UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL INFORMATION OF HUNTINGTON BANCSHARES INCORPORATED AND
SKY FINANCIAL GROUP, INC.
 
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:
 
  •  Huntington recorded an $84.5 million reduction to federal income tax provision. As a result of the resolution of a federal income tax audit for the tax years 2002 and 2003, Huntington released previously established tax reserves and recognized a federal tax loss carryback.
 
  •  Huntington utilized the excess capital resulting from the reduction to the federal income tax provision to restructure certain under-performing components of its balance sheet. Management’s actions included the review of $2.1 billion of securities for potential sale, the refinancing of a portion of its FHLB funding, and the sale of certain residential mortgage loans. Huntington recorded $73.3 million of securities losses, $4.4 million of losses on the early extinguishment of debt (recorded in other non-interest expense) and $0.9 million of losses on the sale of mortgage loans (recorded in mortgage banking income).
 
  •  Sky restructured its balance sheet to strengthen its capital ratios, maintain a sound interest rate risk position, and enhance the net interest margin following its acquisitions of Union Federal Bank and Perpetual Savings Bank by selling approximately $0.5 billion of securities and using the proceeds to pay down certain FHLB advances and other borrowings. This balance sheet restructuring resulted in $19.4 million of securities losses and $4.2 million of gains in other income.


1

 

 
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.


2

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.

Unaudited Pro Forma Condensed Combined Consolidated Statement of Financial Condition
March 31, 2007
(In thousands)
 
                                 
    Huntington
 		    Sky
 		    Pro Forma
 		    Pro Forma
 		 
   
Historical
   
Historical
   
Adjustments
   
Combined
 
 
Assets
                               
Cash and due from banks (See Note 1)
  $ 867,256     $ 326,448     $ (21,213 )   $ 1,172,491  
Federal funds sold and securities purchased under resale agreements
    701,951       45,132               747,083  
Interest bearing deposits in banks
    100,416       11,055               111,471  
Trading account securities
    76,631       —               76,631  
Loans held for sale
    277,538       17,357               294,895  
Investment securities (See Note 3)
    3,724,676       3,043,833               6,768,509  
Loans and leases (See Note 3)
    26,266,747       12,837,735       (108,416 )     38,996,066  
Allowance for loan and lease losses (See Note 3)
    (282,976 )     (172,407 )     13,416       (441,967 )
                                 
Net loans and leases
    25,983,771       12,665,328       (95,000 )     38,554,099  
                                 
Bank owned life insurance
    1,097,986       152,846               1,250,832  
Premises and equipment
    377,687       204,241               581,928  
Goodwill (See Note 3)
    569,779       728,355       1,588,718       2,886,852  
Other intangible assets (See Note 3)
    57,165       70,151       249,849       377,165  
Accrued income and other assets (See Note 3)
    1,144,443       358,263       (62,394 )     1,440,312  
                                 
Total Assets
  $ 34,979,299     $ 17,623,009     $ 1,659,960     $ 54,262,268  
                                 
 
Liabilities and Shareholders’ Equity
Liabilities
Deposits (See Note 3)
  $ 24,585,893     $ 13,135,452     $ 5,500     $ 37,726,845  
Short-term borrowings
    1,577,732       1,208,182               2,785,914  
Federal Home Loan Bank advances & other long-term debt (See Note 3)
    3,371,229       814,391       16,000       4,201,620  
Subordinated notes (See Note 3)
    1,280,870       335,125       350,000       1,965,995  
Allowance for unfunded loan commitments and letters of credit
    40,540       432               40,972  
Deferred federal income tax liability (See Note 3)
    396,005       1,130       (96,695 )     300,440  
Accrued expenses and other liabilities (See Note 3)
    675,670       197,665       185,000       1,058,335  
                                 
Total Liabilities
    31,927,939       15,692,377       459,805       48,080,121  
                                 
Shareholders’ equity
                               
Preferred stock
    —       —       —       —  
Common stock (See Note 2)
    2,563,426       1,463,133       1,667,654       5,694,213  
Less treasury stock (See Note 2)
    (501,578 )     (47,637 )     47,637       (501,578 )
Accumulated other comprehensive loss (See Note 2)
    (59,509 )     (23,689 )     23,689       (59,509 )
Retained earnings (See Note 2)
    1,049,021       538,825       (538,825 )     1,049,021  
                                 
Total Shareholders’ Equity
    3,051,360       1,930,632       1,200,155       6,182,147  
                                 
Total Liabilities and Shareholders’ Equity
  $ 34,979,299     $ 17,623,009     $ 1,659,960     $ 54,262,268  
                                 


3

 

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
 		    Sky
 		    Pro Forma
 		    Pro Forma
 		 
   
Historical
   
Historical
   
Adjustments
   
Combined
 
    (In thousands except per common share)  
 
Interest income
                               
Interest and fee income on loans (See Note 4)
  $ 461,612     $ 241,492     $ 5,421     $ 708,525  
Interest and fee income on securities (See Note 4)
    61,208       38,935       2,738       102,881  
Other interest income
    12,129       840               12,969  
                                 
Total interest income
    534,949       281,267       8,159       824,375  
Interest expense
                               
Interest expense on deposits (See Note 4)
    196,723       106,794       (917 )     302,600  
Interest expense on borrowings (See Note 4)
    82,671       31,707       5,106       119,484  
                                 
Total interest expense
    279,394       138,501       4,189       422,084  
                                 
Net interest income
    255,555       142,766       3,970       402,291  
Provision for credit losses
    29,406       10,703               40,109  
                                 
Net interest income after provision for credit losses
    226,149       132,063       3,970       362,182  
                                 
Service charges on deposit accounts
    44,793       20,811               65,604  
Trust services
    25,894       6,935               32,829  
Brokerage and insurance income
    16,082       18,492               34,574  
Bank owned life insurance income
    10,851       1,929               12,780  
Other service charges and fees
    13,208       6,195               19,403  
Mortgage banking income
    9,351       5,731               15,082  
Securities gains
    104       565               669  
Other income
    24,894       8,155               33,049  
                                 
Total non-interest income
    145,177       68,813       —       213,990  
                                 
Personnel costs
    134,639       66,366               201,005  
Net occupancy and equipment
    38,127       21,319               59,446  
Professional and other outside services
    28,296       9,220               37,516  
Marketing
    7,696       4,616               12,312  
Telecommunications
    4,126       2,291               6,417  
Printing and supplies
    3,242       1,663               4,905  
Amortization of intangibles (See Note 4)
    2,520       4,560       9,986       17,066  
Other expenses
    23,426       12,845               36,271  
                                 
Total non-interest expense
    242,072       122,880       9,986       374,938  
                                 
Income before income taxes
    129,254       77,996       (6,016 )     201,234  
Provision (benefit) for income taxes
    33,528       26,375       (2,106 )     57,797  
                                 
Net income
  $ 95,726     $ 51,621     $ (3,910 )   $ 143,437  
                                 
Average common shares — basic
    235,586       117,291       11,495       364,372  
Average common shares — diluted
    238,754       118,329       11,596       368,679  
Per common share
                               
Net income — basic
  $ 0.41     $ 0.44             $ 0.39  
Net income — diluted
    0.40       0.44               0.39  


4

 

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
 		    Sky
 		    Pro Forma
 		    Pro Forma
 		 
   
Historical
   
Historical
   
Adjustments
   
Combined
 
    (In thousands except per common share)  
 
Interest income
                               
Interest and fee income on loans (See Note 4)
  $ 1,777,599     $ 860,699     $ 21,683     $ 2,659,981  
Interest and fee income on securities (See Note 4)
    255,195       151,451       10,950       417,596  
Other interest income
    37,725       1,341               39,066  
                                 
Total interest income
    2,070,519       1,013,491       32,633       3,116,643  
                                 
Interest expense
                               
Interest expense on deposits (See Note 4)
    717,167       332,938       (3,667 )     1,046,438  
Interest expense on borrowings (See Note 4)
    334,175       139,007       20,425       493,607  
                                 
Total interest expense
    1,051,342       471,945       16,758       1,540,045  
                                 
Net interest income
    1,019,177       541,546       15,875       1,576,598  
Provision for credit losses
    65,191       36,854               102,045  
                                 
Net interest income after provision for credit losses
    953,986       504,692       15,875       1,474,553  
                                 
Service charges on deposit accounts
    185,713       67,707               253,420  
Trust services
    89,955       24,279               114,234  
Brokerage and insurance income
    58,835       67,394               126,229  
Bank owned life insurance income
    43,775       6,317               50,092  
Automobile operating lease income
    43,115                       43,115  
Other service charges and fees
    51,354       20,322               71,676  
Mortgage banking income
    41,491       23,141               64,632  
Securities losses
    (73,191 )     (21,184 )             (94,375 )
Gains on sales of automobile loans
    3,095       —               3,095  
Other income
    116,927       30,894               147,821  
                                 
Total non-interest income
    561,069       218,870       —       779,939  
                                 
Personnel costs
    541,228       243,281               784,509  
Net occupancy and equipment
    141,193       72,560               213,753  
Professional and other outside services
    105,832       36,142               141,974  
Marketing
    31,728       13,623               45,351  
Automobile operating lease expense
    31,286       —               31,286  
Telecommunications
    19,252       8,360               27,612  
Printing and supplies
    13,864       6,092               19,956  
Amortization of intangibles (See Note 4)
    9,962       15,803       42,379       68,144  
Other expenses
    106,649       42,694               149,343  
                                 
Total non-interest expense
    1,000,994       438,555       42,379       1,481,928  
                                 
Income before income taxes
    514,061       285,007       (26,504 )     772,564  
Provision (benefit) for income taxes
    52,840       94,669       (9,276 )     138,233  
                                 
Net income
  $ 461,221     $ 190,338     $ (17,228 )   $ 634,331  
                                 
Average common shares — basic
    236,699       110,107       10,790       357,596  
Average common shares — diluted
    239,920       110,954       10,873       361,747  
Per common share
                               
Net income — basic
  $ 1.95     $ 1.73             $ 1.77  
Net income — diluted
    1.92       1.72               1.75  


5

 

HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.
 
Notes To Unaudited Pro Forma Condensed Combined
Consolidated Financial Statements
 
Note 1.   Basis of Presentation
 
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):
 
         
Impact to net cash
       
Proceeds from issuance of debt
  $ 350,000  
Cash consideration (See Note 3)
    (356,213 )
Direct acquisition costs
    (15,000 )
         
Net adjustment to cash
  $ (21,213 )
         
 
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.


6

 

 
HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.
 
Notes To Unaudited Pro Forma Condensed Combined
Consolidated Financial Statements — (Continued)

 
Note 2.   Adjustments to Equity
 
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:
 
         
Sky shares outstanding
    117,834,248  
Exchange ratio
    × 1.098  
         
Huntington shares to be issued
    129,382,004  
         
 
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):
 
         
Common stock adjustment
       
Shares of Huntington common stock issued
    129,382,004  
Valuation price of Huntington shares
    × $23.85  
         
Increase due to issuance of shares
    $3,085,761  
Less: Sky common stock
    (1,463,133 )
         
Common stock adjustment
    1,622,628  
Adjustment for the estimated fair value of Sky stock options
    45,026  
         
Pro forma adjustment to common stock
    1,667,654  
Retire Sky treasury stock
    47,637  
Eliminate Sky retained earnings
    (538,825 )
Eliminate Sky accumulated other comprehensive loss
    23,689  
         
Total pro forma adjustment to Huntington stockholders’ equity
    $1,200,155  
         
 
Note 3.   Purchase Accounting Adjustments
 
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


7

 

 
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:
 
  •  The issuance by Huntington of $350 million in new debt. This new debt will fund the $356 million cash portion of the merger consideration. This cash portion must be paid by Huntington’s holding company, which is prohibited by banking regulations from funding this cash portion from the cash held by its bank subsidiary. The new debt is expected to qualify as regulatory capital.
 
  •  An estimated $13.4 million reduction to allowance for loan losses, which represents the estimated impact of Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”), on this transaction.
 
  •  An estimated $25.0 million increase to other assets to adjust Sky’s carrying value of its mortgage servicing rights (MSRs) to fair value.


8

 

 
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):
 
                 
Purchase price
               
Huntington shares to be issued
    129,382,004          
Valuation price of Huntington shares
    × $23.85          
                 
Fair value of Huntington shares to be issued
          $ 3,085,761  
Sky shares outstanding:
    117,834,248          
Cash to be paid per Sky share
    × $3.023          
                 
Cash consideration
            356,213  
Estimated fair value of Huntington stock options to be issued for Sky options
            45,026  
Direct acquisition costs
            15,000  
                 
Total consideration
            3,502,000  
Net tangible assets acquired
               
Sky’s stockholders’ equity
    $1,930,632          
Sky’s goodwill
    (728,355 )        
Sky’s other intangibles
    (70,151 )        
Deferred tax liability for Sky’s other intangibles
    24,553          
                 
              (1,156,679 )
                 
Excess of net purchase price over carrying value of net tangible assets acquired
            2,345,321  
Estimated adjustments to reflect fair values of acquired assets and liabilities
               
Reduction of loans and leases to adjust to fair value
            108,416  
Reduction to the allowance for loan losses for acquired impaired loans
            (13,416 )
Estimated core deposit intangible
    $200,000          
Estimated relationship intangible
    100,000          
Estimated trust intangible
    20,000          
                 
Total acquired intangible assets
            (320,000 )
Liabilities assumed for merger-related costs
            185,000  
Increase to interest-bearing deposits to adjust to fair value
            5,500  
Increase to FHLB and other borrowings to adjust to fair value
            16,000  
Mortgage servicing rights
            (24,959 )
Deferred income taxes
               
Increase in temporary differences
    $43,459          
Income tax rate
    × 35 %        
                 
Impact of deferred taxes
            15,211  
                 
Goodwill as a result of the merger
            2,317,073  
Less: goodwill recorded by Sky to be written off in the merger
            (728,355 )
                 
Pro forma adjustment for goodwill
          $ 1,588,718  
                 
 
Note 4.   Pro Forma Statements of Income
 
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


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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):
 
                                 
          Estimated
 		    Estimated
 		    Estimated
 		 
    Estimated
 		    Weighted
 		    Annual
 		    Quarterly
 		 
    Adjustment for
 		    Average Life
 		    Increase
 		    Increase
 		 
   
Fair Value
   
(in years)
   
to Income
   
to Income
 
 
Accretion/amortization of fair value adjustments
                               
Loans
  $ 108,416       5.0     $ 21,683     $ 5,421  
Securities
    32,850       3.0       10,950       2,738  
Deposits
    5,500       1.5       3,667       917  
Borrowings
    16,000       5.0       3,200       800  
                                 
Total accretion/amortization of fair value adjustments
                  $ 39,500     $ 9,876  
                                 
 


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HUNTINGTON BANCSHARES INCORPORATED AND SKY FINANCIAL GROUP, INC.
 
Notes To Unaudited Pro Forma Condensed Combined
Consolidated Financial Statements — (Continued)

                 
    Quarterly
 		    Annual
 		 
    Increase/
 		    Increase/
 		 
    (Decrease)
 		    (Decrease)
 		 
   
to Income
   
to Income
 
 
Total accretion/amortization of fair value adjustments
  $ 9,876     $ 39,500  
Interest expense on new long-term borrowings
    (5,906 )     (23,625 )
Amortization of intangibles
    (14,546 )     (58,182 )
Eliminate amortization of Sky’s existing intangibles
    4,560       15,803  
                 
Reduction in income before income taxes
    (6,016 )     (26,504 )
Income tax rate
    × 35 %     ×35 %
                 
Provision (benefit) for income taxes
    (2,106 )     (9,276 )
                 
Reduction in net income
  $ (3,910 )   $ (17,228 )
                 

 
Note 5.   Merger Costs
 
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.

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