41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes      þ  No

There were 366,150,435 shares of Registrant’s common stock ($0.01 par value) outstanding on July 31, 2008.

 

 

Huntington Bancshares Incorporated

INDEX

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2008, December 31, 2007, and June 30, 2007			61
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007			62
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended			63
June 30, 2008 and 2007
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007			64
Notes to Unaudited Condensed Consolidated Financial Statements			65
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			3
Item 3. Quantitative and Qualitative Disclosures about Market Risk			86
Item 4. Controls and Procedures			86
Item 4T. Controls and Procedures			86
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders			86
Item 6. Exhibits			87
Signatures			88
EX-12.1
EX-12.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part 1. Financial Information

than expected; (b) merger revenue synergies may not be fully realized and/or within the expected timeframes; (c) changes in economic conditions; (d) movements in interest rates and spreads; (e) competitive pressures on product pricing and services; (f) success and timing of other business strategies; (g) the nature, extent, and timing of governmental actions and reforms; and (h) extended disruption of vital infrastructure. Additional factors that could cause results to differ materially from those described above can be found in Huntington’s 2007 Form 10-K, and documents subsequently filed by Huntington with the Securities and Exchange Commission (SEC).

     All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, readers of this document are cautioned against placing undue reliance on such statements.

Risk Factors

     We, like other financial companies, are subject to a number of risks 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 counter parties 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 commitments based on external macro market issues, investor perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues, 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. Please refer to the “Risk Management and Capital” section for additional information regarding risk factors. Additionally, more information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2007 Annual Report on Form 10-K for the year ended December 31, 2007, and subsequent filings with the SEC.

Critical Accounting Policies and Use of Significant Estimates

     Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included in our 2007 Annual Report on Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.

     An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. The most significant accounting estimates and their related application are discussed in our 2007 Form 10-K. The following discussion provides an update of our accounting estimates related to goodwill.

     Huntington accounts for goodwill in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets . The reporting units are tested for impairment annually as of October 1, to determine whether any goodwill 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 non-interest expense.

     Huntington uses judgment in assessing goodwill for impairment. Estimates of fair value are based primarily on the market capitalization of Huntington, adjusted for a control premium. Also considered are projections of cash flows considering historical and anticipated future results, and general economic and market conditions. Changes in market

capitalization, certain judgments, and projections could result in a significantly different estimate of the fair value of the reporting units and could result in an impairment of goodwill.

     As a result of the continued economic weakness across our Midwest markets, our stock price declined significantly during the first six-month period of 2008. Therefore, we performed an impairment test of our goodwill as of June 30, 2008. Based upon the results of the test, no impairment to goodwill was required.

Recent Accounting Pronouncements and Developments

     Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting policies adopted during 2008 and the expected impact of accounting policies recently issued but not yet required to be adopted. To the extent the adoption of new accounting standards materially affect financial condition, results of operations, or liquidity, the impacts are discussed in the applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial Statements.

Acquisition of 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 has been included in our consolidated results since July 1, 2007. As a result of this acquisition, we have a significant loan relationship with Franklin. This relationship is discussed in greater detail in the “Significant Items” and “Commercial Credit” sections of this report.

     Given the significant impact of the merger on reported results, we believe that an understanding of the impacts of the merger and certain post-merger restructuring activities is necessary to better understand the 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 and restructuring costs” represent non-interest expenses primarily associated with merger integration activities, including severance expense for key executive personnel.
	•		“Non-merger-related” refers to performance not attributable to the merger, and includes “merger efficiencies”, which represent non-interest expense reductions realized as a result of the merger.

     After completion of the merger, we combined Sky Financial’s operations with ours, and as such, we could no longer separately monitor the subsequent individual results of Sky Financial. As a result, the following methodologies were implemented to estimate the approximate effect of the Sky Financial merger used to determine “merger-related” impacts. 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.

Balance Sheet Items

For average loans and leases, as well as 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 2008 average balances, it was assumed that the June 30, 2007 balances, as adjusted, remained constant over time.

Income Statement Items

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 divided by two to estimate a quarterly 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.

DISCUSSION OF RESULTS OF OPERATIONS

     This section provides a review of financial performance from a consolidated perspective. It also includes a “Significant Items Influencing Financial Performance Comparisons” section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed in this section. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the “Lines of Business” discussion.

Summary

     We reported 2008 second quarter net income of $101.4 million or earnings per common share of $0.25. These results compared with net income of $127.1 million, or $0.35 per common share in the 2008 first quarter. Current quarter earnings per common share reflected a dilutive impact of $0.03 per common share, related to the convertible preferred stock issuance in April 2008. Comparisons with the prior quarter were also significantly impacted by a number of other factors that are discussed later in the “Significant Items Influencing Financial Performance Comparisons” section.

     During the 2008 second quarter, the primary focus within our industry continued to be credit quality. The economy remained weak in our markets 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 until well into 2009. We do not anticipate that the economic environment will deteriorate materially, but neither do we expect any relief in the near term.

     Given the current economic conditions discussed in the above paragraph, credit quality performance during the current quarter was consistent with our expectations. During the 2008 second quarter, the allowance for credit losses (ACL) increased 13 basis points to 1.80% compared with the prior quarter, and the net charge-off ratio increased 16 basis points to 0.64% compared with the prior quarter. We anticipate a 10-20 basis point increase in our ACL by year-end, and we have increased our expected full-year net charge-off ratio to 0.65%-0.70%. Nonaccrual loans (NALs) increased $157.7 million, or 42%. Our expectation is that NALs will continue to rise for the foreseeable future. We anticipate that the expected increases in NALs will be manageable, and will continue to be centered in our commercial real estate (CRE) loans to single-family homebuilders, and within our commercial and industrial (C&I) portfolio related to businesses that support residential development.

     Capital also continued to be a major focus for us. We took several actions during the current quarter to strengthen our capital position and balance sheet, including: (a) the raising of $569 million of capital in the form of 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock, (b) the on-balance sheet securitization of $887 million in automobile loans, (c) the sale of $473 million of mortgage loans, and (d) managing down our balances of non-relationship collateralized public fund deposits and related collateral securities.

     The loan restructuring associated with our relationship with Franklin, completed during the 2007 fourth quarter, continued to perform consistent with our expectations. Cash flows exceeded the required debt payments, the loans continued to perform with interest accruing, and there were no net charge-offs or related provision for credit losses during the quarter. Based on the performance during the first six-month period of 2008, and continued expected cash flow performance and priority of cash flows, we removed $762 million, or 67%, of our total Franklin exposure from nonperforming asset status during the current quarter. Additionally, the total exposure to Franklin decreased $27 million, or 2%, compared with the prior quarter.

     Fully taxable net interest income in the 2008 second quarter increased $13.2 million, or 3%, compared with the prior quarter. Our net interest margin increased 6 basis points resulting primarily from improved pricing on our core deposits. Average total loans and leases increased, particularly in our commercial loan portfolio, as loans grew in 10 of our 13 regions.

     Non-interest income in the 2008 second quarter increased $0.7 million compared with the prior quarter. Significant items (see “Significant Items”) resulted in a net positive impact of $11.6 million in the current quarter compared with the prior quarter. Considering the impact of these items, fee income performance was strong for the current quarter. Service charges on deposit accounts increased 10%, and other service charges increased 12%, both reflecting continued underlying growth in deposits as well as a return to more seasonally adjusted levels. Core mortgage banking activities increased 20%, reflecting higher loan sale volumes and improved gains on mortgage loan sales.

     Non-interest expense in the 2008 second quarter increased $7.3 million, or 2%, compared with the prior quarter. Significant items (see “Significant Items”) resulted in a net negative impact of $12.6 million in the current quarter compared with the prior quarter. Considering the impact of these items, the remaining components of non-interest expense decreased, reflecting our continued focus on improving expense efficiencies.

Table 1 — Selected Quarterly Income Statement Data ^{(1), (2)}

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.

     To this end, we have adopted a practice of listing as “Significant Items” in our external disclosure documents, including earnings press releases, investor presentations, reports on Forms 10-Q and 10-K, individual and/or particularly volatile items that impact the current period results by $0.01 per share or more. Such “Significant Items” generally fall within the categories discussed below:

Timing Differences

     Parts of our regular business activities are naturally volatile, including capital markets income and sales of loans. While such items may generally be expected to occur within a full-year reporting period, they may vary significantly from period to period. Such items are also typically a component of an income statement line item and not, therefore, readily discernable. By specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.

Other Items

     From time to time, an event or transaction might significantly impact revenues or expenses in a particular reporting period that is judged to be one-time, short-term in nature, and/or materially outside typically expected performance. Examples would be (a) merger costs as they typically impact expenses for only a few quarters during the period of transition; e.g., restructuring charges, asset valuation adjustments, etc.; (b) changes in an accounting principle; (c) large tax assessments/refunds; (d) a large gain/loss on the sale of an asset; and (e) outsized commercial loan net charge-offs related to fraud; and similar events that could occur. In addition, for the periods covered by this report, the impact of the Franklin restructuring is deemed to be a significant item due to its unusually large size 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, readers of this report can better assess how, if at all, to adjust their estimates of future performance.

Provision for Credit Losses

     While the provision for credit losses may vary significantly among periods, and often exceeds $0.01 per share, we typically exclude it from the list of “Significant Items” unless, in our view, there is a significant, specific credit (or multiple significant, specific credits) affecting comparability among periods. In determining whether any portion of the provision for credit losses should be included as a significant item, we consider, among other things, that the provision is a major income statement caption rather than a component of another caption and, therefore, the period-to-period variance can be readily determined. We also consider the additional historical volatility of the provision for credit losses.

Other Exclusions

     “Significant Items” for any particular period are not intended to be a complete list of items that may significantly impact future periods. A number of factors, including those described in Huntington’s 2007 Annual Report on Form 10-K and other factors described from time to time in Huntington’s other filings with the SEC, could also significantly impact future periods.

Significant Items Influencing Financial Performance Comparisons

     Earnings comparisons from the beginning of 2007 through the 2008 second quarter 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 the quarterly reported results compared with premerger reporting periods are as follows:

	•		Increased the absolute level of reported average balance sheet, revenue, expense, and credit quality results (e.g., net charge-offs).
	•		Increased reported non-interest expense items as a result of costs incurred as part of merger integration 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 and restructuring costs were $14.6 million in the 2008 second quarter, $7.3 million in the 2008 first quarter, $44.4 million in the 2007 fourth quarter, $32.3 million in the 2007 third quarter, $7.6 million in the 2007 second quarter, and $0.8 million in the 2007 first quarter.

	2.		Franklin Relationship Restructuring. Performance for the 2007 fourth quarter included a $423.6 million ($0.75 per common share based upon the quarterly average outstanding diluted common shares) negative impact related to our Franklin relationship acquired in the Sky Financial acquisition. On December 28, 2007, the loans associated with Franklin were restructured, resulting in a $405.8 million provision for credit losses and a $17.9 million reduction of net interest income. The net interest income reduction reflected the placement of the Franklin loans on nonaccrual status from November 16, 2007, until December 28, 2007.
	3.		Visa â Initial Public Offering (IPO). Performance for the 2008 first quarter included the positive impact of $37.5 million ($0.07 per common share) related to the Visa ® IPO occurring in March of 2008. This impact was comprised of two components: (a) $25.1 million gain, recorded in other non-interest income, resulting from the proceeds of the IPO, and (b) $12.4 million partial reversal of the 2007 fourth quarter accrual of $24.9 million ($0.04 per common share) for indemnification charges against Visa ® , recorded in other non-interest expense.
	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. Additional information regarding MSRs is located under the “Market Risk” heading of the “Risk Management and Capital” section. Net income included the following net impact of MSR hedging activity (see Table 10):

(in thousands, except per common share)

During the 2008 second quarter, we engaged an independent party to provide improved analytical tools and insight to enhance our strategies with the objective to decrease the volatility from MSR fair value changes. This change is reflected in the improvement in our net impact of MSR hedging during the current quarter.

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: gains and losses from public equity investing included in other non-interest income, net securities gains and losses, net gains and losses from the sale of loans, and the impact from the extinguishment of debt. 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 common share)

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 - Second Quarter

•

$3.4 million ($0.01 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance related to the value of Visa ® shares held.

2008 - First Quarter

	•		$11.1 million ($0.03 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance as a result of the 2008 first quarter Visa ® IPO.
	•		$11.0 million ($0.02 per common share) of asset impairment, including (a) $5.9 million venture capital loss, (b) $2.6 million charge off of a receivable, and (c) $2.5 million write-down of leasehold improvements in our Cleveland main office.

2007 - Fourth Quarter

•

$8.9 million ($0.02 per common share) negative impact primarily due to increases to litigation reserves on existing cases.

2007 - First Quarter

•

$1.9 million ($0.01 per common share) negative impact primarily due to increases to litigation reserves on existing cases.

Table 3 reflects the earnings impact of the above-mentioned significant items for periods affected by this Results of Operations discussion:

Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Items 1, 2, and 4.)

2008 Second Quarter versus 2007 Second Quarter

     Fully taxable equivalent net interest income increased $138.0 million, or 54%, compared with the year-ago quarter. This reflected the favorable impact of a $16.6 billion, or 52%, increase in average earning assets, with $14.6 billion representing an increase in average loans and leases, and a 3 basis point increase in the net interest margin to 3.29%. The increase in average earning assets, including loans and leases, was primarily Sky Financial merger-related. Table 4 details the $14.6 billion reported increase in average loans and leases.

     The $1.8 billion, or 5%, non-merger-related increase in average total loans and leases primarily reflected:

	•		$1.7 billion, or 8%, increase in average total commercial loans, with growth reflected in both C&I and CRE loans. The growth in CRE 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.
	•		$0.1 billion, or 1%, increase in average total consumer loans. This reflected growth in automobile loans and leases and other consumer loans, partially offset by a decline in residential mortgages due to loan sales in the current and year-ago quarters. Average home equity loans were little changed.

Regarding average total deposits, most of the increase was merger-related. The $0.9 billion non-merger-related increase reflected:

•

$1.0 billion, or 17%, growth in other deposits, primarily other domestic deposits over $100,000, reflecting increases in commercial and public funds deposits.

     Partially offset by:

•

$0.1 billion decrease in average total core deposits. This reflected a decline in non-interest bearing demand deposits, a planned reduction in non-relationship collateralized public fund deposits, as well as a decline in average savings and other domestic deposits and money market deposits, as customers continued to transfer funds from lower rate to higher rate accounts like certificates of deposits. Offsetting these declines was continued growth in core certificates of deposit, as well as in interest bearing demand deposits.

2008 Second Quarter versus 2008 First Quarter

     Compared with the 2008 first quarter, fully taxable equivalent net interest income increased $13.2 million, or 3%. This reflected the positive impact of a higher net interest margin and an increase in average earning assets, primarily loans. The net interest margin was 3.29% in the current quarter, up 6 basis points. The 6 basis point increase reflected:

	•		5 basis points positive impact primarily due to improved pricing of core deposits.
	•		2 basis points increase related to the funding provided by the convertible preferred capital issuance.

Partially offset by:

•

1 basis point decrease related to earning asset mix.

     The $0.7 billion, or 2%, increase in average total loans and leases reflected 3% growth in average total commercial loans. The 2008 second quarter growth was comprised primarily of new or increased loan facilities to existing borrowers. This growth was not related to the single family home builder segment or funding interest coverage on existing construction loans. Average total consumer loans increased slightly, led by growth in automobile loans and leases and modest growth in home equity, partially offset by declines in residential mortgages and other consumer loans. During the current quarter, $473 million residential mortgage loans were sold to improve our interest rate risk position and overall balance sheet.

     Average total deposits were $38.0 billion, up slightly compared with the prior quarter. There were changes between the various deposit account categories consisting of:

•

$0.2 billion, or 3%, increase in other deposits.

Partially offset by:

•

$0.1 billion decline in average total core deposits. The primary driver of the change was a planned reduction in non-relationship collateralized public fund deposits.

     Tables 5 and 6 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

Table 5 — Consolidated Quarterly Average Balance Sheets