The following Unaudited Pro Forma Condensed Combined Consolidated Statement of Financial Condition combines the historical Consolidated Statement of Financial Condition of Huntington and its subsidiaries and the historical Consolidated Statement of Financial Condition of Sky and its subsidiaries, giving effect to the merger as if it had occurred on March 31, 2007, as an acquisition by Huntington of Sky using the purchase method of accounting and giving effect to the related pro forma adjustments described in the accompanying Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.

 

The following Unaudited Pro Forma Condensed Combined Consolidated Statements of Income for the year ended December 31, 2006 and the three months ended March 31, 2007 combine the historical consolidated statements of income of Huntington and its subsidiaries and Sky and its subsidiaries, giving effect to the merger as if the merger had become effective at January 1, 2006 as an acquisition by Huntington of Sky using the purchase method of accounting and giving effect to the related pro forma adjustments described in the accompanying Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.

 

The Unaudited Pro Forma Condensed Combined Consolidated Financial Statements included herein are presented for informational purposes only. This information includes various estimates and may not necessarily be indicative of the financial position or results of operations that would have occurred if the merger had been consummated on the date or at the beginning of the period indicated or which may be attained in the future. The unaudited Pro Forma Condensed Combined Consolidated Financial Statements and accompanying notes should be read in conjunction with and are qualified in their entirety by reference to the historical financial statements and related notes thereto of Huntington and its subsidiaries included in Huntington’s Annual Report on Form 10-K for the year ended December 31, 2006 and Huntington’s Quarterly Report on Form 10-Q for the three months ended March 31, 2007 and the historical financial statements and related notes thereto of Sky and its subsidiaries included in “Item 8. Financial Statements and Supplementary Data” of Sky’s Annual Report on Form 10-K for the year ended December 31, 2006 and “Item 1. Financial Statements” of Sky’s Quarterly Report on Form 10-Q for the three months ended March 31, 2007.

 

The historical consolidated statements of income for the year ended December 31, 2006 of Huntington and its subsidiaries and Sky and its subsidiaries include a number of items that impacted the respective results for each company, including:

 

 

We anticipate that the merger will provide the combined company with financial benefits that include reduced operating expenses. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during these periods.

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

Unaudited Pro Forma Condensed Combined Consolidated Statement of Financial Condition
March 31, 2007
(In thousands)

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Unaudited Pro Forma Condensed Combined Consolidated Statement of Income

For the three months ended March 31, 2007

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Unaudited Pro Forma Condensed Combined Consolidated Statement of Income

For the Year ended December 31, 2006

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Notes To Unaudited Pro Forma Condensed Combined

Consolidated Financial Statements

 

 

The merger will be accounted for as an acquisition by Huntington of Sky using the purchase method of accounting and, accordingly, the assets and liabilities of Sky will be recorded at their respective fair values on the date the merger is completed. The merger will be effected by the issuance of Huntington common stock to Sky shareholders. Each share of Sky common stock will be exchanged for 1.098 shares of Huntington common stock plus cash consideration of $3.023. The shares of Huntington common stock issued to effect the merger will be recorded at $23.85 per share. This amount was determined by averaging the closing price of shares of Huntington common stock over a five-day period beginning two days before the date the merger was announced and ending two days after the date the merger was announced.

 

The pro forma financial information includes estimated adjustments to record assets and liabilities of Sky at their respective fair values, to reflect the issuance of shares to effect the merger, the payment of $356 million in cash consideration, and the payment of $15 million in acquisition costs. The pro forma adjustments included herein are subject to change as additional information becomes available and as additional analyses are performed. The impact to net cash, as a result of the acquisition, is as follows (in thousands):

 

 

The final allocation of the purchase price will be determined after the merger is completed and additional analyses are performed to determine the fair values of Sky’s tangible and identifiable intangible assets and liabilities as of the date the merger is completed. Changes in the fair value of the net assets of Sky as of the date of the merger will change the amount of purchase price allocable to excess purchase price. The further refinement of direct acquisition costs will change the amount of excess purchase price (goodwill) recorded. In addition, changes in Sky’s shareholders’ equity, including net income between April 1, 2007 and the date of the merger, will also change the amount of excess purchase price recorded. The final adjustments may be materially different from the unaudited pro forma adjustments presented herein.

 

The pro forma financial information for the merger is included only as of March 31, 2007, for the three months ended March 31, 2007 and for the year ended December 31, 2006. The unaudited pro forma information is not necessarily indicative of the results of income or the combined financial position that would have resulted had the merger been completed at the beginning of the applicable period presented, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined company.

 

Certain reclassifications have been made to the balance sheet and income statement of Sky to conform with Huntington’s presentation.

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Notes To Unaudited Pro Forma Condensed Combined

Consolidated Financial Statements — (Continued)

 

 

The pro forma financial information reflects the issuance of 129,382,004 shares of Huntington common stock on March 31, 2007, and aggregate cash consideration of $356 million. The table below provides the calculation of the number of shares to be issued:

 

 

The pro forma financial information includes adjustments to shareholders’ equity for the elimination of Sky’s accumulated other comprehensive loss of $23.7 million, the retirement of Sky treasury stock of $47.6 million and the elimination of Sky’s retained earnings of $538.8 million. All of these amounts have been reclassified into common stock. In addition to these equity adjustments, $45.0 million was included in the purchase price for the estimated fair value of all unexercised Sky stock options assumed upon the merger. The $45.0 million is a preliminary estimate based on the fair value of the Huntington stock options that will be issued. The final estimate of fair value of the Sky stock options will be based on the Black-Scholes option model.

 

The following table provides a summary of pro forma adjustments to shareholders’ equity (dollars in thousands, except per share amount):

 

 

 

The purchase accounting adjustments included in the pro forma statement of financial condition include a reduction of $108 million to loans and increases to interest-bearing deposits and long-term borrowings of $5.5 million and $16 million, respectively. These adjustments are based on preliminary valuations performed as of March 31, 2007. The adjustments recorded for these assets and liabilities on the merger date could vary significantly from the pro forma adjustments included herein depending on changes in interest rates and the components of the assets and liabilities. An analysis to determine the purchase accounting adjustment to Sky’s property and equipment has not yet been completed. Upon completion of this analysis, adjustments may be recorded which will affect the purchase price allocation.

 

The purchase accounting adjustments include an intangible asset increase of $250 million. The adjustment includes the establishment of a core deposit intangible asset of $200 million, relationship intangibles of $100 million and a trust intangible of $20 million, less Sky’s recorded intangible assets

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Notes To Unaudited Pro Forma Condensed Combined

Consolidated Financial Statements — (Continued)

of $70 million. The estimated core deposit intangible asset was calculated by applying a premium of 2.0% to Sky’s core deposits of $10.0 billion. The amortization of the intangible assets in the pro forma statements of income is assumed to be over a ten-year period using an accelerated method. An analysis to determine if other identifiable intangible assets exist has not yet been completed. Upon completion of this analysis, additional intangible assets may be recorded which will affect the purchase price allocation.

 

The pro forma statement of financial condition includes an estimated $185 million increase to accrued expenses and other liabilities to reflect the amounts allocated to liabilities expected to be assumed in the acquisition. The estimated liabilities assumed in the merger consist of personnel-related costs which include involuntary termination benefits for Sky’s employees severed in connection with the merger, costs to cancel contracts that will provide no future benefit to the combined company, occupancy costs related to lease cancellation penalties for space vacated in connection with the merger and investment banker and legal fees incurred in connection with the transaction. The $185 million pro forma adjustment is included in other liabilities and relates only to costs associated with Sky.

 

The pro forma financial statements also include a net reduction to deferred federal income tax liability of $96.7 million. This adjustment is made to eliminate the deferred tax impact of $24.6 million related to the write-off of Sky’s intangible assets in the merger, to establish a net deferred tax liability of $15.2 million, which is based on 35% of all purchase accounting adjustments to assets and liabilities, including newly recognized identifiable intangible assets (with the exception of excess purchase price) and to reclass Sky’s $87.4 million net deferred tax asset against Huntington’s net deferred tax liability.

 

In addition, the pro forma statement of financial condition includes the following items:

 

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Notes To Unaudited Pro Forma Condensed Combined

Consolidated Financial Statements — (Continued)

 

The following table provides the calculation and allocation of the purchase price used in the pro forma financial statements (dollars in thousands):

 

 

 

The pro forma condensed combined consolidated statements of income for the three months ended March 31, 2007 and for the year ended December 31, 2006 include adjustments for the amortization of the estimated identifiable intangible assets, the estimated accretion of the unrealized loss on Sky’s securities, the estimated amortization or accretion of purchase accounting adjustments

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Notes To Unaudited Pro Forma Condensed Combined

Consolidated Financial Statements — (Continued)

made to loans, interest-bearing deposits, long-term borrowings and the related tax effect of all the adjustments. The amortization or accretion of the purchase accounting adjustments made to securities, loans, interest-bearing deposits, and long-term borrowings was estimated based on the weighted average maturities, using a straight-line method of recognition. The actual amortization or accretion of the purchase accounting adjustments will use the interest method for recognition. An analysis to determine the purchase accounting adjustment to Sky’s premises and equipment has not yet been completed. The amortization of identifiable intangible assets was estimated using a 10-year, sum-of-the-years digits method. Using this method, amortization is expected to be $58.2 million in the first year, $52.4 million in the second year, $46.5 million in the third year, $40.7 million in the fourth year, $34.9 million in the fifth year, and $87.3 million thereafter. The adjustments for pro forma amortization expense include $58.2 million of new amortization expense ($14.5 million for the three months ended March 31, 2007), less Sky’s historical amortization expense of $15.8 million ($4.6 million for the three months ended March 31, 2007).

 

The estimated restructuring and merger-related expenses discussed in Note 5 are not included in the pro forma statements of income since they will be recorded in the combined results of income as they are incurred after completion of the merger and are not indicative of what the historical results of the combined company would have been had the companies been actually combined during the periods presented.

 

Additionally, Huntington currently estimates that it will realize approximately $115 million in annual cost savings following the merger, which Huntington expects to be phased in over a two-year period, but there is no assurance that the anticipated cost savings will be realized on the anticipated time schedule or at all. These cost savings are not reflected in the pro forma financial information.

 

The impact of conforming Sky’s accounting policy to account for mortgage servicing rights at fair value has not been included in the pro forma financial results as the impact on the income statement is not material.

 

Huntington anticipates issuing approximately $350 million in new debt in connection with the merger. This new debt is expected to qualify as bank regulatory capital and, therefore, we have assumed an interest rate of 6.75% for this new debt, resulting in an increase to annual interest expense of $23.6 million, or $5.9 million quarterly. The actual rate applicable to such debt will depend on the market conditions at the time that this debt is issued. It is anticipated that interest expense would be impacted by $0.4 million for each one-eighth of a percent that the actual interest cost of the debt differs from 6.75%.

 

The adjustments reflected in the pro forma condensed combined consolidated statements of income are presented in the table below (in thousands):

 

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

 

Notes To Unaudited Pro Forma Condensed Combined

Consolidated Financial Statements — (Continued)

 

 

In connection with the merger, Huntington and Sky have begun to further develop their preliminary plans to consolidate the operations of Huntington and Sky. Over the next several months, the specific details of these plans will be refined. Huntington and Sky are currently in the process of assessing the two companies’ personnel, benefit plans, premises, equipment, computer systems and service contracts to determine where we may take advantage of redundancies or where it may be beneficial or necessary to convert to one system.

 

Certain decisions arising from these assessments may involve, among other things, involuntary termination of Sky’s employees, vacating Sky’s leased premises, terminating contracts between Sky and certain service providers and selling or otherwise disposing of certain premises, furniture and equipment owned by Sky. The costs associated with such decisions will be recorded as purchase accounting adjustments, which have the effect of increasing the amount of the purchase price allocable to excess purchase price. It is expected that all such costs will be identified and recorded within one year of completion of the merger and all such actions required to effect these decisions would be taken within one year after finalization of these plans. It is anticipated that the total merger costs will approximate $185 million. The pro forma condensed combined consolidated statement of financial condition includes an increase in liabilities of $185 million to reflect all of the merger costs as liabilities assumed in the merger. See Note 3 for additional discussion.

 

In addition to decisions regarding Sky’s employees and activities, certain decisions may be made to, among other things, involuntarily terminate Huntington employees, vacate Huntington leased premises, cancel contracts and sell or otherwise dispose of certain premises, furniture and equipment owned by Huntington. These exit and disposal costs would be recorded in accordance with Financial Accounting Standards Board Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in the results of income of the combined company in the period incurred. Huntington also expects to incur merger-related expenses in the process of combining the operations of the two companies. These merger-related expenses include system conversion costs, employee retention arrangements and costs of incremental communications to customers and others. It is expected that the exit and disposal costs, along with the merger-related costs, will be incurred over a two-year period after completion of the merger. We have not estimated these restructuring and merger-related expenses and have not included an estimate for these in the pro forma statement of income since these costs will be recorded in the combined results of income as they are incurred after completion of the merger and are not indicative of what the historical results of Huntington would have been had Huntington and Sky actually been combined during the periods presented.