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Exhibit 13.1
 
Selected Financial Data Huntington Bancshares Incorporated
 
Table 1 — Selected Financial Data(1)
                                         
    Year Ended December 31,  
(in thousands, except per share amounts)   2008     2007     2006     2005     2004  
Interest income
  $ 2,798,322     $ 2,742,963     $ 2,070,519     $ 1,641,765     $ 1,347,315  
Interest expense
    1,266,631       1,441,451       1,051,342       679,354       435,941  
 
Net interest income
    1,531,691       1,301,512       1,019,177       962,411       911,374  
Provision for credit losses
    1,057,463       643,628       65,191       81,299       55,062  
 
Net interest income after provision for credit losses
    474,228       657,884       953,986       881,112       856,312  
 
Service charges on deposit accounts
    308,053       254,193       185,713       167,834       171,115  
Automobile operating lease income
    39,851       7,810       43,115       133,015       285,431  
Securities (losses) gains
    (197,370 )     (29,738 )     (73,191 )     (8,055 )     15,763  
Other non-interest income
    556,604       444,338       405,432       339,488       346,289  
 
Total noninterest income
    707,138       676,603       561,069       632,282       818,598  
 
Personnel costs
    783,546       686,828       541,228       481,658       485,806  
Automobile operating lease expense
    31,282       5,161       31,286       103,850       235,080  
Other non-interest expense
    662,546       619,855       428,480       384,312       401,358  
 
Total noninterest expense
    1,477,374       1,311,844       1,000,994       969,820       1,122,244  
 
(Loss) Income before income taxes
    (296,008 )     22,643       514,061       543,574       552,666  
(Benefit) provision for income taxes
    (182,202 )     (52,526 )     52,840       131,483       153,741  
 
Net (loss) income
  $ (113,806 )   $ 75,169     $ 461,221     $ 412,091     $ 398,925  
 
Dividends on preferred shares
    46,400                          
 
Net (loss) income applicable to common shares
  $ (160,206 )   $ 75,169     $ 461,221     $ 412,091     $ 398,925  
 
Net (loss) income per common share — basic
    $(0.44 )     $0.25       $1.95       $1.79       $1.74  
Net (loss) income per common share — diluted
    (0.44 )     0.25       1.92       1.77       1.71  
Cash dividends declared per common share
    0.6625       1.060       1.000       0.845       0.750  
                                         
Balance sheet highlights
                                       
 
Total assets (period end)
  $ 54,352,859     $ 54,697,468     $ 35,329,019     $ 32,764,805     $ 32,565,497  
Total long-term debt (period end)(2)
    6,870,705       6,954,909       4,512,618       4,597,437       6,326,885  
Total shareholders’ equity (period end)
    7,227,141       5,949,140       3,014,326       2,557,501       2,537,638  
Average long-term debt(2)
    7,374,681       5,714,572       4,942,671       5,168,959       6,650,367  
Average shareholders’ equity
    6,393,788       4,631,912       2,945,597       2,582,721       2,374,137  
Average total assets
    54,921,419       44,711,676       35,111,236       32,639,011       31,432,746  
                                         
Key ratios and statistics
                                       
 
Margin analysis — as a % of average earnings assets
                                       
Interest income(3)
    5.90 %     7.02 %     6.63 %     5.65 %     4.89 %
Interest expense
    2.65       3.66       3.34       2.32       1.56  
 
Net interest margin(3)
    3.25 %     3.36 %     3.29 %     3.33 %     3.33 %
 
                                         
Return on average total assets
    (0.21 )%     0.17 %     1.31 %     1.26 %     1.27 %
Return on average total shareholders’ equity
    (1.8 )     1.6       15.7       16.0       16.8  
Return on average tangible shareholders’ equity(4)
    (2.1 )     3.9       19.5       17.4       18.5  
Efficiency ratio(5)
    57.0       62.5       59.4       60.0       65.0  
Dividend payout ratio
    N.M.       N.M.       52.1       47.7       43.9  
Average shareholders’ equity to average assets
    11.64       10.36       8.39       7.91       7.55  
Effective tax rate
    N.M.       N.M.       10.3       24.2       27.8  
Tangible common equity to tangible assets (period end)(6)
    4.04       5.08       6.93       7.19       7.18  
Tangible equity to tangible assets (period end)(7)
    7.72       5.08       6.93       7.19       7.18  
Tier 1 leverage ratio (period end)
    9.82       6.77       8.00       8.34       8.42  
Tier 1 risk-based capital ratio (period end)
    10.72       7.51       8.93       9.13       9.08  
Total risk-based capital ratio (period end)
    13.91       10.85       12.79       12.42       12.48  
                                         
Other data
                                       
 
Full-time equivalent employees (period end)
    10,951       11,925       8,081       7,602       7,812  
Domestic banking offices (period end)
    613       625       381       344       342  
 
N.M., not a meaningful value.
 
(1)  Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors.
 
(2)  Includes Federal Home Loan Bank advances, subordinated notes, and other long-term debt.
 
(3)  On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(4)  Net (loss) income less expense excluding amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate.
 
(5)  Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains.
 
(6)  Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.
 
(7)  Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Table of Contents

Management’s Discussion and Analysis of Financial Condition Huntington Bancshares Incorporated

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, including our bank subsidiary, The Huntington National Bank (the Bank), organized in 1866, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, customized insurance service programs, and other financial products and services. Our banking offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Selected financial service activities are also conducted in other states including: Auto Finance and Dealer Services (AFDS) offices in Arizona, Florida, Tennessee, Texas, and Virginia; Private Financial, Capital Markets, and Insurance Group (PFCMIG) offices in Florida; and Mortgage Banking offices in Maryland and New Jersey. International banking services are available through the headquarters office in Columbus and a limited purpose office located in both the Cayman Islands and Hong Kong.
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) provides you with information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows and should be read in conjunction with the financial statements, notes, and other information contained in this report.
 
Our discussion is divided into key segments:
 
  –  Introduction — Provides overview comments on important matters including risk factors, acquisitions, and other items. These are essential for understanding our performance and prospects.
 
  –  Discussion of Results of Operations — Reviews financial performance from a consolidated company perspective. It also includes a “Significant Items” section that summarizes key issues helpful for understanding performance trends. Key consolidated average 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 obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
 
  –  Lines of Business Discussion — Provides an overview of financial performance for each of our major lines of business and provides additional discussion of trends underlying consolidated financial performance.
 
  –  Results for the Fourth Quarter — Provides a discussion of results for the 2008 fourth quarter compared with the 2007 fourth quarter.
 
A reading of each section is important to understand fully the nature of our financial performance and prospects.
 
Forward-Looking Statements
 
This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
 
Actual results could differ materially from those contained or implied by such statements for a variety of factors including: (a) deterioration in the loan portfolio could be worse than expected due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (b) changes in economic conditions; (c) movements in interest rates and spreads; (d) competitive pressures on product pricing and services; (e) success and timing of other business strategies; (f) the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Trouble Asset Relief Program voluntary Capital Purchase Plan under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions; and (g) extended disruption of vital infrastructure. Additional factors that could cause results to differ materially from those described above can be found in Huntington’s 2008 Form 10-K.
 
All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
Risk Factors
 
We, like other financial companies, are subject to a number of risks that may adversely affect our financial condition or results of operation, 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 of loss due to loan and lease customers or other counterparties not being able to meet their financial obligations under agreed upon terms, (2) market risk, which is the risk of loss due to changes in the market value of assets and liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and credit spreads, (3) liquidity risk, which is the risk of loss due to the possibility that funds may not be available to satisfy current or future obligations based on external macro market issues, investor and customer perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues, and (4) operational risk, which is the risk of loss due to human error, inadequate or failed internal systems and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and external influences such as market conditions, fraudulent activities, disasters, and security risks.
 
Throughout 2008, we operated in what is now being labeled by many industry observers as the most difficult environment for financial institutions in many decades. What began as a subprime lending crises in 2007, turned into a widespread housing, banking, and capital markets crisis in 2008. As a result, 2008 represented a year of tremendous capital markets turmoil as capital markets ceased to function and credit markets were largely closed to businesses and consumers. The unavailability of credit to many borrowers and lack of credit flow, even between banks, contributed to the weakening of the economy, especially in the second half of 2008, and the 2008 fourth quarter in particular.
 
Concurrent with and reflecting this environment, the weakness that had been centered primarily in the housing and capital markets segments, spilled over into other segments of the economy. The most visible sector negatively impacted was manufacturing, and most notably, the automobile industry. As 2008 ended, it was estimated that the United States economy had lost 3.6 million jobs, with approximately 50% of those losses occurring in the fourth quarter. According to the United States Labor Department, nationwide unemployment at 2008 year-end was 7.6%.
 
While the United States government took several actions in 2008 and into 2009, such as the largest stimulus plan in United States’ history, and is considering even further actions, no assurances can be given regarding their effectiveness in strengthening the capital markets and improving the economy. Therefore, for the foreseeable future, we believe we will be operating in a heightened risk environment. Of the major risk factors, those most likely to affect us are credit risk, market risk, and liquidity risk.
 
As related to credit risk, we anticipate continued pressure on credit quality performance, including higher loan delinquencies, net charge-offs, and the level of nonaccrual loans. All loan portfolios are expected to be impacted, although we believe the impact will be more concentrated in our commercial loan portfolio. Until unemployment levels decline, and the economic outlook improves, we anticipate that we will continue to build our allowance for credit losses in both absolute and relative terms.
 
With regard to market risk, the continuation of volatile capital markets is likely to be reflected in wide fluctuations in the valuation of certain assets, most notably mortgage asset-backed investment securities. Such fluctuations may result in additional asset value write-downs and other-than-temporary impairment (OTTI) charges.
 
We believe that actions taken by regulatory agencies and government bodies in late 2008 have been effective in reducing systemic liquidity risk. Specific actions included the FDIC raising the deposit insurance limit to $250,000 and providing full guarantees on noninterest bearing deposits at all FDIC-insured financial institutions. Among other actions, the most significant was the passage in October 2008 of the $700 billion Emergency Economic Stabilization Act; the cornerstone of which was the Troubled Asset Relief Program (TARP). The TARP’s voluntary Capital Purchase Plan (CPP) made available $350 billion of funds to banks and other financial institutions. We participated in TARP, which increased capital by $1.4 billion, as well as other such programs.
 
More information on risk is set forth below, and under the heading “Risk Factors” included in Item 1A of our 2008 Form 10-K for the year ended December 31, 2008. Additional information regarding risk factors can also be found in the “Risk Management and Capital” discussion.
 
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 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. Estimates are made

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
under facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed below. This analysis is included to emphasize that estimates are used in connection with the critical and other accounting policies and to illustrate the potential effect on the financial statements if the actual amount were different from the estimated amount.
 
–  Total Allowances for Credit Losses — The allowance for credit losses (ACL) is the sum of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). At December 31, 2008, the ACL was $944.4 million. The amount of the ACL was determined by judgments regarding the quality of the loan portfolio and loan commitments. All known relevant internal and external factors that affected loan collectibility were considered. The ACL represents the estimate of the level of reserves appropriate to absorb inherent credit losses in the loan and lease portfolio, as well as unfunded loan commitments. We believe the process for determining the ACL considers all of the potential factors that could result in credit losses. However, the process includes judgmental and quantitative elements that may be subject to significant change. To the extent actual outcomes differ from our estimates, additional provision for credit losses could be required, which could adversely affect earnings or financial performance in future periods.
 
At December 31, 2008, the ACL as a percent of total loans and leases was 2.30%. To illustrate the potential effect on the financial statements of our estimates of the ACL, a 10 basis point, or 4%, increase would have required $41.1 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted 2008 net income by approximately $26.7 million, or $0.07 per common share.
 
Additionally, in 2007, we established a specific reserve of $115.3 million associated with our loans to Franklin Credit Management Corporation (Franklin). At December 31, 2008, our specific ALLL for Franklin loans increased to $130.0 million, and represented approximately 20% of the remaining loans outstanding. Table 21 details our probability-of-default and recovery-after-default performance assumptions for estimating anticipated cash flows from the Franklin loans that were used to determine the appropriate amount of specific ALLL for the Franklin loans. The calculation of our specific ALLL for the Franklin portfolio is dependent, among other factors, on the assumptions provided in the table, as well as the current one-month LIBOR rate on the underlying loans to Franklin. As the one-month LIBOR rate increases, the specific ALLL for the Franklin portfolio could also increase. Our relationship with Franklin is discussed in greater detail in the “Commercial Credit” section of this report.
 
–  Fair Value Measurements — The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. Our valuation methods consider factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk. Other factors such as model assumptions, market dislocations, and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
 
Many of our assets are carried at fair value, including securities, mortgage loans held-for-sale, derivatives, mortgage servicing rights (MSRs), and trading assets. At December 31, 2008, approximately $5.1 billion of our assets were recorded at fair value. In addition to the above mentioned ongoing fair value measurements, fair value is also the unit of measure for recording business combinations.
 
FASB Statement No. 157, Fair Value Measurements, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
 
  –  Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
  –  Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
  –  Level 3 — inputs that are unobservable and significant to the fair value measurement.
 
At the end of each quarter, we assess the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period.

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
The table below provides a description and the valuation methodologies used for financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. The fair values measured at each level of the fair value hierarchy can be found in Note 19 of the Notes to the Consolidated Financial Statements.
 
Table 2 — Fair Value Measurement of Financial Instruments
 
 
         
Financial Instrument(1)   Hierarchy   Valuation methodology
         
Loans held-for-sale
  Level 2   Loans held-for-sale are estimated using security prices for similar product types.
         
Investment Securities & TradingAccount Securities(2)
  Level 1   Consist of U.S. Treasury and other federal agency securities, and money market mutual funds which generally have quoted prices.
         
    Level 2   Consist of U.S. Government and agency mortgage-backed securities and municipal securities for which an active market is not available. Third-party pricing services provide a fair value estimate based upon trades of similar financial instruments.
         
    Level 3   Consist of asset-backed securities and certain private label CMOs, for which we estimate the fair value. Assumptions used to determine the fair value of these securities have greater subjectivity due to the lack of observable market transactions. Generally, there are only limited trades of similar instruments and a discounted cash flow approach is used to determine fair value.
         
Mortgage Servicing Rights (MSRs)(3)
  Level 3   MSRs do not trade in an active, open market with readily observable prices. Although sales of MSRs do occur, the precise terms and conditions typically are not readily available. Fair value is based upon the final month-end valuation, which utilizes the month-end rate curve and prepayment assumptions.
         
Derivatives(4)
  Level 1   Consist of exchange traded options and forward commitments to deliver mortgage-backed securities which have quoted prices.
         
    Level 2   Consist of basic asset and liability conversion swaps and options, and interest rate caps. These derivative positions are valued using internally developed models that use readily observable market parameters.
         
    Level 3   Consist of interest rate lock agreements related to mortgage loan commitments. The determinination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption.
         
Equity Investments(5)
  Level 3   Consist of equity investments via equity funds (holding both private and publicly-traded equity securities), directly in companies as a minority interest investor, and directly in companies in conjunction with our mezzanine lending activities. These investments do not have readily observable prices. Fair value is based upon a variety of factors, including but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, and changes in market outlook.
 
(1)  Refer to Notes 1 and 19 of the Notes to the Consolidated Financial Statements for additional information.
 
(2)  Refer to Note 4 of the Notes to the Consolidated Financial Statements for additional information.
 
(3)  Refer to Note 6 of the Notes to the Consolidated Financial Statements for additional information.
 
(4)  Refer to Note 20 of the Notes to the Consolidated Financial Statements for additional information.
 
(5)  Certain equity investments are accounted for under the equity method and, therefore, are not subject to the fair value disclosure requirements.
 
Alt-A mortgage-backed / Private-label collateralized mortgage obligation (CMO) securities, included within our Level 3 investment securities portfolio, represent mortgage-backed securities collateralized by first-lien residential mortgage loans. As the lowest level input that is significant to the fair value measurement in its entirety is Level 3, we classify all securities within this portfolio as Level 3. The securities are priced with the assistance of an outside third-party consultant using a discounted cash flow approach

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
using the third-party’s proprietary pricing model. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, discount rates that are implied by market prices for similar securities, and collateral structure types and house price depreciation and appreciation that are based upon macroeconomic forecasts.
 
We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to determine if the impairment in these portfolios was other-than-temporary. We performed this analysis, with the assistance of third-party consultants with knowledge of the structures of these securities and expertise in the analysis and pricing of mortgage-backed securities, and using the guidance in FSP EITF 99-20-1, to determine whether we believed it probable that we would have a loss of principal on a security within the portfolio in the future. All securities in these portfolios remained current with respect to interest and principal at December 31, 2008. (See Note 2 of the Notes to the Consolidated Financial Statements for additional information regarding FSP EITF 99-20-1.)
 
For each security with any indication of impairment, we analyzed nine reasonably possible scenarios, based around the scenario that we considered most likely. To develop these nine scenarios, we analyzed the amount of principal loss that we would expect to have if the expected default rate of the loans underlying the security were 10% higher and 10% lower than the most likely default scenario, a range we believe covers the reasonably possible scenarios for these securities. We also analyzed, for each of these default scenarios, the amount of principal loss that we would expect to have if the severity of the losses that we experienced at default were both 10% higher and 10% lower than the most likely severity-of-loss scenario, a range we believe covers the reasonably possible scenarios for these securities.
 
For each security subject to this additional review, we analyzed all nine of these scenarios to determine whether principal loss was probable. As a result of this analysis, we believe that we will experience a loss of principal on 19 Alt-A mortgage-backed securities and one private-label CMO security. The analysis indicated future expected losses of principal on these other-than-temporarily impaired securities ranged from 0.5% to 75.2% of the par value of the securities in our most-likely scenario. The average amount of expected principal loss was 9.6% of the par value of the securities. These losses were projected to occur beginning anywhere from 25 months to as many as 151 months in the future. We measured the amount of impairment on these securities using the fair value of the security in the scenario we considered to be most likely, using discount rates ranging from 14% to 23%, depending on both the potential variability of outcomes for each security and the expected duration of cash flows for each security. As a result, we recorded $176.9 million of OTTI for our Alt-A mortgage-backed securities and $5.7 million of OTTI for our private-label CMO security.
 
Recognition of additional OTTI could be required for our Alt-A mortgage-backed and private-label CMO securities. To estimate potential impairment losses, we perform stress testing under which we increase probability-of-default and loss-given-default performance assumptions related to the underlying collateral mortgages. Increasing probability-of-default and loss-given-default estimates to 150% and 125%, respectively, of our current most-likely case estimates would result in: (a) the recognition of additional OTTI of $74.3 million, or $0.13 per common share, and (b) a reduction to our equity position of $17.1 million, as most of the decline in fair value would already be reflected in our equity.
 
Pooled-trust-preferred securities, also included within our Level 3 investment securities portfolio, represent collateralized debt obligations (CDOs) backed by a pool of debt securities issued by financial institutions. As the lowest level input that is significant to the fair value measurement in its entirety is Level 3, we classify all securities within this portfolio as Level 3. The collateral is generally trust preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. The first and second-tier bank trust preferred securities, which comprise 80% of the pooled-trust-preferred securities portfolio, are priced with the assistance of an outside third-party consultant using a discounted cash flow approach, and the independent third-party’s proprietary pricing models. The model uses inputs such as estimated default and deferral rates that are implied from the underlying performance of the issuers in the structure, and discount rates that are implied by market prices for similar securities and collateral structure types. Insurance company securities, which comprise 20% of the pooled-trust-preferred securities portfolio, are priced by utilizing a third-party pricing service that determines the fair value based upon trades of similar financial instruments.
 
Cash flow analyses of the first and second-tier bank trust preferred securities issued by banks and bank holding companies were conducted to test for any OTTI, and in accordance with FSP EITF 99-20-1, OTTI was recorded in certain securities within these portfolios as we concluded it was probable that all cash flows would not be collected. The discount rate used to calculate the cash flows ranged from 11%-15%, and was heavily impacted by an illiquidity premium due to the lack of an active market for these securities. We assumed that all issuers deferring interest payments would ultimately default, and we assumed a 10% recovery rate on such defaults. In addition, future defaults were estimated based upon an analysis of the financial strength of the issuers. As a result of this testing, we recognized OTTI of $14.5 million in the pooled-trust-preferred securities portfolio during 2008.
 
Recognition of additional OTTI could be required for our pooled-trust-preferred securities. Our estimates of potential OTTI are performed on a security-by-security basis. The significant variable in estimating OTTI on these securities is the probability of default by banks issuing underlying collateral securities. Tripling the default assumptions we used to evaluate these securities at December 31, 2008,

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
would result in: (a) the recognition of additional OTTI of $64.3 million, or $0.11 per common share, and (b) a reduction to our equity position of only $5.1 million as most of the decline in fair value would already be reflected in our equity.
 
Certain other assets and liabilities which are not financial instruments also involve fair value measurements. A description of these assets and liabilities, and the methodologies utilized to determine fair value are discussed below:
 
Goodwill
Goodwill is tested for impairment annually, as of October 1, based upon reporting units, to determine whether any impairment exists. Goodwill is also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Impairment losses, if any, would be reflected in noninterest expense. For 2008, we performed interim evaluations of our goodwill balances at June 30, 2008 and December 31, 2008 as well as our annual goodwill impairment assessment as of October 1, 2008. Based on our analyses, we concluded that the fair value of our reporting units exceeded the fair value of our assets and liabilities and therefore goodwill was not considered impaired at any of those dates.
 
Huntington identified four reporting units: Regional Banking, Private Financial & Capital Markets Group, Insurance, and AFDS. The reporting units were identified after establishing Huntington’s operating segments. Components of the regional banking segment have been aggregated as one reporting unit based upon the similar economic and operating characteristics of the components. Although Insurance is included within the Private Financial & Capital Markets Group segment for 2008, it is evaluated as a separate reporting unit since the nature of the products and services differ from the rest of the Private Financial & Capital Markets Group segment. The AFDS unit does not have goodwill, and therefore, is not subject to goodwill impairment testing.
 
The first step of impairment testing required a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. An independent third party was engaged to assist with the impairment assessment.
 
To determine the fair value of the Private Financial & Capital Markets Group and Insurance reporting units, a market approach was utilized. Revenue, earnings and market capitalization multiples of comparable public companies were selected and applied to the reporting units’ results to calculate fair value. Using this approach, the Private Financial & Capital Markets Group and Insurance reporting units passed the first step, and as a result, no further impairment testing was required and goodwill was determined to not be impaired for these reporting units.
 
At December 31, 2008, our goodwill totaled $3.1 billion. Of this $3.1 billion, $2.9 billion, or 95%, was allocated to Regional Banking. To determine the fair value of the Regional Banking reporting unit, both an income (discounted cash flows) and market approach were utilized. The income approach is based on discounted cash flows derived from assumptions of balance sheet and income statement activity. It also factors in costs of equity and weighted-average costs of capital to determine an appropriate discount rate. The market approach is similar to the method for the Private Financial & Capital Markets Group and Insurance units as described above. The results of the income and market approach were weighted to arrive at the final calculation of fair value. As market capitalization has declined across the banking industry, we believed that a heavier weighting on the income approach was more representative of a market participant’s view. The Regional Banking unit did not pass the first step of the impairment test, and therefore, we conducted the second step of the impairment testing. The second step required a comparison of the implied fair value of goodwill to the carrying amount of goodwill.
 
The aggregate fair values were compared to market capitalization as an assessment of the appropriateness of the fair value measurements. As our stock price fluctuated greatly during 2008, we used our average stock price for the 30 days preceding the valuation date to determine market capitalization. The comparison between the aggregate fair values and market capitalization indicates an implied premium. A control premium analysis indicated that the implied premium was within range of the overall premiums observed in the market place.
 
To determine the implied fair value of goodwill, the fair value of Regional Banking (as determined in step one) is allocated to all assets and liabilities of the reporting unit including any recognized or unrecognized intangible assets. The allocation is done as if the reporting unit had been acquired in a business combination, and the fair value of the reporting unit was the price paid to acquire the reporting unit. Key valuations were the assessment of core deposit intangibles, the mark-to-fair value of outstanding debt, and discount on the loan portfolio. The mark adjustment on our outstanding debt is based upon observable trades or modeled prices using current yield curves and market spreads. The valuation of the loan portfolio indicated discounts that we believe were consistent with transactions occurring in the marketplace.
 
The results of this allocation indicated the implied fair value of Regional Banking’s goodwill exceeded the carrying amount of goodwill for Regional Banking, and therefore, goodwill was not impaired.
 
It is possible that our assumptions and conclusions regarding the valuation of our reporting units could change adversely and could result in impairment of our goodwill. Such impairment could have a material effect on our financial position and results of operations.

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
Pension
Pension plan assets consist of mutual funds and Huntington common stock. Investments are accounted for at cost on the trade date and are reported at fair value. Mutual funds are valued at quoted redemption value. Huntington common stock is traded on a national securities exchange and is valued at the last reported sales price.
 
The discount rate and expected return on plan assets used to determine the benefit obligation and pension expense for December 31, 2008 are both assumptions. Any deviation from these assumptions could cause actual results to change.
 
Other Real Estate Owned (OREO)
OREO obtained in satisfaction of a loan is recorded at its estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the ALLL. Subsequent declines in value are reported as adjustments to the carrying amount, and are charged to noninterest expense. Gains or losses not previously recognized resulting from the sale of OREO are recognized in noninterest expense on the date of sale.
 
–  Income Taxes — The calculation of our provision for federal income taxes is complex and requires the use of estimates and judgments. We have two accruals for income taxes: Our income tax receivable represents the estimated amount currently due from the federal government, net of any reserve for potential audit issues, and is reported as a component of “accrued income and other assets” in our consolidated balance sheet; our deferred federal income tax asset or liability represents the estimated impact of temporary differences between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities are recognized under the federal tax code.
 
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and nonincome taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We believe the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.
 
From time to time, we engage in business transactions that may have an effect on our tax liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial, and regulatory guidance in the context of the tax position. However, changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial, and regulatory guidance. Such changes could affect the amount of our accrued taxes and could be material to our financial position and/or results of operations. (See Note 17 of the Notes to the Consolidated Financial Statements.)
 
Recent Accounting Pronouncements and Developments
 
Note 2 to the Consolidated Financial Statements discusses new accounting pronouncements adopted during 2008 and the expected impact of accounting pronouncements recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to the Consolidated Financial Statements.
 
Acquisitions
 
Sky Financial Group, Inc. (Sky Financial)
 
The merger with Sky Financial was completed on July 1, 2007. At the time of acquisition, Sky Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion. The impact of this acquisition was included in our consolidated results for the last six months of 2007. Additionally, in September 2007, Sky Bank and Sky Trust, National Association (Sky Trust), merged into the Bank and systems integration was completed. As a result, performance comparisons between 2008 and 2007, and 2007 and 2006, are affected.
 
As a result of this acquisition, we have a significant loan relationship with Franklin. This relationship is discussed in greater detail in the “Commercial Credit” section of this report.
 
Unizan Financial Corp. (Unizan)
 
The merger with Unizan was completed on March 1, 2006. At the time of acquisition, Unizan had assets of $2.5 billion, including $1.6 billion of loans and core deposits of $1.5 billion. The impact of this acquisition was included in our consolidated results for the last ten months of 2006. As a result, performance comparisons between 2007 and 2006, and 2006 and 2005, are affected.

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

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
Table 3 — Selected Annual Income Statements(1)
                                                                         
    Year Ended December 31,  
          Change from 2007           Change from 2006                    
(in thousands, except per share amounts)   2008     Amount     Percent     2007     Amount     Percent     2006     2005     2004  
Interest income
  $ 2,798,322     $ 55,359       2.0 %   $ 2,742,963     $ 672,444       32.5 %   $ 2,070,519     $ 1,641,765     $ 1,347,315  
Interest expense
    1,266,631       (174,820 )     (12.1 )     1,441,451       390,109       37.1       1,051,342       679,354       435,941  
 
Net interest income
    1,531,691       230,179       17.7       1,301,512       282,335       27.7       1,019,177       962,411       911,374  
Provision for credit losses
    1,057,463       413,835       64.3       643,628       578,437       N.M.       65,191       81,299       55,062  
 
Net interest income after provision for credit losses
    474,228       (183,656 )     (27.9 )     657,884       (296,102 )     (31.0 )     953,986       881,112       856,312  
 
Service charges on deposit accounts
    308,053       53,860       21.2       254,193       68,480       36.9       185,713       167,834       171,115  
Brokerage and insurance income
    137,796       45,421       49.2       92,375       33,540       57.0       58,835       53,619       54,799  
Trust services
    125,980       4,562       3.8       121,418       31,463       35.0       89,955       77,405       67,410  
Electronic banking
    90,267       19,200       27.0       71,067       19,713       38.4       51,354       44,348       41,574  
Bank owned life insurance income
    54,776       4,921       9.9       49,855       6,080       13.9       43,775       40,736       42,297  
Automobile operating lease income
    39,851       32,041       N.M.       7,810       (35,305 )     (81.9 )     43,115       133,015       285,431  
Mortgage banking
    8,994       (20,810 )     (69.8 )     29,804       (11,687 )     (28.2 )     41,491       28,333       26,786  
Securities (losses) gains
    (197,370 )     (167,632 )     N.M.       (29,738 )     43,453       (59.4 )     (73,191 )     (8,055 )     15,763  
Other
    138,791       58,972       73.9       79,819       (40,203 )     (33.5 )     120,022       95,047       113,423  
 
Total noninterest income
    707,138       30,535       4.5       676,603       115,534       20.6       561,069       632,282       818,598  
 
Personnel costs
    783,546       96,718       14.1       686,828       145,600       26.9       541,228       481,658       485,806  
Outside data processing and other services
    128,163       918       0.7       127,245       48,466       61.5       78,779       74,638       72,115  
Net occupancy
    108,428       9,055       9.1       99,373       28,092       39.4       71,281       71,092       75,941  
Equipment
    93,965       12,483       15.3       81,482       11,570       16.5       69,912       63,124       63,342  
Amortization of intangibles
    76,894       31,743       70.3       45,151       35,189       N.M.       9,962       829       817  
Professional services
    53,667       13,347       33.1       40,320       13,267       49.0       27,053       34,569       36,876  
Marketing
    32,664       (13,379 )     (29.1 )     46,043       14,315       45.1       31,728       26,279       24,600  
Automobile operating lease expense
    31,282       26,121       N.M.       5,161       (26,125 )     (83.5 )     31,286       103,850       235,080  
Telecommunications
    25,008       506       2.1       24,502       5,250       27.3       19,252       18,648       19,787  
Printing and supplies
    18,870       619       3.4       18,251       4,387       31.6       13,864       12,573       12,463  
Other
    124,887       (12,601 )     (9.2 )     137,488       30,839       28.9       106,649       82,560       95,417  
 
Total noninterest expense
    1,477,374       165,530       12.6       1,311,844       310,850       31.1       1,000,994       969,820       1,122,244  
 
(Loss) Income before income taxes
    (296,008 )     (318,651 )     N.M.       22,643       (491,418 )     (95.6 )     514,061       543,574       552,666  
(Benefit) provision for income taxes
    (182,202 )     (129,676 )     N.M.       (52,526 )     (105,366 )     N.M.       52,840       131,483       153,741  
 
Net (Loss) Income
    (113,806 )     (188,975 )     N.M.       75,169       (386,052 )     (83.7 )     461,221       412,091       398,925  
 
Dividends on preferred shares
    46,400       46,400       N.M.                                      
 
Net (loss) income applicable to common shares
  $ (160,206 )   $ (235,375 )     N.M. %   $ 75,169     $ (386,052 )     (83.7 )%   $ 461,221     $ 412,091     $ 398,925  
 
Average common shares — basic
    366,155       65,247       21.7 %     300,908       64,209       27.1 %     236,699       230,142       229,913  
Average common shares — diluted(2)
    366,155       62,700       20.7       303,455       63,535       26.5       239,920       233,475       233,856  
                                                                         
Per common share:
                                                                       
Net income — basic
  $ (0.44 )   $ (0.69 )     N.M. %   $ 0.25     $ (1.70 )     (87.2 )%   $ 1.95     $ 1.79     $ 1.74  
Net income — diluted
    (0.44 )     (0.69 )     N.M.       0.25       (1.67 )     (87.0 )     1.92       1.77       1.71  
Cash dividends declared
    0.6625       (0.40 )     (37.5 )     1.060       0.06       6.0       1.000       0.845       0.750  
                                                                         
Revenue — fully taxable equivalent (FTE)
                                                                       
Net interest income
  $ 1,531,691     $ 230,179       17.7 %   $ 1,301,512     $ 282,335       27.7 %   $ 1,019,177     $ 962,411     $ 911,374  
FTE adjustment
    20,218       969       5.0       19,249       3,224       20.1       16,025       13,393       11,653  
 
Net interest income(3)
    1,551,909       231,148       17.5       1,320,761       285,559       27.6       1,035,202       975,804       923,027  
Noninterest income
    707,138       30,535       4.5       676,603       115,534       20.6       561,069       632,282       818,598  
 
Total revenue(3)
  $ 2,259,047     $ 261,683       13.1 %   $ 1,997,364     $ 401,093       25.1 %   $ 1,596,271     $ 1,608,086     $ 1,741,625  
 
N.M., not a meaningful value.
 
(1)  Comparisons for presented periods are impacted by a number of factors. Refer to “Significant Factors” for additional discussion regarding these key factors.
 
(2)  For the year ended December 31, 2008, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation. It was excluded because the result would have been higher than basic earnings per common share (anti-dilutive) for the year.
 
(3)  On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
DISCUSSION OF RESULTS OF OPERATIONS
 
This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items” section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Lines of Business” discussion.
 
Summary
 
2008 versus 2007
 
We reported a net loss of $113.8 million in 2008, representing a loss per common share of $0.44. These results compared unfavorably with net income of $75.2 million, or $0.25 per common share, in 2007. Comparisons with the prior year were significantly impacted by a number of factors that are discussed later in the “Significant Items” section.
 
During 2008, the primary focus within our industry continued to be credit quality. The economy deteriorated substantially throughout the year in our regions, and continued to put stress on our borrowers. Our expectation is that the economy will remain under stress, and that no improvement will be seen through at least the end of 2009.
 
The largest setback to 2008 performance was the credit quality deterioration of the Franklin relationship that occurred in the 2008 fourth quarter resulting in a negative impact of $454.3 million, or $0.81 per common share. The loan restructuring associated with our relationship with Franklin, completed during the 2007 fourth quarter, continued to perform consistent with the terms of the restructuring agreement through the 2008 third quarter. However, cash flows that we received deteriorated significantly during the 2008 fourth quarter, reflecting a more severe than expected deterioration in the overall economy. This, and other factors discussed in the “Franklin relationship” section, resulted in a significant partial charge-off of the loans to Franklin. Although disappointing, and while we can give no further assurances, this charge represents our best estimate of the inherent loss within this credit relationship.
 
Non-Franklin-related net charge-offs (NCOs) and provision levels increased substantially compared with 2007. During 2008, the non-Franklin-related allowance for credit losses (ACL) as a percentage of total loans and leases increased to 2.01% compared with 1.36% at the prior year-end. Non-Franklin-related nonaccrual loans (NALs) also significantly increased to $851.9 million, compared with $319.8 million at the prior year-end, reflecting increased NALs in our commercial real estate (CRE) loans, particularly the single family home builder and retail properties segments, and within our commercial and industrial (C&I) portfolio related to businesses that support residential development. We expect to see continued levels of elevated charge-offs and provision expense during 2009.
 
Our year-end regulatory capital levels were strong. Our tangible equity ratio improved 264 basis points to 7.72% compared with the prior year-end, reflecting the benefits of a $0.6 billion preferred stock issuance in the 2008 second quarter and a $1.4 billion preferred stock issuance in the 2008 fourth quarter as a result of our participation in the Troubled Assets Relief Program (TARP) voluntary Capital Purchase Plan (CPP) (see “Risk Factors” included in Item 1A of our 2008 Form 10-K for the year ended December 31, 2008). However, our tangible common equity ratio declined 104 basis points compared with the prior year-end, and we believe that it is important that we begin rebuilding our common equity. To that end, we reduced our quarterly common stock dividend to $0.01 per common share, effective with the dividend declared on January 22, 2009. Our period-end liquidity position was sound, as we have conservatively managed our liquidity position at both the parent company and bank levels. At December 31, 2008, the parent company had sufficient cash for operations and does not have any debt maturities for several years. Further, the Bank has a manageable level of debt maturities during the next 12-month period. In the 2008 fourth quarter, the FDIC introduced the Temporary Liquidity Guarantee Program (TLGP). One component of this program guarantees certain newly issued senior unsecured debt. In the 2009 first quarter, the Bank issued $600 million of debt as part of the TLGP.
 
Fully taxable net interest income in 2008 increased $231.1 million, or 18%, compared with 2007. The prior year reflected only six months of net interest income attributable to the acquisition of Sky Financial compared with twelve months for 2008. The Sky Financial acquisition added $13.3 billion of loans and $12.9 billion of deposits at July 1, 2007. There was good non-merger-related growth in total average commercial loans, partially offset by a decline in total average residential mortgages reflecting the continued slowdown in the housing market, as well as loan sales. Fully taxable net interest income in 2008 was negatively impacted by an 11 basis point decline in the net interest margin compared with 2007, primarily due to the interest accrual reversals resulting from loans being placed on nonaccrual status, as well as deposit pricing. We anticipate the net interest margin will remain under modest pressure during 2009 resulting from the absolute low-level of current interest rates and expected continued aggressive deposit pricing in our markets.
 
Noninterest income in 2008 increased $30.5 million, or 5%, compared with 2007. Comparisons with the prior year were affected by: (a) $153.2 million of lower noninterest income resulting from Significant Items (see “Significant Items” discussion), and (b) $137.4 million increase resulting from the Sky Financial acquisition. Considering the impact of both of these items, the remaining components of noninterest income increased $45.0 million, or 6%. The increase primarily reflects automobile operating

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lease income, and a 9% increase in brokerage and insurance income reflecting growth in annuity sales. These increases were partially offset by a 7% decline in trust services income reflecting the impact of lower market values on asset management revenues.
 
Expenses were well controlled, with our efficiency ratio improving to 57.0% in 2008 compared with 62.5% in 2007. Noninterest expense in 2008 increased $165.5 million, or 13%, compared with 2007. Comparisons with the prior year were affected by: (a) $62.4 million of net lower expenses resulting from Significant Items (see “Significant Items” discussion), and (b) $208.1 million increase resulting from the Sky Financial acquisition, including the impact of restructuring and merger costs. Considering the impact of both of these items, the remaining components of noninterest expense increased $20.4 million, or 1%. The increase primarily reflected increased collection and OREO expenses as the economy continues to weaken, as well as increased insurance expense and automobile operating lease expense. These increases are partially offset by a decline in personnel expense, as well as other expense categories, due to merger/restructuring efficiencies.
 
2007 versus 2006
 
We reported 2007 net income of $75.2 million and earnings per common share of $0.25. These results compared unfavorably with net income of $461.2 million and earnings per common share of $1.92 in 2006. Comparisons with the prior year were significantly impacted by: (a) our acquisition of Sky Financial, which closed on July 1, 2007, as well as the credit deterioration of the Franklin relationship that was also acquired with Sky Financial, (b) a 2006 reduction in the provision for income taxes as a result of the favorable resolution to certain federal income tax audits, and (c) balance sheet restructuring charges taken in 2006.
 
The credit deterioration of the Franklin relationship late in 2007 was the largest setback to 2007 performance. A negative impact of $423.6 million pretax ($275.4 million after-tax, or $0.91 per common share based upon the annual average outstanding diluted common shares) related to this relationship. Other factors negatively impacting our 2007 performance included: (a) the building of the non-Franklin-related allowance for loan losses due to continued weakness in the residential real estate development markets and (b) the volatility of the financial markets resulting in net market-related losses.
 
The negative factors discussed above were partially offset by the $47.5 million, or 4%, decline in non-merger-related expenses, representing the realization of most of the merger efficiencies that were targeted from the acquisition. Also, commercial loans showed good non-merger-related growth, and there was also strong non-merger-related growth in several key noninterest income activities, including deposit service charges, trust services, and electronic banking income.
 
Fully taxable net interest income for 2007 increased $285.6 million, or 28%, from 2006. Six months of net interest income attributable to the acquisition of Sky Financial was included in 2007. There was good non-merger-related growth in total average commercial loans. However, total average automobile loans and leases declined, as expected, due to lower consumer demand and competitive pricing. Additionally, the non-merger-related declines in total average residential mortgages, as well as the lack of growth in non-merger-related total average home equity loans, reflected the continued softness in the real estate markets, as well as loan sales. Growth in non-merger-related average total deposits was good in 2007, driven by strong growth in interest-bearing demand deposits. Our net interest margin increased seven basis points to 3.36% from 3.29% in 2006.
 
In addition to the Franklin credit deterioration discussed previously, credit quality generally weakened in 2007 compared with 2006. The ALLL increased to 1.44% in 2007 from 1.04% in the prior year. The ALLL coverage of NALs decreased to 181% at December 31, 2007, from 189% at December 31, 2006. Nonperforming assets (NPAs) also increased from the prior year, including the NPAs acquired from Sky Financial. The deterioration of all of these measures reflected the continued economic weakness in our Midwest markets, most notably among our borrowers in eastern Michigan and northern Ohio, and within the residential real estate development portfolio.
 
Significant Items
 
Definition of Significant Items
 
Certain components of the income statement are naturally subject to more volatility than others. As a result, readers of this report may view such items differently in their assessment of “underlying” or “core” earnings performance compared with their expectations and/or any implications resulting from them on their assessment of future performance trends.
 
Therefore, we believe the disclosure of certain “Significant Items” affecting current and prior period results aids readers of this report in better understanding corporate performance so that they can ascertain for themselves what, if any, items they may wish to include or exclude from their analysis of performance, within the context of determining how that performance differed from their expectations, as well as how, if at all, to adjust their estimates of future performance accordingly.

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To this end, we have adopted a practice of listing as “Significant Items”, individual and/or particularly volatile items that impact the current period results by $0.01 per share or more. Such “Significant Items” generally fall within the categories discussed below:
 
Timing Differences
 
Parts of our regular business activities are naturally volatile, including capital markets income and sales of loans. While such items may generally be expected to occur within a full-year reporting period, they may vary significantly from period to period. Such items are also typically a component of an income statement line item and not, therefore, readily discernable. By specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
 
Other Items
 
From time to time, an event or transaction might significantly impact revenues or expenses in a particular reporting period that is judged to be infrequent, short-term in nature, and/or materially outside typically expected performance. Examples would be (1) merger costs as they typically impact expenses for only a few quarters during the period of transition; including related restructuring charges and asset valuation adjustments; (2) changes in an accounting principle; (3) large and infrequent tax assessments/refunds; (4) a large gain/loss on the sale of an asset; and (5) outsized commercial loan net charge-offs related to fraud. In addition, for the periods covered by this report, the impact of the Franklin relationship is deemed to be a significant item due to its unusually large size and because it was acquired in the Sky Financial merger and thus it is not representative of our typical underwriting criteria. By disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
 
Provision for Credit Losses
 
While the provision for credit losses may vary significantly among periods, and often exceeds $0.01 per share, we typically exclude it from the list of “Significant Items” unless, in our view, there is a significant, specific credit (or multiple significant, specific credits) affecting comparability among periods. In determining whether any portion of the provision for credit losses should be included as a significant item, we consider, among other things, that the provision is a major income statement caption rather than a component of another caption and, therefore, the period-to-period variance can be readily determined. We also consider the additional historical volatility of the provision for credit losses.
 
Other Exclusions
 
“Significant Items” for any particular period are not intended to be a complete list of items that may significantly impact future periods. A number of factors, including those described in Huntington’s 2008 Annual Report on Form 10-K and other factors described from time to time in Huntington’s other filings with the SEC, could also significantly impact future periods.
 
Significant Items Influencing Financial Performance Comparisons
 
Earnings comparisons among the three years ended December 31, 2008, 2007, and 2006 were impacted by a number of significant items summarized below.
 
  1.  Sky Financial Acquisition.  The merger with Sky Financial was completed on July 1, 2007. The impacts of Sky Financial on the 2008 reported results compared with the 2007 reported results are as follows:
 
  –  Increased the absolute level of reported average balance sheet, revenue, expense, and credit quality results (e.g., NCOs).
 
  –  Increased reported noninterest expense items as a result of costs incurred as part of merger integration and post- merger restructuring activities, most notably employee retention bonuses, outside programming services related to systems conversions, and marketing expenses related to customer retention initiatives. These net merger costs were $21.8 million ($0.04 per common share) in 2008 and $85.1 million ($0.18 per common share) in 2007.
 
  2.  Franklin Relationship.  Our relationship with Franklin was acquired in the Sky Financial acquisition. The impacts of the Franklin relationship on the 2008 reported results compared with the 2007 reported results are as follows:
 
  –  Performance for 2008 included a $454.3 million ($0.81 per common share) negative impact. In the 2008 fourth quarter, the cash flow from Franklin’s mortgages, which represent the collateral for our loans, deteriorated significantly. This deterioration resulted in a $438.0 million provision for credit losses, $9.0 million reduction of net interest income as the loans were placed on nonaccrual status, and $7.3 million of interest-rate swap losses recorded to noninterest income.

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  –  Performance for 2007 included a $423.6 million ($0.91 per common share) negative impact. On December 28, 2007, the loans associated with Franklin were restructured, resulting in a $405.8 million provision for credit losses and a $17.9 million reduction of net interest income.
 
  3.  Visa® Initial Public Offering (IPO).  Prior to the Visa® IPO occurring in March 2008, Visa® was owned by its member banks, which included the Bank. Impacts related to the Visa® IPO included a positive impact of $42.1 million ($0.07 per common share) in 2008, and a negative impact of $24.9 million ($0.04 per common share) in 2007. The impacts included:
 
  –  In 2007, we recorded a $24.9 million ($0.05 per common share) for our pro-rata portion of an indemnification charge provided to Visa® by its member banks for various litigation filed against Visa®. Subsequently, in 2008, we reversed $17.0 million ($0.03 per common share) of the $24.9 million, as an escrow account was established by Visa® using a portion of the proceeds received from the IPO. This escrow accent was established for the potential settlements relating to this litigation thereby mitigating our potential liability from the indemnification. The accrual, and subsequent reversal, was recorded to noninterest expense.
 
  –  In 2008, a $25.1 million gain ($0.04 per common share), was recorded in other noninterest income resulting from the proceeds of the IPO in 2008 relating to the sale of a portion of our ownership interest in Visa®.
 
  4.  Mortgage Servicing Rights (MSRs) and Related Hedging.  Included in total net market-related losses are net losses or gains from our MSRs and the related hedging. (See “Mortgage Servicing Rights” located within the “Market Risk” section). Net income included the following net impact of MSR hedging activity (see Table 10):
 
                                         
(in thousands, except per share amounts)  
                            Per
 
    Net interest
    Noninterest
    Pretax
    Net
    common
 
Period   income     income     (loss) income     (loss) income     share  
2008
  $ 33,139     $ (63,955 )   $ (30,816 )   $ (20,030 )   $ (0.05 )
2007
    5,797       (24,784 )     (18,987 )     (12,342 )     (0.04 )
2006
    36       3,586 (1)     3,622       2,354       0.01  
 
(1) Includes $5.1 million related to the positive impact of adopting SFAS No 156.
 
  5.  Other Net Market-Related Gains or Losses.  Other net market-related gains or losses included gains and losses related to the following market-driven activities: net securities gains and losses, gains and losses from public and private equity investments included in other noninterest income, net losses from the sale of loans included primarily in other noninterest income (except as otherwise noted), and the impact from the extinguishment of debt included in other noninterest expense. Total net market-related losses also include the net impact of MSRs and related hedging (see item 4 above). Net income included the following impact from other net market-related losses:
 
                                                         
(in thousands, except per share amounts)  
                      Debt
                Per
 
    Securities
    Equity
    Net loss on
    extinguish-
    Pretax
    Net
    common
 
Period   losses     investments     loans sold     ment     (loss) income     (loss) income     share  
2008
  $ (197,370 )   $ (5,892 )   $ (5,131 )(1)   $ 23,541     $ (184,852 )   $ (120,154 )   $ (0.33 )
2007(2)
    (30,486 )     (20,009 )     (34,003 )     8,058       (76,440 )     (49,686 )     (0.16 )
2006
    (73,191 )     7,436       (859 )(3)           (66,614 )     (43,299 )     (0.18 )
 
(1) This amount included a $2.1 million gain reflected in mortgage banking income.
 
(2) $748 thousand of securities losses related to debt extinguishment, therefore, this amount is reflected as debt extinguishment in the above table.
 
(3) This amount is reflected entirely in mortgage banking income.
 
The 2008 securities losses total included OTTI adjustments of $176.9 million in our Alt-A mortgage-backed securities portfolio (see “Investment Portfolio” discussion within the “Credit Risk” section).
 
  6.  Other Significant Items Influencing Earnings Performance Comparisons.  In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:
 
2008
 
  –  $12.4 million ($0.02 per common share) of asset impairment, including (a) $5.9 million venture capital loss included in other noninterest income, (b) $4.0 million charge off of a receivable included in other noninterest expense, and (c) $2.5 million write-down of leasehold improvements in our Cleveland main office included in net occupancy expense.
 
  –  $7.9 million ($0.02 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carryforward valuation allowance as a result of the 2008 first quarter Visa® IPO.
 
2007
 
  –  $10.8 million ($0.02 per common share) pretax negative impact primarily due to increases in litigation reserves on existing cases.

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2006
 
  –  $84.5 million ($0.35 per common share) reduction of provision for income taxes from the release of tax reserves as a result of the resolution of the federal income tax audit for 2002 and 2003, and recognition of a federal tax loss carryback.
 
  –  $10.0 million ($0.03 per common share) pretax contribution to the Huntington Foundation.
 
  –  $4.8 million ($0.01 per common share) in severance and consolidation pretax expenses. This reflected fourth quarter severance-related expenses associated with a reduction of 75 Regional Banking staff positions, as well as costs associated with the retirements of a vice chairman and an executive vice president.
 
  –  $3.7 million ($0.01 per common share) of Unizan pretax merger costs, primarily associated with systems conversion expenses.
 
  –  $3.5 million ($0.01 per common share) pretax negative impact associated with the refinancing of Federal Home Loan Bank (FHLB) funding.
 
  –  $3.3 million ($0.01 per common share) pretax gain on the sale of MasterCard® stock.
 
  –  $3.2 million ($0.01 per common share) pretax negative impact associated with the write-down of equity method investments.
 
  –  $2.3 million ($0.01 per common share) pretax unfavorable impact due to a cumulative adjustment to defer home equity annual fees.
 
Table 4 reflects the earnings impact of the above-mentioned significant items for periods affected by this Results of Operations discussion:
 
Table 4 — Significant Items Influencing Earnings Performance Comparison (1)
 
                                                 
    2008     2007     2006  
(in thousands)   After-tax     EPS     After-tax     EPS     After-tax     EPS  
Net income — GAAP
  $ (113,806 )           $ 75,169             $ 461,221          
Earnings per share, after tax
          $ (0.44 )           $ 0.25             $ 1.92  
Change from prior year — $
            (0.69 )             (1.67 )             0.15  
Change from prior year — %
            N.M. %             (87.0 )%             8.5 %
Significant items — favorable (unfavorable) impact:   Earnings(2)     EPS(3)     Earnings(2)     EPS(3)     Earnings(2)     EPS(3)  
Aggegate impact of Visa IPO
  $ 25,087     $ 0.04     $     $     $     $  
Visa® anti-trust indemnification
    16,995       0.03       (24,870 )     (0.05 )            
Deferred tax valuation allowance benefit(4)
    7,892       0.02                          
Franklin Credit relationship
    (454,278 )     (0.81 )     (423,645 )     (0.91 )            
Net market-related losses
    (215,667 )     (0.38 )     (95,427 )     (0.10 )     (62,992 )     (0.17 )
Merger/Restructuring costs
    (21,830 )     (0.04 )     (85,084 )     (0.18 )     (3,749 )     (0.01 )
Asset impairment
    (12,400 )     (0.02 )                        
Litigation losses
                (10,767 )     (0.02 )            
Reduction to federal income tax expense(4)
                            84,541       0.35  
Gain on sale of MasterCard® stock
                            3,341       0.01  
Huntington Foundation contribution
                            (10,000 )     (0.03 )
Severance and consolidation expenses
                            (4,750 )     (0.01 )
FHLB refinancing
                            (3,530 )     (0.01 )
Accounting adjustment for certain equity investments
                            (3,240 )     (0.01 )
Adjustment to defer home equity annual fees
                            (2,254 )     (0.01 )
 
N.M., not a meaningful value.
(1)  See Significant Factors Influencing Financial Performance discussion.
(2)  Pre-tax unless otherwise noted.
(3)  Based upon the annual average outstanding diluted common shares.
(4)  After-tax.
 
Net Interest Income / Average Balance Sheet
 
(This section should be read in conjunction with Significant Items 1, 2, and 4.)
 
Our primary source of revenue is net interest income, which is the difference between interest income from earning assets (primarily loans, direct financing leases, and securities), and interest expense of funding sources (primarily interest bearing deposits and borrowings). Earning asset balances and related funding, as well as changes in the levels of interest rates, impact net interest income. The difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities is the

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net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest bearing sources of funds, often referred to as “free” funds, is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Given the “free” nature of noninterest bearing sources of funds, the net interest margin is generally higher than the net interest spread. Both the net interest spread and net interest margin are presented on a fully taxable equivalent basis, which means that tax-free interest income has been adjusted to a pre-tax equivalent income, assuming a 35% tax rate.
 
The table below shows changes in fully taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest bearing liabilities.
 
Table 5 — Change in Net Interest Income Due to Changes in Average Volume and Interest Rates(1)
 
                                                 
    2008     2007  
    Increase (Decrease) From
    Increase (Decrease) From
 
    Previous Year Due To     Previous Year Due To  
Fully-taxable equivalent basis(2)
        Yield/
                Yield/
       
(in millions)   Volume     Rate     Total     Volume     Rate     Total  
Loans and direct financing leases
  $ 504.7     $ (449.6 )   $ 55.1     $ 519.8     $ 97.8     $ 617.6  
Securities
    17.0       (16.2 )     0.8       (27.7 )     23.2       (4.5 )
Other earning assets
    19.1       (18.7 )     0.4       60.2       2.4       62.6  
 
Total interest income from earning assets
    540.8       (484.5 )     56.3       552.3       123.4       675.7  
 
Deposits
    206.8       (301.5 )     (94.7)       224.0       85.2       309.2  
Short-term borrowings
    5.1       (55.6 )     (50.5)       18.3       2.3       20.6  
Federal Home Loan Bank advances
    49.3       (44.1 )     5.2       32.2       10.4       42.6  
Subordinated notes and other long-term debt, including capital securities
    22.3       (57.1 )     (34.8)       6.6       11.1       17.7  
 
Total interest expense of interest-bearing liabilities
    283.5       (458.3 )     (174.8)       281.1       109.0       390.1  
                                                 
Net interest income
  $ 257.3     $ (26.2 )   $ 231.1     $ 271.2     $ 14.4     $ 285.6  
 
 
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.
 
(2)  Calculated assuming a 35% tax rate.
 
2008 versus 2007
 
Fully taxable equivalent net interest income for 2008 increased $231.1 million, or 18%, from 2007. This reflected the favorable impact of a $8.4 billion, or 21%, increase in average earning assets, of which $7.8 billion represented an increase in average loans and leases, partially offset by a decrease in the fully-taxable net interest margin of 11 basis points to 3.25%. The increase to average earning assets, and to average loans and leases, reflected the Sky Financial acquisition.

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The following table details the estimated merger-related impacts on our reported loans and deposits:
 
Table 6 — Average Loans/Leases and Deposits — Estimated Merger-Related Impacts — 2008 vs. 2007
 
                                                         
                            Change Attributable to:  
    Twelve Months Ended
                 
    December 31,     Change           Non-merger-related  
            Merger-
     
(in millions)   2008     2007     Amount     Percent     Related     Amount     Percent(1)  
Loans/Leases
                                                       
Commercial and industrial
  $ 13,588     $ 10,636     $ 2,952       27.8 %   $ 2,388     $ 564       4.3 %
Commerical real estate
    9,732       6,807       2,925       43.0       1,986       939       10.7  
 
Total commercial
  $ 23,320     $ 17,443     $ 5,877       33.7 %   $ 4,374     $ 1,503       6.9 %
Automobile loans and leases
    4,527       4,118       409       9.9       216       193       4.5  
Home equity
    7,404       6,173       1,231       19.9       1,193       38       0.5  
Residential mortgage
    5,018       4,939       79       1.6       556       (477 )     (8.7 )
Other consumer
    691       529       162       30.6       72       90       15.0  
 
Total consumer
    17,640       15,759       1,881       11.9       2,037       (156 )     (0.9 )
 
Total loans and leases
  $ 40,960     $ 33,202     $ 7,758       23.4 %   $ 6,411     $ 1,347       3.4 %
                                                         
Deposits
                                                       
Demand deposits — noninterest bearing
  $ 5,095     $ 4,438     $ 657       14.8 %   $ 915     $ (258 )     (4.8 )%
Demand deposits — interest bearing
    4,003       3,129       874       27.9       730       144       3.7  
Money market deposits
    6,093       6,173       (80 )     (1.3 )     498       (578 )     (8.7 )
Savings and other domestic time deposits
    4,949       4,001       948       23.7       1,297       (349 )     (6.6 )
Core certificates of deposit
    11,527       8,057       3,470       43.1       2,315       1,155       11.1  
 
Total core deposits
    31,667       25,798       5,869       22.7       5,755       114       0.4  
Other deposits
    6,169       5,268       901       17.1       672       229       3.9  
 
Total deposits
  $ 37,836     $ 31,066     $ 6,770       21.8 %   $ 6,427     $ 343       0.9 %
 
 
(1) Calculated as non-merger related / (prior period + merger-related)
 
The $1.3 billion, or 3%, non-merger-related increase in average total loans and leases primarily reflected:
 
  –  $1.5 billion, or 7%, growth in average total commercial loans, with growth reflected in both the C&I and CRE portfolios. The growth in CRE loans was primarily to existing borrowers with a focus on traditional income producing property types and was not related to the single family home builder segment. The growth in C&I loans reflected a combination of draws associated with existing commitments, new loans to existing borrowers, and some originations to new high quality borrowers.
 
Partially offset by:
 
  –  $0.2 billion, or 1%, decline in total average consumer loans reflecting a $0.5 billion, or 9%, decline in residential mortgages due to loan sales, as well as the continued slowdown in the housing markets. This decrease was partially offset by a $0.2 billion, or 4%, increase in average automobile loans and leases reflecting higher automobile loan originations, although automobile loan origination volumes have declined throughout 2008 due to the industry wide decline in sales. Automobile lease origination volumes have also declined throughout 2008. During the 2008 fourth quarter, we exited the automobile leasing business.
 
Average other earning assets increased $0.6 billion, primarily reflecting the increase in average trading account securities. The increase in these assets reflected a change in our strategy to use trading account securities to hedge the change in fair value of our MSRs, however, the practice of hedging the change in fair value of our MSRs using on-balance sheet trading assets ceased at the end of 2008.
 
The $0.3 billion, or 1%, increase in average total deposits reflected growth in other deposits. These deposits were primarily other domestic time deposits of $100,000 or more reflecting increases in commercial and public fund deposits. Changes from the prior year also reflected customers transferring funds from lower rate to higher rate accounts such as certificates of deposit as short-term rates had fallen.
 
2007 versus 2006
 
Fully taxable equivalent net interest income for 2007 increased $285.6 million, or 28%, from 2006. This reflected the favorable impact of a $7.9 billion, or 25%, increase in average earning assets, of which $7.3 billion represented an increase in average loans and leases, as well as the benefit of an increase in the fully-taxable net interest margin of seven basis points to 3.36%. The increase to average earning assets, and to average loans and leases, was primarily merger-related.

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
The following table details the estimated merger-related impacts on our reported loans and deposits:
 
Table 7 — Average Loans/Leases and Deposits — Estimated Merger-Related Impacts
 
                                                         
    Twelve Months Ended
                               
    December 31,     Change           Non-merger-related  
            Merger-
     
(in millions)   2007     2006     Amount     Percent     Related     Amount     Percent(1)  
Loans/Leases
                                                       
Commercial and industrial
  $ 10,636     $ 7,323     $ 3,313       45.2 %   $ 2,388     $ 925       9.5 %
Commercial real estate
    6,807       4,542       2,265       49.9       1,986       279       4.3  
 
Total commercial
    17,443       11,865       5,578       47.0       4,374       1,204       7.4  
Automobile loans and leases
    4,118       4,088       30       0.7       216       (186 )     (4.3 )
Home equity
    6,173       4,970       1,203       24.2       1,193       10       0.2  
Residential mortgage
    4,939       4,581       358       7.8       556       (198 )     (3.9 )
Other consumer
    529       439       90       20.5       72       18       3.5  
 
Total consumer
    15,759       14,078       1,681       11.9       2,037       (356 )     (2.2 )
 
Total loans and leases
  $ 33,202     $ 25,943     $ 7,259       28.0 %   $ 6,411     $ 848       2.6 %
 
Deposits
                                                       
Demand deposits — noninterest bearing
  $ 4,438     $ 3,530     $ 908       25.7 %   $ 915     $ (7 )     (0.2 )%
Demand deposits — interest bearing
    3,129       2,138       991       46.4       730       261       9.1  
Money market deposits
    6,173       5,604       569       10.2       498       71       1.2  
Savings and other domestic time deposits
    4,001       3,060       941       30.8       1,297       (356 )     (8.2 )
Core certificates of deposit
    8,057       5,050       3,007       59.5       2,315       692       9.4  
 
Total core deposits
    25,798       19,382       6,416       33.1       5,755       661       2.6  
Other deposits
    5,268       4,802       466       9.7       672       (206 )     (3.8 )
 
Total deposits
  $ 31,066     $ 24,184     $ 6,882       28.5 %   $ 6,427     $ 455       1.5 %
                                                         
 
(1)  Calculated as non-merger related / (prior period + merger-related)
 
The $0.8 billion, or 3%, non-merger-related increase in total average loans compared with the prior year primarily reflected a $1.2 billion, or 7%, increase in average total commercial loans. This increase was the result of strong growth in both C&I loans and CRE loans across substantially all regions. This was partially offset by a $0.4 billion, or 2%, decrease in average total consumer loans reflecting declines in automobile loans and leases and residential mortgages. These declines reflect weaker demand, a softer economy, as well as the continued impact of competitive pricing. In addition to these factors, loan sales contributed to the decline in residential mortgages.
 
Average other earning assets increased $0.6 billion, primarily reflecting the increase in average trading account securities. The increase in these assets reflected a change in our strategy to use trading account securities to hedge the change in fair value of our MSRs.
 
The $0.5 billion, or 1%, increase in total non-merger-related average deposits primarily reflected a $0.7 billion, or 3%, increase in average total core deposits as interest bearing demand deposits grew $0.3 billion, or 9%. While there was also strong growth in core certificates of deposit, this was partially offset by the decline in savings and other domestic deposits, as customers transferred funds from lower rate to higher rate accounts. In 2007, we reduced our dependence on noncore funds (total liabilities less core deposits and accrued expenses and other liabilities) to 30% of total assets, down from 33% in 2006.
 
Table 8 shows average annual balance sheets and fully taxable equivalent net interest margin analysis for the last five years. It details average balances for total assets and liabilities, as well as shareholders’ equity, and their various components, most notably loans and leases, deposits, and borrowings. It also shows the corresponding interest income or interest expense associated with each earning asset and interest bearing liability category along with the average rate with the difference resulting in the net interest spread. The net interest spread plus the positive impact from the noninterest bearing funds represents the net interest margin.

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
 
Table 8 — Consolidated Average Balance Sheet and Net Interest Margin Analysis
 
                                                                         
    Average Balances  
                            Change from
                   
          Change from 2007           2006                    
Fully-taxable equivalent basis(1)
                                     
(in millions)   2008     Amount     Percent     2007     Amount     Percent     2006     2005     2004  
Assets
                                                                       
Interest bearing deposits in banks
  $ 303     $ 43       16.5 %   $ 260     $ 207       N.M. %   $ 53     $ 53     $ 66  
Trading account securities
    1,090       448       69.8       642       550       N.M.       92       207       105  
Federal funds sold and securities purchased under resale agreement
    435       (156 )     (26.4 )     591       270       84.1       321       262       319  
Loans held for sale
    416       54       14.9       362       87       31.6       275       318       243  
Investment securities:
                                                                       
Taxable
    3,878       225       6.2       3,653       (544 )     (13.0 )     4,197       3,683       4,425  
Tax-exempt
    705       59       9.1       646       76       13.3       570       475       412  
 
Total investment securities
    4,583       284       6.6       4,299       (468 )     (9.8 )     4,767       4,158       4,837  
Loans and leases:(3)
Commercial:
                                                                       
Commercial and industrial
    13,588       2,953       27.8       10,636       3,308       45.1       7,327       6,171       5,466  
Construction
    2,061       527       34.4       1,533       275       21.8       1,259       1,738       1,468  
Commercial
    7,671       2,397       45.4       5,274       1,995       60.8       3,279       2,718       2,867  
 
Commercial real estate
    9,732       2,924       42.9       6,807       2,270       50.0       4,538       4,456       4,335  
 
Total commercial
    23,320       5,877       33.7       17,443       5,578       47.0       11,865       10,627       9,801  
 
Consumer:
                                                                       
Automobile loans
    3,676       1,043       39.6       2,633       576       28.0       2,057       2,043       2,285  
Automobile leases
    851       (634 )     (42.7 )     1,485       (546 )     (26.9 )     2,031       2,422       2,192  
 
Automobile loans and leases
    4,527       409       9.9       4,118       30       0.7       4,088       4,465       4,477  
Home equity
    7,404       1,231       19.9       6,173       1,203       24.2       4,970       4,752       4,244  
Residential mortgage
    5,018       79       1.6       4,939       358       7.8       4,581       4,081       3,212  
Other loans
    691       162       30.6       529       90       20.5       439       385       393  
 
Total consumer
    17,640       1,881       11.9       15,759       1,681       11.9       14,078       13,683       12,326  
 
Total loans and leases
    40,960       7,758       23.4       33,202       7,259       28.0       25,943       24,310       22,127  
Allowance for loan and lease losses
    (695 )     (313 )     81.9       (382 )     (95 )     33.1       (287 )     (268 )     (298 )
 
Net loans and leases
    40,265       7,445       22.7       32,820       7,164       27.9       25,656       24,042       21,829  
 
Total earning assets
    47,787       8,431       21.4       39,356       7,905       25.1       31,451       29,308       27,697  
 
Automobile operating lease assets
    180       163       N.M.       17       (76 )     (81.7 )     93       351       891  
Cash and due from banks
    958       28       3.0       930       105       12.7       825       845       843  
Intangible assets
    3,446       1,427       70.7       2,019       1,452       N.M.       567       218       216  
All other assets
    3,245       473       17.1       2,772       309       12.5       2,462       2,185       2,084  
 
Total Assets
  $ 54,921     $ 10,209       22.8 %   $ 44,712     $ 9,600       27.3 %   $ 35,111     $ 32,639     $ 31,433  
 
Liabilities and Shareholders’ Equity
                                                                       
Deposits:
                                                                       
Demand deposits — noninterest bearing
  $ 5,095     $ 657       14.8 %   $ 4,438     $ 908       25.7 %   $ 3,530     $ 3,379     $ 3,230  
Demand deposits — interest bearing
    4,003       874       27.9       3,129       991       46.4       2,138       1,920       1,953  
Money market deposits
    6,093       (80 )     (1.3 )     6,173       569       10.2       5,604       5,738       5,254  
Savings and other domestic time deposits
    4,949       948       23.7       4,001       941       30.8       3,060       3,206       3,434  
Core certificates of deposit
    11,527       3,470       43.1       8,057       3,007       59.5       5,050       3,334       2,689  
 
Total core deposits
    31,667       5,869       22.7       25,798       6,416       33.1       19,382       17,577       16,560  
Other domestic time deposits of $100,000 or more
    1,951       563       40.6       1,388       343       32.8       1,045       859       590  
Brokered time deposits and negotiable CDs
    3,243       4       0.1       3,239       (3 )     (0.1 )     3,242       3,119       1,837  
Deposits in foreign offices
    975       334       52.1       641       126       24.5       515       457       508  
 
Total deposits
    37,836       6,770       21.8       31,066       6,882       28.5       24,184       22,012       19,495  
Short-term borrowings
    2,374       129       5.7       2,245       445       24.7       1,800       1,379       1,410  
Federal Home Loan Bank advances
    3,281       1,254       61.9       2,027       658       48.1       1,369       1,105       1,271  
Subordinated notes and other long-term debt
    4,094       406       11.0       3,688       114       3.2       3,574       4,064       5,379  
 
Total interest bearing liabilities
    42,490       7,902       22.8       34,588       7,191       26.2       27,397       25,181       24,325  
 
All other liabilities
    942       (112 )     (10.6 )     1,054       (185 )     (14.9 )     1,239       1,496       1,504  
Shareholders’ equity
    6,394       1,762       38.0       4,632       1,686       57.2       2,945       2,583       2,374  
 
Total Liabilities and Shareholders’ Equity
  $ 54,921     $ 10,209       22.8 %   $ 44,712     $ 9,600       27.3 %   $ 35,111     $ 32,639     $ 31,433  
                                                                         
Net interest income
                                                                       
                                                                         
Net interest rate spread
                                                                       
Impact of noninterest bearing funds on margin
                                                                       
 
Net Interest Margin
                                                                       
                                                                         
 
N.M., not a meaningful value.
(1)  Fully-taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
(2)  Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.
(3)  For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
 
 
                                                                             
Interest Income/Expense     Average Rate(2)  
2008     2007     2006     2005     2004     2008     2007     2006     2005     2004  
$ 7.7     $ 12.5     $ 3.2     $ 1.1     $ 0.7       2.53 %     4.80 %     6.00 %     2.16 %     1.05 %
  57.5       37.5       3.8       8.5       4.4       5.28       5.84       4.19       4.08       4.15  
  10.7       29.9       16.1       6.0       5.5       2.46       5.05       5.00       2.27       1.73  
  25.0       20.6       16.8       17.9       13.0       6.01       5.69       6.10       5.64       5.35  
                                                                             
  217.9       221.9       229.4       158.7       171.7       5.62       6.07       5.47       4.31       3.88  
  48.2       43.4       38.5       31.9       28.8       6.83       6.72       6.75       6.71       6.98  
                                                                             
  266.1       265.3       267.9       190.6       200.5       5.81       6.17       5.62       4.58       4.14  
                                                                             
                                                                             
  770.2       791.0       536.3       362.9       250.6       5.67       7.44       7.32       5.88       4.58  
  104.2       119.4       101.5       111.7       66.9       5.05       7.80       8.07       6.42       4.55  
  430.1       395.8       244.3       162.9       141.5       5.61       7.50       7.45       5.99       4.95  
                                                                             
  534.3       515.2       345.8       274.6       208.4       5.49       7.57       7.61       6.16       4.81  
                                                                             
  1,304.5       1,306.2       882.1       637.5       459.0       5.59       7.49       7.43       6.00       4.68  
                                                                             
                                                                             
  263.4       188.7       135.1       133.3       165.1       7.17       7.17       6.57       6.52       7.22  
  48.1       80.3       102.9       119.6       109.6       5.65       5.41       5.07       4.94       5.00  
                                                                             
  311.5       269.0       238.0       252.9       274.7       6.88       6.53       5.82       5.66       6.14  
  475.2       479.8       369.7       288.6       208.6       6.42       7.77       7.44       6.07       4.92  
  292.4       285.9       249.1       212.9       163.0       5.83       5.79       5.44       5.22       5.07  
  68.0       55.5       39.8       39.2       29.5       9.85       10.51       9.07       10.23       7.51  
                                                                             
  1,147.1       1,090.2       896.6       793.6       675.8       6.50       6.92       6.37       5.80       5.48  
                                                                             
  2,451.6       2,396.4       1,778.7       1,431.1       1,134.8       5.99       7.22       6.86       5.89       5.13  
                                                                             
                                                                             
                                                                             
                                                                             
  2,818.6       2,762.2       2,086.5       1,655.2       1,358.9       5.90       7.02       6.63       5.65       4.89  
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                         
  22.2       40.3       19.3       10.6       8.3       0.55       1.29       0.90       0.55       0.42  
  117.5       232.5       193.1       124.9       65.8       1.93       3.77       3.45       2.18       1.25  
  92.9       96.1       53.5       45.2       44.2       1.88       2.40       1.75       1.41       1.29  
  491.6       391.1       214.8       118.7       90.4       4.27       4.85       4.25       3.56       3.36  
                                                                             
  724.2       760.0       480.7       299.4       208.7       2.73       3.55       3.02       2.10       1.56  
  73.6       70.5       52.3       28.5       11.2       3.76       5.08       5.00       3.32       1.88  
  118.8       175.4       169.1       109.4       33.1       3.66       5.41       5.22       3.51       1.80  
  15.2       20.5       15.1       9.6       4.1       1.56       3.19       2.93       2.10       0.82  
                                                                             
  931.8       1,026.4       717.2       446.9       257.1       2.85       3.85       3.47       2.40       1.58  
  42.3       92.8       72.2       34.3       13.0       1.78       4.13       4.01       2.49       0.93  
  107.8       102.6       60.0       34.7       33.3       3.29       5.06       4.38       3.13       2.62  
  184.8       219.6       201.9       163.5       132.5       4.51       5.96       5.65       4.02       2.46  
                                                                             
  1,266.7       1,441.4       1,051.3       679.4       435.9       2.98       4.17       3.84       2.70       1.79  
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
$ 1,551.9     $ 1,320.8     $ 1,035.2     $ 975.8     $ 923.0                                          
                                                                             
                                          2.92       2.85       2.79       2.95       3.10  
                                          0.33       0.51       0.50       0.38       0.23  
                                                                             
                                          3.25 %     3.36 %     3.29 %     3.33 %     3.33 %
                                                                             

 31


Table of Contents

Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
Provision for Credit Losses
 
(This section should be read in conjunction with Significant Item 1, 2, and the Credit Risk section.)
 
The provision for credit losses is the expense necessary to maintain the ALLL and the allowance for 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 and letters of credit.
 
The provision for credit losses in 2008 was $1,057.5 million, up $413.8 million from 2007, and exceeded NCOs by $299.4 million. The $413.8 million increase reflects $32.2 million of higher provision related to Franklin ($438.0 million in 2008 compared with $405.8 million in 2007). The remaining increase in 2008 from 2007 primarily reflected the continued economic weakness across all our regions and within the single family home builder segment of our CRE portfolio.
 
The provision for credit losses in 2007 was $643.6 million, up from $65.2 million in 2006, primarily reflecting a $405.8 million increase in the 2007 fourth-quarter provision related to Franklin. The remainder of the increase reflected the continued weakness across all our regions, most notably among our borrowers in eastern Michigan and northern Ohio, and within the single family home builder segment of our CRE portfolio.
 
Noninterest Income
 
(This section should be read in conjunction with Significant Items 1, 2, 3, 4, 5, and 6.)
 
Table 9 reflects noninterest income for the three years ended December 31, 2008:
 
Table 9 — Noninterest Income
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2007           Change from 2006        
(in thousands)   2008     Amount     Percent     2007     Amount     Percent     2006  
Service charges on deposit accounts
  $ 308,053     $ 53,860       21.2 %   $ 254,193     $ 68,480       36.9 %   $ 185,713  
Brokerage and insurance income
    137,796       45,421       49.2       92,375       33,540       57.0       58,835  
Trust services
    125,980       4,562       3.8       121,418       31,463       35.0       89,955  
Electronic banking
    90,267       19,200       27.0       71,067       19,713       38.4       51,354  
Bank owned life insurance income
    54,776       4,921       9.9       49,855       6,080       13.9       43,775  
Mortgage banking
    8,994       (20,810 )     (69.8 )     29,804       (11,687 )     (28.2 )     41,491  
Securities losses
    (197,370 )     (167,632 )     N.M.       (29,738 )     43,453       (59.4 )     (73,191 )
Other income
    138,791       58,972       73.9       79,819       (40,203 )     (33.5 )     120,022  
 
Sub-total
    667,287       (1,506 )     (0.2 )     668,793       150,839       29.1       517,954  
Automobile operating lease income
    39,851       32,041       N.M.       7,810       (35,305 )     (81.9 )     43,115  
 
Total noninterest income
  $ 707,138     $ 30,535       4.5 %   $ 676,603     $ 115,534       20.6 %   $ 561,069  
                                                         
N.M., not a meaningful value.

 32


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Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
Table 10 details mortgage banking income and the net impact of MSR hedging activity for the three years ended December 31, 2008:
 
Table 10 — Mortgage Banking Income
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2007           Change from 2006        
(in thousands)   2008     Amount     Percent     2007     Amount     Percent     2006  
Mortgage Banking Income
                                                       
Origination and secondary marketing
  $ 37,257     $ 11,292       43.5 %   $ 25,965     $ 7,748       42.5 %   $ 18,217  
Servicing fees
    45,558       9,546       26.5       36,012       11,353       46.0       24,659  
Amortization of capitalized servicing(1)
    (26,634 )     (6,047 )     29.4       (20,587 )     (5,443 )     35.9       (15,144 )
Other mortgage banking income
    16,768       3,570       27.0       13,198       3,025       29.7       10,173  
                                                         
Sub-total
    72,949       18,361       33.6       54,588       16,683       44.0       37,905  
MSR valuation adjustment(1)
    (52,668 )     (36,537 )     N.M.       (16,131 )     (21,002 )     N.M.       4,871  
Net trading losses related to MSR hedging
    (11,287 )     (2,634 )     30.4       (8,653 )     (7,368 )     N.M.       (1,285 )
                                                         
Total mortgage banking income
  $ 8,994     $ (20,810 )     (69.8 )%   $ 29,804     $ (11,687 )     (28.2 )%   $ 41,491  
                                                         
                                                         
Average trading account securities used to hedge MSRs (in millions)
  $ 1,031     $ 437       73.6 %   $ 594     $ 568       N.M. %   $ 26  
Capitalized mortgage servicing rights(2)
    167,438       (40,456 )     (19.5 )     207,894       76,790       58.6       131,104  
Total mortgages serviced for others (in millions)(2)
    15,754       666       4.4       15,088       6,836       82.8       8,252  
MSR % of investor servicing portfolio
    1.06 %     (0.32 )     (23.2 )%     1.38%       (0.21 )     (13.2 )%     1.59 %
                                                         
Net Impact of MSR Hedging
                                                       
MSR valuation adjustment(1)
  $ (52,668 )   $ (36,537 )     N.M. %   $ (16,131 )   $ (21,002 )     N.M. %   $ 4,871  
Net trading losses related to MSR hedging
    (11,287 )     (2,634 )     30.4       (8,653 )     (7,368 )     N.M.       (1,285 )
Net interest income related to MSR hedging
    33,139       27,342       N.M.       5,797       5,761       N.M.       36  
 
Net impact of MSR hedging
  $ (30,816 )   $ (11,829 )     62.3 %   $ (18,987 )   $ (22,609 )     N.M. %   $ 3,622  
                                                         
N.M., not a meaningful value.
 
(1)  The change in fair value for the period represents the MSR valuation adjustment, net of amortization of capitalized servicing.
 
(2)  At period end.
 
 
2008 versus 2007
 
Noninterest income increased $30.5 million, or 5%, from a year ago.
 
Table 11 — Noninterest Income — Estimated Merger-Related Impact — 2008 vs. 2007
 
                                                                 
                            Change attributable to:  
    Twelve Months Ended
                 
    December 31,     Change                 Other  
            Merger-
    Significant
     
(in thousands)   2008     2007     Amount     Percent     Related     Items     Amount     Percent(1)  
Service charges on deposit accounts
  $ 308,053     $ 254,193     $ 53,860       21.2 %   $ 48,220     $     $ 5,640       1.9 %
Brokerage and insurance income
    137,796       92,375       45,421       49.2       34,122             11,299       8.9  
Trust services
    125,980       121,418       4,562       3.8       14,018             (9,456 )     (7.0 )
Electronic banking
    90,267       71,067       19,200       27.0       11,600             7,600       9.2  
Bank owned life insurance income
    54,776       49,855       4,921       9.9       3,614             1,307       2.4  
Mortgage banking income
    8,994       29,804       (20,810 )     (69.8 )     12,512       (37,102 )(2)     3,780       8.9  
Securities losses
    (197,370 )     (29,738 )     (167,632 )     N.M.       566       (168,198 )(3)            
Other income
    138,791       79,819       58,972       73.9       12,780       52,065  (4)     (5,873 )     (6.3 )
 
Sub-total
    667,287       668,793       (1,506 )     (0.2 )     137,432       (153,235 )     14,297       1.8  
Automobile operating lease income
    39,851       7,810       32,041       N.M.                   32,041       N.M.  
 
Total noninterest income
  $ 707,138     $ 676,603     $ 30,535       4.5 %   $ 137,432     $ (153,235 )   $ 46,338       5.7 %
                                                                 
N.M., not a meaningful value.
 
(1)  Calculated as other / (prior period + merger-related).
 
(2)  Refer to Significant Items 4 and 5 of the “Significant Items” discussion.
 
(3)  Refer to Significant Item 5 of the “Significant Items” discussion.
 
(4)  Refer to Significant Items 2, 3, 5 and 6 of the “Significant Items” discussion.

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Table of Contents

Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
 
The $30.5 million increase in total noninterest income reflected $137.4 million of merger-related impacts, and the net change of $153.2 million from Significant Items (see “Significant Items” discussion). After adjusting for these factors, total noninterest income increased $46.3 million, or 6%, reflecting:
 
  –  $32.0 million increase in automobile operating lease income as all leases originated since the 2007 fourth quarter were recorded as operating leases. During the 2008 fourth quarter, we exited the automobile leasing business.
 
  –  $11.3 million, or 9%, increase in brokerage and insurance income reflecting growth in annuity sales and the 2007 fourth quarter acquisition of an insurance company.
 
  –  $7.6 million, or 9%, increase in electronic banking income reflecting increased debit card transaction volumes.
 
Partially offset by:
 
  –  $9.5 million, or 7%, decline in trust services income reflecting the impact of lower market values on asset management revenues.
 
  –  $5.9 million, or 6%, decline in other noninterest income, primarily reflecting lower derivatives revenue.
 
2007 versus 2006
 
Noninterest income increased $115.5 million, or 21%, from a year ago.
 
Table 12 — Noninterest Income — Estimated Merger-Related Impact — 2007 vs. 2006
 
                                                                 
                            Change attributable to:  
    Twelve Months Ended
                 
    December 31,     Change                 Other  
            Merger-
    Significant
     
(in thousands)   2007     2006     Amount     Percent     Related     Items     Amount     Percent(1)  
Service charges on deposit accounts
  $ 254,193     $ 185,713     $ 68,480       36.9 %   $ 48,220     $     $ 20,260       8.7 %
Trust services
    121,418       89,955       31,463       35.0       14,018             17,445       16.8  
Brokerage and insurance income
    92,375       58,835       33,540       57.0       34,122             (582 )     (0.6 )
Electronic banking
    71,067       51,354       19,713       38.4       11,600             8,113       12.9  
Bank owned life insurance income
    49,855       43,775       6,080       13.9       3,614             2,466       5.2  
Mortgage banking income
    29,804       41,491       (11,687 )     (28.2 )     12,512       (27,511 )(2)     3,312       6.1  
Securities losses
    (29,738 )     (73,191 )     43,453       (59.4 )     566       42,887  (3)            
Other income
    79,819       120,022       (40,203 )     (33.5 )     12,780       (58,547 )(4)     5,564       4.2  
 
Sub-total
    668,793       517,954       150,839       29.1       137,432       (43,171 )     56,578       8.6  
Automobile operating lease income
    7,810       43,115       (35,305 )     (81.9 )                 (35,305 )     (81.9 )
 
Total noninterest income
  $ 676,603     $ 561,069     $ 115,534       20.6 %   $ 137,432     $ (43,171 )   $ 21,273       3.0 %
                                                                 
(1)  Calculated as other / (prior period + merger-related).
 
(2)  Refer to Significant Items 4 and 5 of the “Significant Items” discussion.
 
(3)  Refer to Significant Item 5 of the “Signficant Items” discussion.
 
(4)  Refer to Significant Items 5 and 6 of the “Signficant Items” discussion.
 
The $115.5 million increase in total noninterest income reflected the $137.4 million of merger-related noninterest income, and the net charge of $43.2 million from Significant Items (see “Significant Items” discussion). The remaining $21.3 million, or 3%, increase in non-merger-related noninterest income primarily reflected:
 
  –  $20.3 million, or 9%, increase in service charges on deposit accounts, primarily reflecting higher personal and commercial service charge income.
 
  –  $17.4 million, or 17%, increase in trust services income. This increase reflected: (a) $9.7 million of revenues associated with the acquisition of Unified Fund Services, and (b) $4.8 million increase in Huntington Fund fees due to growth in Huntington Funds’ managed assets.
 
  –  $8.1 million, or 13%, increase in electronic banking income primarily reflecting increased debit card fees due to higher volume.
 
  –  $5.6 million, or 4%, increase in other income. This increase primarily reflected higher derivatives revenue.
 
  –  $4.2 million, or 8%, increase in mortgage banking income primarily reflecting increased fees due to higher origination volumes.
 
Partially offset by:
 
  –  $35.3 million, or 82%, decline in automobile operating lease income.

 34


Table of Contents

Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
 
Noninterest Expense
 
(This section should be read in conjunction with Significant Items 1, 3, 5, and 6.)
 
Table 13 reflects noninterest expense for the three years ended December 31, 2008:
 
Table 13 — Noninterest Expense
 
                                                         
    Twelve Months Ended December 31,  
          Change from 2007           Change from 2006        
(in thousands)   2008     Amount     Percent     2007     Amount     Percent     2006  
Salaries
  $ 634,881     $ 77,627       13.9 %   $ 557,254     $ 131,597       30.9 %   $ 425,657  
Benefits
    148,665       19,091       14.7       129,574       14,003       12.1       115,571  
 
Personnel costs
    783,546       96,718       14.1       686,828       145,600       26.9       541,228  
Outside data processing and other services
    128,163       918       0.7       127,245       48,466       61.5       78,779  
Net occupancy
    108,428       9,055       9.1       99,373       28,092       39.4       71,281  
Equipment
    93,965       12,483       15.3       81,482       11,570       16.5       69,912  
Amortization of intangibles
    76,894       31,743       70.3       45,151       35,189       N.M.       9,962  
Professional services
    53,667       13,347       33.1       40,320       13,267       49.0       27,053  
Marketing
    32,664       (13,379 )     (29.1 )     46,043       14,315       45.1       31,728  
Telecommunications
    25,008       506       2.1       24,502       5,250       27.3       19,252  
Printing and supplies
    18,870       619       3.4       18,251       4,387       31.6       13,864  
Other
    124,887       (12,601 )     (9.2 )     137,488       30,839       28.9       106,649  
 
Sub-total
    1,446,092       139,409       10.7       1,306,683       336,975       34.8       969,708  
Automobile operating lease expense
    31,282       26,121       N.M.       5,161       (26,125 )     (83.5 )     31,286  
 
Total noninterest expense
  $ 1,477,374     $ 165,530       12.6 %   $ 1,311,844     $ 310,850       31.1 %   $ 1,000,994  
                                                         
N.M., not a meaningful value.
 
2008 versus 2007
 
Table 14 — Noninterest Expense — Estimated Merger-Related Impact — 2008 vs. 2007
 
                                                                         
                            Change attributable to:        
    Twelve Months Ended
                       
    December 31,     Change                       Other  
            Merger-
    Restructuring/
    Significant
     
(in thousands)   2008     2007     Amount     Percent     Related     Merger Costs     Items     Amount     Percent(1)  
Personnel costs
  $ 783,546     $ 686,828     $ 96,718       14.1 %   $ 136,500     $ (17,633 )   $     $ (22,149 )     (2.7 )%
Outside data processing and other services
    128,163       127,245       918       0.7       24,524       (16,017 )           (7,589 )     (5.6 )
Net occupancy
    108,428       99,373       9,055       9.1       20,368       (6,487 )     2,500  (2)     (7,326 )     (6.5 )
Equipment
    93,965       81,482       12,483       15.3       9,598       942             1,943       2.1  
Amortization of intangibles
    76,894       45,151       31,743       70.3       32,962                   (1,219 )     (1.6 )
Professional services
    53,667       40,320       13,347       33.1       5,414       (6,399 )           14,332       36.4  
Marketing
    32,664       46,043       (13,379 )     (29.1 )     8,722       (13,410 )           (8,691 )     (21.0 )
Telecommunications
    25,008       24,502       506       2.1       4,448       (550 )           (3,392 )     (11.9 )
Printing and supplies
    18,870       18,251       619       3.4       2,748       (1,433 )           (696 )     (3.6 )
Other expense
    124,887       137,488       (12,601 )     (9.2 )     26,096       (2,267 )     (64,863 )(3)     28,433       17.6  
 
                                                                         
Sub-total
    1,446,092       1,306,683       139,409       10.7       271,380       (63,254 )     (62,363 )     (6,354 )     (0.4 )
Automobile operating lease expense
    31,282       5,161       26,121       N.M.                         26,121       N.M.  
 
Total noninterest expense
  $ 1,477,374     $ 1,311,844     $ 165,530       12.6 %   $ 271,380     $ (63,254 )   $ (62,363 )   $ 19,767       1.3 %
                                                                         
N.M., not a meaningful value.
 
 
(1)  Calculated as other / (prior period + merger-related + restructuring/merger costs).
 
 
(2)  Refer to Significant Item 6 of the “Significant Items” discussion.
 
 
(3)  Refer to Significant Items 3, 5, and 6 of the “Significant Items” discussion.
 
As shown in the above table, noninterest expense increased $165.5 million, or 13%, from a year ago. Of the $165.5 million increase, $271.4 million pertained to merger-related expenses, partially offset by $63.3 million of lower merger/restructuring costs and $62.4 million lower expenses related to Significant Items (see “Significant Items” discussion). After adjusting for these factors, total noninterest expense increased $19.8 million, or 1%, reflecting:
 
  –  $28.4 million, or 18%, increase in other expense primarily reflecting higher Federal Deposit Insurance Corporation (FDIC) insurance expense (discussed below) and OREO losses.
 
  –  $26.1 million increase in automobile operating lease expense as all leases originated since the 2007 fourth quarter were recorded as operating leases. During the 2008 fourth quarter, we exited the automobile leasing business.

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Table of Contents

Management’s Discussion and Analysis Huntington Bancshares Incorporated
 
 
  –  $14.3 million, or 36%, increase in professional services, reflecting increased legal and collection costs. We expect that collection costs will remain at higher levels throughout 2009.
 
Partially offset by:
 
  –  $22.1 million, or 3%, decline in personnel expense reflecting the benefit of merger and restructuring efficiencies.
 
  –  $8.7 million, or 21%, decline in marketing expense.
 
  –  $7.6 million, or 6%, decline in outside data processing and other services reflecting merger efficiencies.
 
  –  $7.3 million, or 6%, decline in net occupancy expense, reflecting merger efficiencies.
 
As a participating FDIC insured bank, we were assessed quarterly deposit insurance premiums totaling $24.1 million during 2008. However, we received a one-time assessment credit from the FDIC which substantially offset our 2008 deposit insurance premium and, therefore, only $7.9 million of deposit insurance premium expense was recognized during 2008. In late 2008, the FDIC raised assessment rates for the first quarter of 2009 by a uniform 7 basis points, resulting in a range between 12 and 50 basis points, depending upon the risk category of the institution. At the same time, the FDIC proposed further changes in the assessment system beginning in the 2009 second quarter. The final rule, expected to be issued in early 2009, could result in adjustments to the proposed changes. Based on these proposed changes, as well as the full consumption of the one-time assessment credit prior to 2009 (discussed above), our full-year 2009 deposit insurance premium expense will increase compared with our full-year 2008 deposit insurance premium expense. We anticipate this increase will negatively impact our earnings per common share by $0.07-$0.09. See “Risk Factors” included in Item 1A of our 2008 Form 10-K for the year ended December 31, 2008 for additional discussion.
 
In the 2009 first quarter, details of an expense reduction initiative were announced. We anticipate this initiative will reduce expenses approximately $100 million, net of one-time expenses in 2009, compared with 2008 levels.
 
2007 versus 2006
 
Noninterest expense increased $310.9 million, or 31%, from 2006.
 
Table 15 — Noninterest Expense — Estimated Merger-Related Impact-2007 vs. 2006
 
                                                                         
                            Change Attributable to:  
    Twelve Months Ended
                 
    December 31,     Change                       Other  
            Merger-
    Restructuring/
    Significant
     
(in thousands)   2007     2006     Amount     Percent     Related     Merger Costs     Items     Amount     Percent(1)  
Personnel costs
  $ 686,828     $ 541,228     $ 145,600       26.9 %   $ 136,500     $ 30,487     $ (4,750 )(2)   $ (16,637 )     (2.3 )%
Outside data processing and other services
    127,245       78,779       48,466       61.5       24,524       16,996             6,946       5.8  
Net occupancy
    99,373       71,281       28,092       39.4       20,368       8,495             (771 )     (0.8 )
Equipment
    81,482       69,912       11,570       16.5       9,598       1,936             36       0.0  
Amortization of intangibles
    45,151       9,962       35,189       N.M.       34,862                   327       0.7  
Marketing
    46,043       31,728       14,315       45.1       8,722       12,789             (7,196 )     (13.5 )
Professional services
    40,320       27,053       13,267       49.0       5,414       6,046             1,807       4.7  
Telecommunications
    24,502       19,252       5,250       27.3       4,448       1,002             (200 )     (0.8 )
Printing and supplies
    18,251       13,864       4,387       31.6       2,748       1,332             307       1.7  
Other expense
    137,488       106,649       30,839       28.9   &nb