constitute the total ACL. Our credit administration group is responsible for developing the methodology and determining the adequacy of the ACL.
     The ALLL represents the estimate of probable losses inherent in the loan portfolio at the balance sheet date. Additions to the ALLL result from recording provision expense for loan losses or recoveries, while reductions reflect charge-offs, net of recoveries, or the sale of loans. The AULC is determined by applying the transaction reserve process to the unfunded portion of the portfolio adjusted by an applicable funding percentage.
     We have an established process to determine the adequacy of the ACL that relies on a number of analytical tools and benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. For determination purposes, the allowance is comprised of two components: the transaction reserve and the economic reserve.

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Transaction Reserve
     The transaction reserve component of the ACL includes both (a) an estimate of loss based on characteristics of each commercial and consumer loan or lease in the portfolio and (b) an estimate of loss based on an impairment review of each loan greater than $500,000 that is considered to be impaired.
     For middle market C&I, middle market CRE, and small business loans, the estimate of loss based on characteristics of each loan made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The reserve factors applied to these portfolios were developed based on internal credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data.
     In the case of more homogeneous portfolios, such as consumer loans and leases, and residential mortgage loans, the determination of the transaction component is conducted at an aggregate, or pooled, level. For such portfolios, the development of the reserve factors includes the use of forecasting models to measure inherent loss in these portfolios.
     We analyze each middle market C&I, middle market CRE, or small business loan over $500,000 for impairment when the loan is non-performing or has a grade of substandard or lower. The impairment tests are done in accordance with applicable accounting standards and regulations. For loans that are determined to be impaired, an estimate of loss is made for the amount of the impairment.
     Models and analyses are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in the loss mitigation or credit origination strategies. Adjustments to the reserve factors are made as needed based on observed results of the portfolio analytics.
Economic Reserve
     Changes in the economic environment are a significant judgmental factor we consider in determining the appropriate level of the ACL. The economic reserve incorporates our determination of the impact of risks associated with the general economic environment on the portfolio. The economic reserve is designed to address economic uncertainties and is determined based on a variety of economic factors that are correlated to the historical performance of the loan portfolio. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period-to-period.
     The methodology to determine the economic reserve is specifically tied to economic indices that have a high correlation to our historic charge-off variability. The indices currently in the model consist of the Real Consumer Spending, Consumer Confidence, ISM Manufacturing Index, and Non-Agriculture Job Creation in our core states of Ohio, Michigan, West Virginia, and Indiana. The indices and time frame may be adjusted as actual portfolio performance changes over time. The indices were changed during the first quarter of 2006. The changes did not have a material impact in the calculation. We have the capability to judgmentally adjust the calculated economic reserve amount by a maximum of +/– 20% to reflect, among other factors, differences in local versus national economic conditions. This adjustment capability is deemed necessary given the continuing uncertainty of forecasting economic environment changes.
     This methodology allows for a more meaningful discussion of our view of the current economic conditions and the potential impact on credit losses. The continued use of quantitative methodologies for the transaction reserve and the introduction of the quantitative methodology for the economic component may have the impact of more period-to-period fluctuation in the absolute and relative level of the reserve than exhibited in prior-period results.
     The June 30, 2006, ALLL was $287.5 million, $32.7 million higher than $254.8 million a year earlier, and $3.7 million higher than $283.8 million at March 31, 2006. Expressed as a percent of period-end loans and leases, the ALLL ratio at June 30, 2006, was 1.09%, up from 1.04% a year ago, but unchanged from March 31, 2006.
     The ALLL as a percent of NPLs was 213% at June 30, 2006, down from 304% a year ago, but up from 209% at March 31, 2006. The ALLL as a percent of NPAs was 168% at June 30, 2006, down from 262% a year ago, and from

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183% at March 31, 2006. At June 30, 2006, the AULC was $38.9 million, up from $37.5 million at the end of the year-ago quarter, but down slightly from March 31, 2006.
     On a combined basis, the ACL as a percent of total loans and leases at June 30, 2006, was 1.24%, up from 1.19% a year ago, but unchanged from March 31, 2006. The ACL as a percent of NPAs was 191% at June 30, 2006, down from 300% a year earlier and 209% at March 31, 2006.
     Table 14 reflects activity in the ALLL and AULC for each of the last five quarters.
Table 14 — Quarterly Credit Reserves Analysis
                                         
    2006     2005  
(in thousands)   Second     First     Fourth     Third     Second  
Allowance for loan and lease losses, beginning of period
  $ 283,839     $ 268,347     $ 253,943     $ 254,784     $ 264,390  
Acquired allowance for loan and lease losses (1)
    1,498       22,187                    
Loan and lease losses
    (24,325 )     (33,405 )     (27,072 )     (25,830 )     (25,733 )
Recoveries of loans previously charged off
    10,373       9,189       9,504       7,877       9,469  
         
 
                                       
Net loan and lease losses
    (13,952 )     (24,216 )     (17,568 )     (17,953 )     (16,264 )
         
Provision for loan and lease losses
    16,132       17,521       31,972       17,112       13,247  
Economic reserve transfer
                            (6,253 )
Allowance of assets sold and securitized
                            (336 )
         
Allowance for loan and lease losses, end of period
  $ 287,517     $ 283,839     $ 268,347     $ 253,943     $ 254,784  
         
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 39,301     $ 36,957     $ 38,098     $ 37,511     $ 31,610  
 
                                       
Acquired AULC
          325                    
Provision for unfunded loan commitments and letters of credit losses
    (387 )     2,019       (1,141 )     587       (352 )
Economic reserve transfer
                            6,253  
         
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 38,914     $ 39,301     $ 36,957     $ 38,098     $ 37,511  
         
Total allowances for credit losses
  $ 326,431     $ 323,140     $ 305,304     $ 292,041     $ 292,295  
         
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Transaction reserve
    0.89 %     0.88 %     0.89 %     0.84 %     0.82 %
Economic reserve
    0.20       0.21       0.21       0.20       0.22  
         
Total loans and leases
    1.09 %     1.09 %     1.10 %     1.04 %     1.04 %
         
Non-performing loans and leases (NPLs)
    213       209       263       283       304  
Non-performing assets (NPAs)
    168       183       229       249       262  
 
                                       
Total allowances for credit losses (ACL) as % of:
                                       
Total loans and leases
    1.24 %     1.24 %     1.25 %     1.19 %     1.19 %
Non-performing loans and leases
    241       238       300       326       349  
Non-performing assets
    191       209       261       287       300  
         
     
(1)   Represents an adjustment of the allowance and corresponding adjustment to loan balances, resulting from the Unizan merger.

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     Table 15 reflects activity in the ALLL and AULC for the first six months of 2006 and 2005.
Table 15 — Year to Date Credit Reserves Analysis
                 
    Six Months Ended June 30,
(in thous