SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

     
þ   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2004

or

     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 

Commission File Number 0-2525

Huntington Bancshares Incorporated

(Exact name of registrant as specified in its charter)
     
Maryland   31-0724920
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
41 S. High Street, Columbus, OH   43287
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (614) 480-8300

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock — Without Par Value
(Title of class)

     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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). þ Yes o No

     The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2004, determined by using a per share closing price of $22.98, as quoted by NASDAQ on that date, was $5,208,533,440. As of February 28, 2005, there were 231,857,099 shares of common stock without par value outstanding.

Documents Incorporated By Reference

     Part II of this Form 10-K incorporates by reference certain information from the registrant’s Annual Report to Shareholders for the period ended December 31, 2004.

     Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2005 Annual Shareholders’ Meeting.

 
 

 


HUNTINGTON BANCSHARES INCORPORATED

INDEX

             
Part I.
           
Item 1.
  Business     3  
Item 2.
  Properties     15  
Item 3.
  Legal Proceedings     15  
Item 4.
  Submission of Matters to a Vote of Security Holders     15  
Part II.
           
Item 5.
  Market for Registrant’s Common Equity and Related Shareholder Matters     15  
Item 6.
  Selected Financial Data     16  
Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     16  
Item 7A.
  Quantitative and Qualitative Disclosures About Market Risk     16  
Item 8.
  Financial Statements and Supplementary Data     16  
Item 9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     16  
Item 9A.
  Controls and Procedures     16  
Item 9B.
  Other Information     17  
Part III.
           
Item 10.
  Directors and Executive Officers of the Registrant     17  
Item 11.
  Executive Compensation     17  
Item 12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     18  
Item 13.
  Certain Relationships and Related Transactions     18  
Item 14.
  Principal Accounting Fees and Services     18  
Part IV.
           
Item 15.
  Exhibits and Financial Statement Schedules     19  
Signatures     20  
  Exhibit 10(E)
  Exhibit 12
  Exhibit 13
  Exhibit 21
  Exhibit 23.A
  Exhibit 23.B
  Exhibit 24
  Exhibit 31.A
  Exhibit 31.B
  Exhibit 32.A
  Exhibit 32.B
  Exhibit 99.A

 


Huntington Bancshares Incorporated

 

PART I

 

Item 1: Business

     Huntington Bancshares Incorporated (Huntington or the Company) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, and discount brokerage services, as well as reinsuring credit life and disability insurance, and selling other insurance and financial products and services. The Huntington National Bank (the Bank), organized in 1866, is Huntington’s only bank subsidiary. At December 31, 2004, the Bank had 167 banking offices in Ohio, 112 banking offices in Michigan, 27 banking offices in West Virginia, 21 banking offices in Indiana, 12 banking offices in Kentucky, 3 private banking offices in Florida, and one foreign office in each of the Cayman Islands and Hong Kong. Certain activities are conducted in other states including Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, Pennsylvania, and Tennessee. Foreign banking activities, in total or with any individual country, are not significant to the operations of Huntington. At December 31, 2004, Huntington and its subsidiaries had 7,812 full-time equivalent employees.

     A discussion of Huntington’s lines of business can be found in its Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report to Shareholders, which is incorporated into this report by reference. The financial statement results for each line of business can be found in Note 28 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders, which is incorporated into this report by reference.

     Competition is intense in most of the markets Huntington serves. Huntington competes on price and service with other banks and financial services companies such as savings and loans, credit unions, finance companies, mortgage banking companies, insurance companies, and brokerage firms. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking reform. For example, financial services reform legislation enacted in 1999 eliminated the long-standing Glass-Steagall Act restrictions on securities activities of bank holding companies and banks. The legislation, among other things, permits securities and insurance firms to engage in banking activities under specified conditions.

Regulatory Matters

     As discussed further in note 23 of the Notes to Consolidated Financial Statements, on March 1, 2005, Huntington announced that it had entered into formal, written agreements with its banking regulators, the Federal Reserve Bank of Cleveland and the Office of the Comptroller of the Currency. More information about these arrangements can be found in the “Recent Regulatory Agreements” section and in the “Business Risks—Operational Risks” section. To the extent that the following information describes statutory or regulatory provisions or their impact on Huntington, it is qualified in its entirety by reference to such statutory or regulatory provisions and, to the extent applicable, to the formal, written agreements with Huntington’s regulators.

General

     As a financial holding company, Huntington is subject to examination and supervision by the Board of Governors of the Federal Reserve System (FRB). Huntington is required to file reports and other information regarding its business operations and the business operations of its subsidiaries with the FRB. It is also required to obtain FRB approval prior to acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after such acquisition, it would own or control more than 5% of the voting stock of such bank.

     Pursuant to the Gramm-Leach-Bliley Act of 1999 (GLB Act), however, a financial holding company may engage in, or own or control companies that engage in, any activities determined by the FRB to be financial in nature or incidental to activities financial in nature, or complementary to financial activities, provided that such complementary activities do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The GLB Act designated various lending; advisory; insurance underwriting; securities underwriting, dealing, and market-making; and merchant banking activities (as well as those activities previously approved for bank holding companies by the FRB) as financial in nature, and authorized by the FRB, in coordination with the Office of the Comptroller of the Currency (OCC), to determine that additional activities are financial in nature or incidental to activities that are financial in nature. Except for the acquisition of a savings association, a financial holding company may commence any new financial activity with notice to the FRB within 30 days subsequent to the commencement of the new financial activity.

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     The Bank is subject to examination and supervision by the OCC. It’s deposits are insured by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). Huntington’s non-bank subsidiaries are also subject to examination and supervision by the FRB (or, in the case of non-bank subsidiaries of the Bank, by the OCC), and examination by other federal and state agencies, including, in the case of certain securities and investment management activities, regulation by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers.

     In addition to the impact of federal and state regulation, the Bank and non-bank subsidiaries of Huntington are affected significantly by the actions of the FRB as it attempts to control the money supply and credit availability in order to influence the economy.

Holding Company Structure

     Huntington is a financial holding company with one national bank subsidiary, The Huntington National Bank, and numerous non-bank subsidiaries. See Exhibit 21 for a list of Huntington’s subsidiaries. The Bank is subject to affiliate transaction restrictions under federal laws, which limit the transfer of funds by the subsidiary bank to the parent or any non-bank subsidiary of the parent, whether in the form of loans, extensions of credit, investments, or asset purchases. Such transfers by a subsidiary bank to its parent corporation or to any individual non-bank subsidiary of the parent are limited to 10% of the subsidiary bank’s capital and surplus and, with respect to such parent together with all such non-bank subsidiaries of the parent, to an aggregate of 20% of the subsidiary bank’s capital and surplus. Furthermore, such loans and extensions of credit are required to be secured within specified amounts. In addition, all affiliate transactions must be conducted on terms and under circumstances that are substantially the same as such transactions with unaffiliated entities.

     As a matter of policy, the FRB expects a bank holding company to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. Under the source of strength doctrine, the FRB may require a bank holding company to make capital injections into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital injection may be required at times when Huntington does not have the resources to provide it. Any loans by a holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, the bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations.

     Federal law permits the OCC to order the pro rata assessment of shareholders of a national bank whose capital stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank’s capital stock. This statute also provides for the enforcement of any such pro rata assessment of shareholders of such national bank to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock owned by any assessed shareholder failing to pay the assessment. Huntington, as the sole shareholder of the Bank, is subject to such provisions. Moreover, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of deposit liabilities of such an institution are accorded priority over the claims of general unsecured creditors of such an institution, including the holders of the institution’s note obligations, in the event of a liquidation or other resolution of such institution. Claims of a receiver for administrative expenses and claims of holders of deposit liabilities of the Bank (including the FDIC, as the subrogee of such holders) would receive priority over the holders of notes and other senior debt of the Bank in the event of a liquidation or other resolution and over the interests of Huntington as sole shareholder of the Bank.

Dividend Restrictions

     Dividends from the Bank are the primary source of funds for payment of dividends to Huntington’s shareholders. In the year ended December 31, 2004, Huntington declared cash dividends to its shareholders of $172.7 million. There are, however, statutory limits on the amount of dividends that the Bank can pay to Huntington without regulatory approval.

     The Bank may not, without prior regulatory approval, pay a dividend in an amount greater than its undivided profits. In addition, the prior approval of the OCC is required for the payment of a dividend by a national

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bank if the total of all dividends declared in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years. Under these provisions and in accordance with the above-described formula, the Bank could, without regulatory approval, declare dividends to Huntington in 2005 of approximately $274.3 million plus an additional amount equal to its net profits during 2005.

     If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FRB and the OCC have issued policy statements that provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings.

FDIC Insurance

     During 2004, the Bank was classified by the FDIC as a “well-capitalized” institution in the highest supervisory subcategory and was therefore not obliged under FDIC assessment practices to pay deposit insurance premiums in 2004, either on its deposits insured by the BIF or on that portion of its deposits acquired from savings and loan associations and insured by the Savings and Loan Association Insurance Fund (SAIF). Although not currently subject to FDIC assessments for insurance premiums, the Bank is required to make payments for the servicing of obligations of the Financing Corporation (FICO) that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding.

     The FDIC may alter its assessment practices in the future if required by developments affecting the resources of the BIF or the SAIF. Assessment practices may also be altered if pending legislative initiatives involving the merger of the BIF and the SAIF, as well as other changes, become law.

Capital Requirements

     The FRB has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies such as Huntington. The risk-based capital ratio guidelines establish a systematic analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures into explicit account in assessing capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting being assigned to categories perceived as representing greater risk. A bank holding company’s capital (as described below) is then divided by total risk weighted assets to yield the risk-based ratio. The leverage ratio is determined by relating core capital (as described below) to total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements.

     Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers. Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted short-term subordinated debt. “Tier 1”, or core capital, includes common equity, non-cumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less both goodwill and, with certain limited exceptions, all other intangible assets. Bank holding companies, however, may include cumulative preferred stock in their Tier 1 capital, up to a limit of 25% of such Tier 1 capital. “Tier 2”, or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations. “Total capital” is the sum of Tier 1 and Tier 2 capital.

     The FRB and the other federal banking regulators require that all intangible assets, with certain limited exceptions, be deducted from Tier 1 capital. Under the FRB’s rules the only types of intangible assets that may be included in (i.e., not deducted from) a bank holding company’s capital are originated or purchased mortgage servicing rights, non-mortgage servicing assets, and purchased credit card relationships, provided that, in the aggregate, the total amount of these items included in capital does not exceed 100% of Tier 1 capital.

     Under the risk-based guidelines, financial institutions are required to maintain a risk-based ratio (total capital to risk-weighted assets) of 8%, of which 4% must be Tier 1 capital. The appropriate regulatory authority may set higher capital requirements when an institution’s circumstances warrant.

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     Under the leverage guidelines, financial institutions are required to maintain a leverage ratio (Tier 1 capital to adjusted total assets, as specified in the guidelines) of at least 3%. The 3% minimum ratio is applicable only to financial institutions that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate exposure, and the highest regulatory rating. Financial institutions not meeting these criteria are required to maintain a minimum Tier 1 leverage ratio of 4%.

     Special minimum capital requirements apply to equity investments in nonfinancial companies. The requirements consist of a series of marginal capital charges that increase within a range from 8% to 25% as a financial institution’s over-all exposure to equity investments increases as a percentage of its Tier 1 capital.

     Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC, as well as the measures described below under “Prompt Corrective Action” as applicable to “under-capitalized” institutions.

     The risk-based capital standards of the FRB, the OCC, and the FDIC specify that evaluations by the banking agencies of a bank’s capital adequacy will include an assessment of the exposure to declines in the economic value of the bank’s capital due to changes in interest rates. These banking agencies issued a joint policy statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on internal measures of exposure and active oversight of risk management activities by senior management.

Prompt Corrective Action

     The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal banking regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: “well-capitalized”, “adequately-capitalized”, “under-capitalized”, “significantly under-capitalized”, and “critically under-capitalized”.

     An institution is deemed to be “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately-capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a Tier 1 leverage ratio of 4% or greater and the institution does not meet the definition of a “well-capitalized” institution. An institution that does not meet one or more of the “adequately-capitalized” tests is deemed to be “under-capitalized”. If the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a Tier 1 leverage ratio that is less than 3%, it is deemed to be “significantly under-capitalized”. Finally, an institution is deemed to be “critically under-capitalized” if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%. Through out 2004, both Huntington and the Bank had regulatory capital ratios in excess of the levels established for “well-capitalized” institutions.

     FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company if the depository institution would thereafter be “under-capitalized”. “Under-capitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan by the appropriate federal banking agency. If an “under-capitalized” institution fails to submit an acceptable plan, it is treated as if it is “significantly under-capitalized”. “Significantly under-capitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately-capitalized”, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically under-capitalized” institutions may not, beginning 60 days after becoming “critically under-capitalized”, make any payment of principal or interest on their subordinated debt. In addition, “critically under-capitalized” institutions are subject to appointment of a receiver or conservator within 90 days of becoming so classified.

     Under FDICIA, a depository institution that is not “well-capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. The Bank,

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however, is “well-capitalized” and, therefore, the FDICIA’s brokered deposit rule did not adversely affect the ability of the Bank to accept brokered deposits. Under the regulatory definition of brokered deposits, the Bank had $2.1 billion of such deposits at December 31, 2004.

Financial Holding Company Status

     Huntington operates as a “financial holding company”. In order to maintain its status as a financial holding company, a bank holding company’s depository subsidiaries must all be both “well capitalized” and “well managed,” and must meet their Community Reinvestment Act obligations.

     Financial holding company powers relate to “financial activities” that are determined by the FRB, in coordination with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity (provided that the complementary activity does not pose a safety and soundness risk). The statute itself defines certain activities as financial in nature, including but not limited to underwriting insurance or annuities; providing financial or investment advice; underwriting, dealing in, or making markets in securities; merchant banking, subject to significant limitations; insurance company portfolio investing, subject to significant limitations; and any activities previously found by the FRB to be closely related to banking.

Recent Regulatory Developments

     Authority for financial holding companies to engage in real estate brokerage and property management services was proposed by the Treasury Department and the FRB in 2000, but final regulations implementing the proposal have been subject to a statutory moratorium which was renewed by Congress during 2004 for a period ending September 30, 2005. It is not possible at present to assess the likelihood of the ultimate effectiveness of final regulations

     Congress took no action toward reform of the federal deposit insurance program during 2004, but the subject is likely to receive legislative attention in 2005. It is not possible to predict if deposit insurance reform legislation will be enacted, or if enacted, what its effect will be on Huntington.

     The Basel Committee on Banking Supervision presented its “Basel II” regulatory capital guidelines in July 2004, which would require changes by large banks in the way in which their risk-based capital requirements are calculated. Federal banking regulators are considering the extent and timing of application of the guidelines to U.S. depository institutions. It is uncertain at the present time if Huntington will be either required or permitted to make changes in its regulatory capital structure in accordance with Basel II guidelines.

     In December 2004, the FRB announced a revision of its bank holding company rating system to align the system more closely with current supervisory practices. The revised system emphasizes risk management, introduces a framework for analyzing and rating financial factors, and provides a framework for assessing and rating the potential impact of nondepository entities of a holding company on its subsidiary depository institution(s). A composite rating will be assigned based on the foregoing three components, but a fourth component will also be rated, and will reflect generally the assessment of depository institution subsidiaries by their principal regulators. Ratings will be made on a scale of 1 to 5 (1 highest) and will, like current ratings, not be made public. The new rating system will be applied to Huntington commencing with Huntington’s first examination following the system’s effective date of January 1, 2005.

     Information related to the Securities Exchange Commission’s formal investigation and formal regulatory supervisory agreements can be found in Notes 22 and 23, respectively, of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders, which are incorporated into this report by reference.

Business Risks

     Huntington, like other financial companies, is subject to a number of risks, many of which are outside of Management’s control, though Management strives to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk that loan and lease customers or other counter parties will be unable to perform their contractual obligations, (2) market risk , which is the risk that changes in market rates and prices will adversely affect Huntington’s financial condition or results of operation, (3) liquidity risk , which is the risk that Huntington and / or the Bank will have insufficient cash or access to cash to meet its operating needs, and (4)

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operational risk , which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

     In addition to the other information included or incorporated by reference into this report, readers should carefully consider that the following important factors, among others, could materially impact Huntington’s business, future results of operations, and future cash flows.

(1) Credit Risks:

Huntington extends credit to a variety of customers based on internally set standards and the judgment of Management. Huntington manages the credit risk it takes through a program of underwriting standards that it follows, the review of certain credit decisions, and an on-going process of assessment of the quality of the credit it has already extended. There can be no assurance that Huntington’s credit standards and its on-going process of credit assessment will protect Huntington from significant credit losses.

     Huntington takes credit risk by virtue of funding loans and leases, purchasing non-governmental securities, extending loan commitments and letters of credit, and being counterparties to off-balance sheet financial instruments such as interest rate and foreign exchange derivatives.

     Huntington’s exposure to credit risk is managed through the use of consistent underwriting standards that emphasize “in-market” lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The credit administration function employs risk management techniques to ensure that loans and leases adhere to corporate policy and problem loans and leases are promptly identified. These procedures provide Management with the information necessary to implement policy adjustments where necessary, and to take proactive corrective actions. In 2004, Management continued to focus on commercial lending to customers with existing or potential relationships within Huntington’s primary markets.

     For further discussion about Huntington’s management of credit risk, see the “Credit Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference. There can be no assurance that Huntington’s credit standards and its on-going process of credit assessment will protect Huntington from significant credit losses.

Huntington’s loans, leases, and deposits are focused in five states and adverse economic conditions in those states, in particular, could negatively impact results from operations, cash flows, and financial condition.

     Concentration of credit risk can also arise with respect to loans and leases when the borrowers are located in the same geographical region. Huntington’s customers with loan and/or deposit balances at December 31, 2004, were located predominantly in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Because of the concentration of loans, leases, and deposits in these states, in the event of adverse economic conditions in these states, Huntington could experience more difficulty in attracting deposits and experience higher rates of loss and delinquency on its loans and leases than if the loans and leases were more geographically diversified. Adverse economic conditions and other factors, such as political or business developments or natural hazards that may affect these states, may reduce demand for credit or fee-based products and could negatively affect real estate and other collateral values, interest rate levels, and the availability of credit to refinance loans at or prior to maturity.

(2) Market Risks:

Changes in interest rates could negatively impact Huntington’s financial condition and results of operations.

     Huntington’s results of operations depend substantially on net interest income, the difference between interest earned on interest-earning assets (such as investments, loans, and direct financing leases) and interest paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply, and other factors beyond Management’s control may also affect interest rates. If Huntington’s interest-earning assets mature or reprice more quickly than interest-bearing liabilities in a declining interest rate environment, net interest income could be adversely impacted. Likewise, if interest-bearing liabilities mature or reprice more quickly than interest-earnings assets in a rising interest rate environment, net interest income could be adversely impacted.

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     Changes in interest rates also can affect the value of loans and other assets, including retained interests in securitizations, mortgage and non-mortgage servicing rights, and Huntington’s ability to realize gains on the sale of assets. A portion of Huntington’s earnings results from transactional income. Examples of this type of earnings result from gains on sales of loans and other real estate owned. This type of income can vary significantly from quarter-to-quarter and year-to-year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans and leases may lead to an increase in non-performing assets and a reduction of discount accreted into income, which could have a material adverse effect on Huntington’s results of operations and cash flows. For further discussion, see “Loan Sales and Securitizations” in the Notes to Consolidated Financial Statements included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

     Although fluctuations in market interest rates are neither completely predictable nor controllable, Huntington’s Market Risk Committee (MRC) meets periodically to monitor Huntington’s interest rate sensitivity position and oversee its financial risk management by establishing policies and operating limits. For further discussion, see the “Interest Rate Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

Huntington could experience losses on its residual values related to its automobile lease portfolio.

     Inherently, automobile lease portfolios are subject to residual risk, which arises when the market price of the leased vehicle at the end of the lease term is below the estimated residual value at the time the lease is originated. This situation arises due to a decline in used car market values. For further discussion about Huntington’s management of lease residual risk, see the “Lease Residual Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

(3) Liquidity Risks:

If Huntington is unable to borrow funds through access to capital markets, it may not be able to meet the cash flow requirements of its depositors and borrowers, or meet the operating cash needs of Huntington to fund corporate expansion and other activities.

     Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by the board of directors, with operating limits set by MRC, based upon the ratio of loans to deposits and percentage of assets funded with non-core or wholesale funding. The Bank’s MRC regularly monitors the overall liquidity position of the Bank and the parent company to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. MRC also establishes policies and monitors guidelines to diversify the Bank’s wholesale funding sources to avoid concentrations in any one market source. Wholesale funding sources include Federal funds purchased, securities sold under repurchase agreements, non-core deposits, and medium- and long-term debt, which includes a domestic bank note program and a Euronote program. The Bank is also a member of certain Federal Home Loan Banks (FHLB), which provide funding through advances to members that are collateralized with mortgage-related assets.

     Huntington maintains a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity should they be needed. These sources include the sale or securitization of loans, the ability to acquire additional national market, non-core deposits, additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common securities in public or private transactions. The Bank also can borrow through the Federal Reserve’s discount window.

     If Huntington were unable to access any of these funding sources when needed, it might be unable to meet the needs of its customers, which could adversely impact Huntington’s financial condition, its results of operations, cash flows, and its level of regulatory-qualifying capital. For further discussion, see the “Liquidity” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

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If Huntington’s credit rating were downgraded, its ability to access funding sources may be negatively impacted or eliminated and Huntington’s liquidity and the market price of its common stock could be adversely impacted.

     Credit ratings by the three major credit rating agencies are an important component of the Company’s liquidity profile. Among other factors, the credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of Management, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the Company’s ability to access a broad array of wholesale funding sources. Adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets, but also the cost of these funds. In addition, certain financial on- and off-balance sheet arrangements contain credit rating triggers that could increase funding needs if a negative rating change occurs. Letter of credit commitments for marketable securities, interest rate swap collateral agreements, and certain asset securitization transactions contain credit rating provisions.

     Credit ratings as of February 8, 2005, for the parent company and the Bank can be found in Table 17 of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as exhibit 13 to this report and incorporated herein by reference.

     Huntington relies on certain funding sources such as large corporate deposits, public fund deposits, federal funds, Euro deposits, FHLB advances, and bank notes. Although not contractually tied to credit ratings, Huntington’s ability to access these funding sources may be impacted by negative changes in credit ratings. In the case of public funds or FHLB advances, a credit downgrade also may trigger a requirement that Huntington pledge additional collateral against outstanding borrowings.

     A downgraded credit rating by any of the three credit rating agencies could negatively affect Huntington’s common stock price and accelerate the timing of the pass through of cash flows from obligors to its securitization trusts. In addition, if the unsecured senior debt of the Bank falls below BBB+ or Baa1, a Servicer Downgrade Event automatically occurs, which will trigger an early amortization event in Huntington’s largest securitization. At that point, Huntington would no longer be permitted to sell additional loans to the trust.

(4) Operational Risks:

Huntington has significant competition in both attracting and retaining deposits and in originating loans and leases.

     Competition is intense in most of the markets Huntington serves. Huntington competes on price and service with other banks and financial services companies such as savings and loans, credit unions, finance companies, and brokerage firms. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking reform.

Management maintains internal operational controls and Huntington has invested in technology to help it process large volumes of transactions. However, there can be no assurance that Huntington will be able to continue processing at the same or higher levels of transactions. If Huntington’s system of internal controls should fail to work as expected, if its systems were to be used in an unauthorized manner, or if employees were to subvert the system of internal controls, significant losses to Huntington could occur.

     Huntington processes large volumes of transactions on a daily basis and is exposed to numerous types of operational risk. Operational risk resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by employees or persons outside Huntington, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.

     Huntington establishes and maintains systems of internal operational controls that provide Management with timely and accurate information about its level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost effective levels. Huntington has also established

10


procedures that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. From time to time, Huntington experiences losses from operational risk, including the effects of operational errors, and these losses are recorded as non-interest expense.

     While Management continually monitors and improves its system of internal controls, data processing systems, and corporate-wide processes and procedures, there can be no assurance that Huntington will not suffer such losses in the future.

Huntington’s acquisitions may not receive the necessary approvals, meet income expectations and/or cost savings levels, or be integrated within time frames originally anticipated. Huntington may encounter unforeseen difficulties, including unanticipated integration problems and business disruption in connection with its acquisitions. Acquisitions could also dilute stockholder value and adversely affect operating results.

     The completion of any merger is dependent on, among other things, receipt of shareholder and regulatory approvals, the timing of which cannot be predicted with precision and which may not be received at all. Additionally, a merger may be more expensive to complete than anticipated, as a result of unexpected factors or events and the anticipated cost savings of a merger may take longer to be realized or may not be achieved in their entirety. The integration of acquired businesses and operations with those of Huntington, including systems conversions, may take longer than anticipated, may be more costly than anticipated and may have unanticipated adverse results relating to Huntington’s existing businesses or the businesses acquired. Further, decisions to sell or close units or otherwise change the business mix of either company may adversely impact combined results. Moreover, Huntington may be unable to identify, negotiate, or finance future acquisitions successfully. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities, or amortization expenses.

An extended disruption of vital infrastructure could negatively impact Huntington’s business, results of operations, and financial condition.

     Huntington’s operations depend upon, among other things, its infrastructure, including its equipment and facilities. Extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of Huntington’s control could have a material adverse impact on the financial services industry as a whole and on Huntington’s business, results of operations, cash flows, and financial condition in particular. To mitigate this risk, Huntington has established a business recovery plan.

Huntington’s financial statements must conform to accounting principles generally accepted in the United States (GAAP), which require Management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from those estimates.

     The preparation of financial statements in conformity with GAAP requires Management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. 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. Huntington’s financial statements include estimates related to accruals of income and expenses and determination of fair values or carrying values of certain, but not all, assets and liabilities. These estimates are based on information available to Management at the time the estimates are made. Factors involved in these estimates could change in the future leading to a change of those estimates, which could be material to Huntington’s results of operations or financial condition.

     For further discussion, see the “Critical Accounting Policies and Use of Significant Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

Failure to maintain effective internal controls over financial reporting in the future could impair Huntington’s ability to accurately and timely report its financial results or prevent fraud, resulting in loss of investor confidence and adversely affecting Huntington’s business and stock price.

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     Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. As a financial holding company, Huntington is subject to regulation that focuses on effective internal controls and procedures. Management continually seeks to improve these controls and procedures. In addition, in 2004, Huntington has worked diligently to further document and test its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. This Act requires, beginning with this report, Management to furnish a report assessing Huntington’s internal controls over financial reporting and stating whether such controls are effective. Huntington’s independent auditors must attest to Management’s assessment. These reports for the year ended December 31, 2004, can be found in Part II, Item 9A: Controls and Procedures.

     Management believes that Huntington’s key internal controls over financial reporting are currently effective; however, such controls and procedures will be modified, supplemented, and changed from time to time as necessitated by the Company’s growth and in reaction to external events and developments. While Management will continue to assess Huntington’s controls and procedures and take immediate action to remediate any future perceived gaps, there can be no guarantee of the effectiveness of these controls and procedures on an on-going basis. Any failure to maintain in the future an effective internal control environment could impact Huntington’s ability to report its financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact its business and stock price.

New or changes in existing tax, accounting, and regulatory laws, regulations, rules, standards, policies, and interpretations or requirements could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.

     The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a financial company’s shareholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect Huntington are described in this report under the heading “Regulatory Matters.” These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.

     In addition, Huntington may be subject to actions of its regulators that are specific to Huntington itself. For further discussion, see Note 23 of the Notes to Consolidated Financial Statements of the Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

     Events that may not have a direct impact on Huntington, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and various taxing authorities responding by adopting and/or proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. International capital standards developed in the framework of the Basel Committee on Banking Supervision may also affect the competitive environment for United States banks.

     The nature, extent, and timing of the adoption of significant new laws and regulations, or changes in or repeal of existing laws and regulations, or specific actions of regulators, may have a material impact on Huntington’s business and results of operations; however, it is impossible to predict at this time the extent to which any such adoption, change, or repeal would impact Huntington.

The OCC may impose dividend payment and other restrictions on the Bank, which would impact Huntington’s ability to pay dividends to its shareholders or repurchase its stock.

     The OCC is the primary regulatory agency that examines the Bank, its subsidiaries, and their respective activities. Under certain circumstances, including any determination that the activities of the Bank or its subsidiaries constitute an unsafe and unsound banking practice, the OCC has the authority by statute to restrict the Bank’s ability to transfer assets, make distributions to its shareholder, and redeem preferred securities.

     Under applicable statutes and regulations, dividends by a national bank may be paid out of current or retained net profits, but a national bank is prohibited from declaring a cash dividend on shares of its common stock out of net profits until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the

12


amount of capital stock, until certain amounts from net profits are transferred to the surplus fund. Moreover, the prior approval of the OCC is required for the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for the year combined with its net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred securities.

     Payment of dividends could also be subject to regulatory limitations if the Bank became under-capitalized for purposes of the OCC prompt corrective action regulations. Under-capitalized is currently defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a core capital, or leverage, ratio of less than 4.0%. The Bank’s inability to pay dividends to Huntington would negatively impact Huntington’s ability to pay dividends to its shareholders and repurchase its stock. Through out 2004, the Bank was in compliance with all regulatory capital requirements and considered to be “well-capitalized”.

     For further discussion, see the “Bank Liquidity” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

The Federal Reserve Board may require Huntington to commit capital resources to support the Bank.

     The FRB, which examines Huntington and its non-bank subsidiaries, has a policy stating that a bank holding company is expected to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the source of strength doctrine, the FRB may require a bank holding company to make capital injections into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it, and therefore may be required to borrow the funds. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, the bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s results of operations and cash flows.

     Management does not foresee the need to make capital injections to the Bank under the source of strength doctrine in the foreseeable future.

If any of Huntington’s Real Estate Investment Trust (REIT) affiliates fail to qualify as a REIT, Huntington may be subject to a higher consolidated effective tax rate.

     Huntington Preferred Capital, Inc. (HPCI) and Huntington Preferred Capital II, Inc. (HPC-II) operate as REITs for federal income tax purposes. HPCI and HPC-II are consolidated subsidiaries of Huntington that were established to acquire, hold, and manage mortgage assets and other authorized investments to generate net income for distribution to their shareholders.

     Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At December 31, 2004, HPCI had met all of the quarterly asset tests.

     Also, a REIT must annually satisfy two gross income tests: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived

13


from sources qualifying for the 75% test plus dividends, interest and gains from the sale of securities. In addition, a REIT must distribute 90% of the REIT’s taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. For the tax year, HPCI had met all annual income and distribution tests. If these REIT affiliates fail to meet any of the required provisions for REITs, HPCI or HPC-II will no longer qualify as a REIT and the resulting tax consequences would increase Huntington’s effective tax rate.

Huntington could be held responsible for environmental liabilities of properties acquired through foreclosure of loans secured by real estate.

     In the event that Huntington is forced to foreclose on a defaulted commercial mortgage and/or residential mortgage loan to recover its investment in the mortgage loan, Huntington may be subject to environmental liabilities in connection with the underlying real property, which could exceed the value of the real property. Although Huntington exercises due diligence to discover potential environmental liabilities prior to the acquisition of any property through foreclosure, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on properties during Huntington’s ownership or after a sale to a third party. There can be no assurance that Huntington would not incur full recourse liability for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property, or that Huntington could recover any of the costs from any third party.

Huntington is currently under investigation by the SEC, the final results of which are unknown.

     On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff was conducting a formal investigation into certain financial accounting matters relating to fiscal years 2002 and earlier and certain related disclosure matters. On August 9, 2004, Huntington announced the Company was in negotiations with the staff of the SEC regarding a settlement of the formal investigation and disclosed that it expected that a settlement of this matter, which is subject to approval by the SEC, would involve the entry of an order requiring, among other possible matters, Huntington to comply with various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933, along with the imposition of a civil money penalty. At December 31, 2004, the Company had reserves related to the expectation of the imposition of a civil money penalty, which the Company viewed as sufficient given negotiations with the SEC. However, no assurances can be made that any assessed penalty may not exceed this amount.

     Management continues to have ongoing discussions with the staff of the SEC regarding resolution of this matter. The final results of the investigation, however, are not known at the time of this filing and therefore, the impact to Huntington’s financial condition, results of operations, and cash flows is not known.

Huntington has entered into formal supervisory agreements with its banking regulators.

     On March 1, 2005, Huntington announced that it had entered into formal written agreements with its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance its corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. They call for independent third-party reviews, as well as the submission of written plans and progress reports by management. These written agreements remain in effect until terminated by the banking regulators.

     Management has been working with its banking regulators over the past several months and has been taking actions and devoting significant resources to address all of the issues raised. Management believes that the changes that it has already made, and is in the process of making, will address these issues fully and comprehensively. No assurances, however, can be provided as to the ultimate timing or outcome of these matters.

     As a result of regulatory, supervisory and examination activities, Huntington has been advised that it no longer satisfies financial holding company requirements for purposes of the advantages in regulatory procedures and powers existing under the GLB Act for financial holding companies (the “GLB Procedures and Powers”), and Huntington has agreed to take certain corrective actions within a 180 day period. During the interim, Huntington is unable to engage in new activities or make new investments in reliance on the GLB Procedures and Powers without prior FRB approval, and Huntington may be subject to limitations on the conduct of its activities. The failure to take these corrective actions could result in Huntington’s loss of the GLB Procedures and Powers, though any such loss is not expected to be material to Huntington’s consolidated business.

     As a result of entering into the written agreements, Huntington Bank is required to obtain approval of the Office of the Comptroller of the Currency prior to employing new senior executive officers. In addition, Huntington and Huntington Bank are prohibited from making “golden parachute payments” as defined in applicable regulations without prior regulatory approval.

Guide 3 Information

     Information required by Industry Guide 3 relating to statistical disclosure by bank holding companies is contained in the information incorporated by reference in response to Items 7 and 8 of this report.

Available Information

     Huntington makes available free of charge on its Internet website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as

14


reasonably practicable after those reports have been electronically filed or submitted to the SEC. The public may read and copy any materials Huntington files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These filings can be accessed under the “Investor Relations” link found on the homepage of Huntington’s website at huntington.com. These filings are also accessible on the SEC’s website at www.sec.gov.

 

Item 2: Properties

     The headquarters of Huntington and the Bank are located in the Huntington Center, a thirty-seven-story office building located in Columbus, Ohio. Of the building’s total office space available, Huntington leases approximately 39%. The lease term expires in 2015, with nine five-year renewal options for up to 45 years but with no purchase option. The Bank has an indirect minority equity interest of 18% in the building. Huntington’s other major properties consist of a thirteen-story and a twelve-story office building, both of which are located adjacent to the Huntington Center; a twenty-one story office building, known as the Huntington Building, located in Cleveland, Ohio; an eighteen-story office building in Charleston, West Virginia; a three-story office building located in Holland, Michigan; a Business Service Center in Columbus, Ohio, which serves as Huntington’s primary operations and data center; The Huntington Mortgage Group’s building, located in the greater Columbus area; an office complex located in Troy, Michigan; and two data processing and operations centers located in Ohio. The office buildings above serve as regional administrative offices occupied predominantly by Huntington’s Regional and Private Financial Group lines of business. The Dealer Sales line of business is primarily located in a three-story office building located in Columbus Ohio. Of these properties, Huntington owns the thirteen-story and twelve-story office buildings, and the Business Service Center. All of the other major properties are held under long-term leases. In 1998, Huntington entered into a sale/leaseback agreement that included the sale of 51 of its locations. The transaction included a mix of branch banking offices, regional offices, and operational facilities, including certain properties described above, which Huntington will continue to operate under a long-term lease.

 

Item 3: Legal Proceedings

     Information required by this item is set forth in Notes 21 and 22 of Notes to Consolidated Financial Statements included in Huntington’s 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

 

Item 4: Submission of Matters to a Vote of Security Holders

     Not Applicable.

 

PART II

Item 5: Market for Registrant’s Common Equity and Related Shareholder Matters

     The common stock of Huntington Bancshares Incorporated is traded on the NASDAQ Stock Market under the symbol “HBAN”. The stock is listed as “HuntgBcshr” or “HuntBanc” in most newspapers. As of January 31, 2005, Huntington had 26,700 shareholders of record.

     Information regarding the high and low sale prices of Huntington Common Stock and cash dividends declared on such shares, as required by this item, is set forth in Table 30 entitled “Quarterly Stock Summary, Key Ratios and Statistics, and Capital Data” included in the 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference. Information regarding restrictions on dividends, as required by this item, is set forth in Item 1 “Business-Regulatory Matters-Dividend Restrictions” and in Note 24 of Notes to Consolidated Financial Statements of the Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

     Huntington did not sell any unregistered equity securities during the year ended December 31, 2004. Neither Huntington nor any “affiliated purchaser” (as defined by Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) repurchased any equity securities of Huntington in any month within the fourth quarter ended December 31, 2004.

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                                      Maximum    
                            Total Number of       Number of    
        Total       Average       Shares Purchased       Shares that May    
        Number of       Price       as Part of Publicly       Yet Be Purchased    
        Shares       Paid Per       Announced Plans       Under the Plans or    
  Period     Purchased       Share       or Programs       Programs (1)    
 
October 1, 2004 to October 31, 2004
                              7,500,000    
 
November 1, 2004 to November 30, 2004
                              7,500,000    
 
December 1, 2004 to December 31, 2004
                              7,500,000    
 
Total
                              7,500,000    
 

      (1) Information is as of the end of the Period. On April 27, 2004, Huntington announced that its board of directors had authorized a new program for the repurchase in the open market or through privately negotiated transactions of 7,500,000 shares of Huntington’s common stock (the “2004 Repurchase Program”). The 2004 Repurchase Program does not have an expiration date.

 

Item 6: Selected Financial Data

     Information required by this item is set forth in Table 1 included in the 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

 

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Information required by this item is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

 

Item 7a: Quantitative and Qualitative Disclosures About Market Risk

     Information required by this item is set forth in the caption “Market Risk” included in the 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

 

Item 8: Financial Statements and Supplementary Data

     Information required by this item is set forth in the Independent Auditor’s Report, Consolidated Financial Statements and Notes, and Selected Quarterly Income Statements included in the 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

 

Item 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

     Not applicable.

 

Item 9A: Controls and Procedures

Disclosure Controls and Procedures

     Huntington’s Management, with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntington’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Huntington’s disclosure controls and procedures are effective.

Internal Controls Over Financial Reporting

     Information required by this item is set forth in “Report of Management” and “Report of Independent Registered Public Accounting Firm” included in the 2004 Annual Report to Shareholders, portions of which are filed as Exhibit 13 to this report and incorporated herein by reference.

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Changes in Control Over Financial Reporting

     During 2004, Huntington worked diligently to document and test its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Among other things, this Act requires, beginning with this Form 10-K, annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments.

     In order to be in a position to give the required reports, Huntington engaged an outside consultant and adopted a detailed work plan to (1) assess and document the adequacy of Huntington’s internal control over financial reporting, (2) take steps to remediate any perceived gaps in its internal control over financial reporting and improve its control processes where appropriate, and (3) validate through testing that Huntington’s control processes are functioning as documented. This work was completed prior to the end of 2004 and serves as the basis for management’s conclusion that Huntington’s internal control over financial reporting is effective as of December 31, 2004.

     There have not been any changes in Huntington’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2004 to which this report relates that have materially affected, or are reasonably likely to materially affect, Huntington’s internal control over financial reporting.

 

Item 9B: Other Information.

     Not applicable.

 

PART III

 

Item 10: Directors and Executive Officers of The Registrant

     Information required by this item is set forth under the captions “Election of Directors”, “Corporate Governance”, “Executive Officers of Huntington”, “Board Committees”, “Report of the Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” of Huntington’s 2005 Proxy Statement, which is expected to be filed on or about March 15, 2005, and is incorporated herein by reference.

 

Item 11: Executive Compensation

     Information required by this item is set forth under the captions “Executive Compensation” and “Director Compensation” of Huntington’s 2005 Proxy Statement, which is expected to be filed on or about March 15, 2005, and is incorporated herein by reference.

17


 

      Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  

Equity Compensation Plan Information

                                   
 
                            Number of    
                            securities    
                            remaining available    
        Number of                 for future issuance    
        securities to be                 under equity    
        issued upon       Weighted-average       compensation plans    
        exercise of       exercise price of       (excluding    
        outstanding       outstanding       securities    
        options, warrants,       options, warrants,       reflected in column    
        and rights       and rights       (a))    
  Plan category     (a)       (b)       (c)    
 
Equity compensation plans approved by security holders
      17,169,530         20.43         8,815,229    
 
Equity compensation not approved by security holders (1) (2)
      2,847,691         19.18            
 
Total
      20,017,221         20.25         8,815,229    
 

(1) On September 4, 2001, options totaling 3.2 million shares of common stock were granted to, with certain specified exceptions, full- and part-time employees under the Huntington Bancshares Incorporated Employee Stock Incentive Plan (the Incentive Plan). Under the terms of the Incentive Plan, these options were to vest on the earlier of September 4, 2006, or at such time as the closing price for Huntington’s common stock for five consecutive trading days reached or exceeded $25.00. Huntington’s common stock closing price exceeded $25.00 for each of the five consecutive trading days beginning October 1, 2004, and ending October 7, 2004. As a result, options for 2.0 million shares of common stock granted under the Incentive Plan, net of options for 1.2 million shares cancelled due to employee attrition, became fully vested and exercisable after the close of trading on October 7, 2004. At December 31, 2004, the number of outstanding options was 1,106,241.

(2) On August 27, 2002, options totaling 2.4 million shares of common stock were granted to, with certain specified exceptions, full- and part-time employees under the Incentive Plan. Under the terms of the Incentive Plan, these options were to vest on the earlier of August 27, 2007, or at such time as the closing price for Huntington’s common stock for five consecutive trading days reached or exceeded $27.00. At December 31, 2004, the number of outstanding options was 1,741,450.

Other Information

     The other information required by this item is set forth under the caption “Ownership of Voting Stock” of Huntington’s 2005 Proxy Statement, which is expected to be filed on or about March 15, 2005, and is incorporated herein by reference.

 

Item 13: Certain Relationships and Related Transactions

     Information required by this item is set forth under the caption “Transactions With Directors and Executive Officers” of Huntington’s 2005 Proxy Statement, which is expected to be filed on or about March 15, 2005, and is incorporated herein by reference.

 

Item 14: Principal Accounting Fees and Services

     Information required by this item is set forth under the caption “Proposal to Ratify the Appointment of Independent Auditors” of Huntington’s 2005 Proxy Statement, which is expected to be filed on or about March 15, 2005, and is incorporated herein by reference.

18


 

PART IV

 

Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)   The following documents are filed as part of this report:

  (1)   The report of independent auditors and consolidated financial statements appearing in Huntington’s 2004 Annual Report to Shareholders on the pages indicated below are incorporated by reference in Item 8.

         
 
    Annual  
    Report Page  
Report of Independent Registered Public Accounting Firm
    95  
Consolidated Balance Sheets as of December 31, 2004 and 2003
    96  
Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
    97  
Consolidated Statements of Changes in Shareholders Equity For the years ended December 31, 2004, 2003 and 2002
    98  
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    99  
Notes to Consolidated Financial Statements
    100 – 136  

  (2)   Huntington is not filing separately financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the notes thereto.
 
  (3)   The exhibits required by this item are listed in the Exhibit Index of this Form 10- K. The management contracts and compensation plans or arrangements required to be filed as exhibits to this Form 10-K are listed as Exhibits 10(a) through 10(t) in the Exhibit Index.

(b)   The exhibits to this Form 10-K begin on page 25.
 
(c)   See Item 15(a)(2) above.

19


 

Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of March 2005.

HUNTINGTON BANCSHARES INCORPORATED
(Registrant)

             
By:
  /s/ Thomas E. Hoaglin   By:   /s/ Donald R. Kimble
           
  Thomas E. Hoaglin       Donald R. Kimble
  Chairman, President, Chief Executive       Chief Financial Officer and Controller,
  Officer, and Director (Principal Executive Officer)       (Principal Financial and Accounting Officer)

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 2nd day of March, 2005.

 
     
Raymond J. Biggs *
  David L. Porteous *
 
   
Raymond J. Biggs
  David L. Porteous
Director
  Director
 
   
Don M. Casto, III *
  Kathleen H. Ransier *
 
   
Don M. Casto, III
  Kathleen H. Ransier
Director
  Director
 
   
Michael J. Endres *
  Robert H. Schottenstein *
 
   
Michael J. Endres
  Robert H. Schottenstein
Director
  Director
 
   
 
   
 
   
Karen A. Holbrook
   
Director
   
 
   
John B. Gerlach, Jr.*
   
 
   
John B. Gerlach, Jr.
   
Director
   
 
   
David P. Lauer*
   
 
   
David P. Lauer
   
Director
   
 
   
Wm. J. Lhota*
   
 
   
Wm. J. Lhota
   
Director
   
 
   
* /s/ Donald R. Kimble
   
 
   
Donald R. Kimble
   
Attorney-in-fact for each of the persons indicated
   

20


 

Exhibit Index

This document incorporates by reference the documents listed below that Huntington has previously filed with the SEC. The SEC allows Huntington to incorporate by reference information in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.

This information may be read and copied at the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains an internet world-wide web site that contains reports, proxy statements and other information about issuers, like Huntington, who file electronically with the SEC. The address of the site is http://www.sec.gov . The reports and other information filed by Huntington with the SEC are also available at Huntington’s internet world-wide web site. The address of the site is http://www.huntington.com . Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this proxy statement/prospectus. You also should be able to inspect reports, proxy statements, and other information about Huntington at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.

         
2.(a).
      Agreement and Plan of Merger, dated January 27, 2004, by and between Unizan Financial Corp. and Huntington Bancshares Incorporated — previously filed as Exhibit 2 to Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference.
 
       
   (b).
      Amendment No. 1 to the Agreement and Plan of Merger, dated November 12, 2004, by and between Unizan Financial Corp. and Huntington Bancshares Incorporated — previously filed as Exhibit 99.1 to Current Report on Form 8-K dated November 12, 2004, and incorporated herein by reference.
 
       
3(i)(a).
      Articles of Restatement of Charter, Articles of Amendment to Articles of Restatement of Charter, and Articles Supplementary — previously filed as Exhibit 3(i) to Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference.
 
       
   (i)(b).
      Articles of Amendment to Articles of Restatement of Charter — previously filed as Exhibit 3(i)(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference.
 
       
   (ii).
      Amended and Restated Bylaws as of July 16, 2002 — previously filed as Exhibit 3(ii) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference.
 
       
4.(a).
      Instruments defining the Rights of Security Holders — reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request.
 
       
   (b).
      Rights Plan, dated February 22, 1990, between Huntington Bancshares Incorporated and The Huntington National Bank (as successor to The Huntington Trust Company, National Association) — previously filed as Exhibit 1 to Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on February 22, 1990, and incorporated herein by reference.
 
       
   (c).
      Amendment No. 1 to the Rights Agreement, dated August 16, 1995— previously filed as Exhibit 4(b) to Form 8-K, dated August 16, 1995, and incorporated herein by reference.
 
       
10.
      Material contracts:
 
       
   (a).
  *   Form of Tier I Executive Agreement for certain executive officers — previously filed as Exhibit 10(a) to Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.
 
       
   (b).
  *   Form of Tier II Executive Agreement for certain executive officers — previously filed as Exhibit 10(b) to Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

21


         
   (c).
  *   Form of Tier IIA Executive Agreement for certain executive officers — previously filed as Exhibit 99.1 to Current Report on Form 8-K dated February 14, 2005, and incorporated herein by reference.
 
       
   (d).
  *   Form of Tier III Executive Agreement for certain executive officers — previously filed as Exhibit 10(a) to Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference.
 
       
   (e).
  *   Schedule identifying material details of Tier I, II, IIA, or III Executive Agreements.
 
       
   (f).
  *   Huntington Bancshares Incorporated Management Incentive Plan, as amended and restated effective for plan years beginning on or after January 1, 2004 — previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference.
 
       
   (g).
  *   Restated Huntington Supplemental Retirement Income Plan — previously filed as Exhibit 10(n) to Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
 
       
   (h).
  *   Deferred Compensation Plan and Trust for Directors — reference is made to Exhibit 4(a) of Post-Effective Amendment No. 2 to Registration Statement on Form S-8, Registration No. 33-10546, filed with the Securities and Exchange Commission on January 28, 1991, and incorporated herein by reference.
 
       
   (i)(1).
  *   Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors — reference is made to Exhibit 4(a) of Registration Statement on Form S-8, Registration No. 33-41774, filed with the Securities and Exchange Commission on July 19, 1991, and incorporated herein by reference.
 
       
   (i)(2).
  *   First Amendment to Huntington Bancshares Incorporated Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors – previously filed as Exhibit 10(q) to Quarterly Report 10-Q for the quarter ended March 31, 2001, and incorporated herein by reference.
 
       
   (j).
  *   Executive Deferred Compensation Plan, as amended and restated on February 18, 2004 — previously filed as Exhibit 10(c) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference.
 
       
   (k)(1).
  *   The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust (as amended and restated as of February 9, 1990) — previously filed as Exhibit 4(a) to Registration Statement on Form S-8, Registration No. 33-44208, filed with the Securities and Exchange Commission on November 26, 1991, and incorporated herein by reference.
 
       
   (k)(2).
  *   First Amendment to The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust Plan — previously filed as Exhibit 10(o)(2) to Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference.
 
       
   (l)(1).
  *   1990 Stock Option Plan — reference is made to Exhibit 4(a) of Registration Statement on Form S-8, Registration No. 33-37373, filed with the Securities and Exchange Commission on October 18, 1990, and incorporated herein by reference.
 
       
   (l)(2).
  *   First Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan — previously filed as Exhibit 10(q)(2) to Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference.
 
       
   (l)(3).
  *   Second Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan — previously filed as Exhibit 10(n)(3) to Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference.

22


         
   (l)(4).
  *   Third Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan — previously filed as Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference.
 
       
   (l)(5).
  *   Fourth Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan — previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference.
 
       
   (l)(6).
  *   Fifth Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan — previously filed as Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference.
 
       
   (m)(1).
  *   Amended and Restated 1994 Stock Option Plan — previously filed as Exhibit 10(r) to Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference.
 
       
   (m)(2).
  *   First Amendment to Huntington Bancshares Incorporated 1994 Stock Option Plan — previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference.
 
       
   (m)(3).
  *   First Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan — previously filed as Exhibit 10(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference.
 
       
   (m)(4).
  *   Second Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan — previously filed as Exhibit 10(d) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference.
 
       
   (m)(5).
  *   Third Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan — previously filed as Exhibit 10(e) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference.
 
       
   (n)(1).
  *   Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan — previously filed as Exhibit 10(r) to Quarterly Report 10-Q for the quarter ended March 31, 2001, and incorporated herein by reference.
 
       
   (n)(2).
  *   First Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan — previously filed as Exhibit 10(h) to Quarterly Report 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference.
 
       
   (n)(3).
  *   Second Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan — previously filed as Exhibit 10(i) to Quarterly Report 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference.
 
       
   (o).
  *   Huntington Bancshares Incorporated 2004 Stock and Long-Term Incentive Plan — previously filed as Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference.
 
       
   (p).
  *   Employment Agreement, dated February 15, 2004, between Huntington Bancshares Incorporated and Thomas E. Hoaglin — previously filed as Exhibit 10(n) to Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference.

23


         
   (q).
  *   Letter Agreement between Huntington Bancshares Incorporated and James W. Nelson, acknowledged and agreed to by Mr. Nelson on February 14, 2005 — previously filed as Exhibit 99.2 to Current Report on Form 8-K dated February 14, 2005, and incorporated herein by reference.
 
       
   (r)
  *   Huntington Investment and Tax Savings Plan — reference is made to Exhibit 4(a) of Post-effective Amendment No. 1 to Registration Statement on Form S-8, Registration 33-46327, previously filed with the Securities and Exchange Commission on April 1, 1998.
 
       
   (s)(1).
  *   Huntington Bancshares Incorporated Employee Stock Incentive Plan (incorporating changes made by first amendment to Plan) – reference is made to Exhibit 4(a) of Registration Statement on Form S-8, Registration 333-75032, previously filed with the Securities and Exchange Commission on December 13, 2001.
 
       
   (s)(2).
 
  *   Second Amendment to Huntington Bancshares Incorporated Employee Stock Incentive Plan — previously filed as Exhibit 10(s) to Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.
 
       
   (t).
  *   Performance criteria and potential awards for executive officers for fiscal year 2005 under the Management Incentive Plan and for a long-term incentive award cycle beginning on January 1, 2005 and ending on December 31, 2007 under the 2004 Stock and Long-Term Incentive Plan, as set forth in a Current Report on Form 8-K dated February 15, 2005, and incorporated herein by reference.
 
       
12.
      Ratio of Earnings to Fixed Charges.
 
       
13.
      Portions of Huntington’s 2004 Annual Report to Shareholders.
 
       
14.
      Code of Business Conduct and Ethics, adopted January 14, 2003 and restated on January 1, 2005, is available on Huntington’s website at http://www.investquest.com/iq/h/hban/main/cg/cg.htm#top.
 
       
21.
      Subsidiaries of the Registrant.
 
       
23. (a).
      Consent of Deloitte & Touche LLP, Independent Auditors.
 
       
23. (b).
      Consent of Ernst & Young LLP, Independent Auditors.
 
       
24
      Power of Attorney.
 
       
31. (a).
      Sarbanes-Oxley Act 302 Certification – Chief Executive Officer.
 
       
31. (b).
      Sarbanes-Oxley Act 302 Certification – Chief Financial Officer.
 
       
32. (a).
      Sarbanes-Oxley Act 906 Certification — Chief Executive Officer.
 
       
32. (b).
      Sarbanes-Oxley Act 906 Certification — Chief Financial Officer.
 
       
99. (a).
      Opinion of Ernst & Young LLP, Independent Auditors.
 
       
99. (b).
      Written Agreement between Huntington National Bank and the Office of the Comptroller of the Currency dated February 28, 2005, as set forth in a Current Report on Form 8-K dated March 2, 2005, and incorporated herein by reference.
 
       
99. (c).
      Written Agreement between Huntington Bancshares Incorporated and the Federal Reserve Bank of Cleveland dated February 28, 2005, as set forth in a Current Report on Form 8-K dated March 2, 2005, and incorporated herein by reference.


*   Denotes management contract or compensatory plan or arrangement.

24


 
 
 

 

Exhibit 10(e).

Schedule Identifying Material Details of
Executive Agreements Substantially Similar to Exhibit 10(a)
 

     
Name   Effective Date
 
   
Ronald C. Baldwin
  May 16, 2001
Thomas E. Hoaglin
  February 15, 2001
Michael J. McMennamin
  November 14, 2000
 

Schedule Identifying Material Details of
Executive Agreements Substantially Similar to Exhibit 10(b)

     
Name   Effective Date
 
   
Daniel B. Benhase
  August 16, 2000
Richard A. Cheap
  May 4, 1998
Mary W. Navarro
  July 16, 2002
Nicholas G. Stanutz
  February 26, 2002

Schedule Identifying Material Details of
 
Executive Agreements Substantially Similar to Exhibit 10(c)

     
Name   Effective Date
 
   
James W. Nelson
  November 9, 2004

Schedule Identifying Material Details of
Executive Agreements Substantially Similar to Exhibit 10(d)

     
Name   Effective Date
 
   
Donald R. Kimble, Jr.
  July 14, 2004

 
 
 

 

Exhibit 12

Ratio of Earnings to Fixed Charges

                                         
    Twelve Months Ended December 31,  
(in thousands of dollars)   2004     2003     2002     2001     2000  
 
 
                                       
Earnings:
                                       
 
                                       
Income before taxes
  $ 552,666     $ 523,987     $ 522,705     $ 95,477     $ 448,454  
 
Add: Fixed charges, excluding interest on deposits
    191,648       179,903       169,788       299,872       398,214  
 
Earnings available for fixed charges, excluding interest on deposits
    744,314       703,890       692,493       395,349       846,668  
Add: Interest on deposits
    257,099       288,271       385,733       654,056       782,076  
 
Earnings available for fixed charges, including interest on deposits
  $ 1,001,413     $ 992,161     $ 1,078,226     $ 1,049,405     $ 1,628,744  
 
 
                                       
Fixed Charges:
                                       
Interest expense, excluding interest on deposits
  $ 178,842     $ 168,499     $ 157,888     $ 285,445     $ 383,997  
Interest factor in net rental expense
    12,806       11,404       11,900       14,427       14,217  
 
Total fixed charges, excluding interest on deposits
    191,648       179,903       169,788       299,872       398,214  
Add: Interest on deposits
    257,099       288,271       385,733       654,056       782,076  
 
Total fixed charges, including interest on deposits
  $ 448,747     $ 468,174     $ 555,521     $ 953,928     $ 1,180,290  
 
 
                                       
Ratio of Earnings to Fixed Charges
                                       
Excluding interest on deposits
    3.88 x       3.91 x       4.08 x       1.32 x       2.13 x  
Including interest on deposits
    2.23 x       2.12 x       1.94 x       1.10 x       1.38 x  

 
 
 

 

Exhibit 13
S ELECTED F INANCIAL D ATA HUNTINGTON BANCSHARES INCORPORATED

Table 1 — Selected Financial Data

                                           
Year Ended December 31,

(in thousands of dollars, except per share amounts) 2004 2003 2002 2001 2000

 
Interest income
  $ 1,347,315     $ 1,305,756     $ 1,293,195     $ 1,654,789     $ 1,833,388  
 
Interest expense
    435,941       456,770       543,621       939,501       1,163,278  

Net interest income
    911,374       848,986       749,574       715,288       670,110  
 
Provision for credit losses
    55,062       163,993       194,426       257,326       61,464  

Net interest income after provision for credit losses
    856,312       684,993       555,148       457,962       608,646  

 
Operating lease income
    287,091       489,698       657,074       691,733       623,835  
 
Service charges on deposit accounts
    171,115       167,840       153,564       165,012       161,426  
 
Securities gains
    15,763       5,258       4,902       723       37,101  
 
Gain on sales of automobile loans
    14,206       40,039                    
 
Gain on sale of branch offices
          13,112                    
 
Gain on sale of Florida operations
                182,470              
 
Merchant Services gain
                24,550              
 
Other non-interest income
    330,423       353,206       319,144       342,474       300,840  

Total non-interest income
    818,598       1,069,153       1,341,704       1,199,942       1,123,202  

 
Personnel costs
    485,806       447,263       418,037       454,210       396,230  
 
Operating lease expense
    236,478       393,270       518,970       558,626       494,800  
 
Restructuring reserve (releases) charges
    (1,151 )     (6,666 )     48,973       79,957          
 
Loss on early extinguishment of debt
          15,250                    
 
Other non-interest expense
    401,111       381,042       388,167       469,634       392,101  

Total non-interest expense
    1,122,244       1,230,159       1,374,147       1,562,427       1,283,131  

Income before income taxes
    552,666       523,987       522,705       95,477       448,717  
 
Provision (benefit) for income taxes
    153,741       138,294       198,974       (39,319 ) (6)     126,299  

Income before cumulative effect of change in accounting principle
    398,925       385,693       323,731       134,796       322,418  
Cumulative effect of change in accounting principle, net of tax (1)
          (13,330 )                  

Net income
  $ 398,925     $ 372,363     $ 323,731     $ 134,796     $ 322,418  

Income before cumulative effect of change in accounting
principle per common share — basic
    $1.74       $1.68       $1.34       $0.54       $1.30  
Net Income per common share — basic
    1.74       1.62       1.34       0.54       1.30  
Income before cumulative effect of change in accounting principle per common share — diluted
    1.71       1.67       1.33       0.54       1.29  
Net Income per common share — diluted
    1.71       1.61       1.33       0.54       1.29  
Cash dividends declared
    0.75       0.67       0.64       0.72       0.76  
 
Balance sheet highlights
                                       

Total assets (period end) (2)
  $ 32,565,497     $ 30,519,326     $ 27,539,753     $ 28,458,769     $ 28,534,567  
Total long-term debt (period end) (3)
    6,326,885       6,807,979       4,246,801       2,739,332       3,388,126  
Total shareholders’ equity (period end)
    2,537,638       2,275,002       2,189,793       2,341,897       2,335,229  
Average long-term debt (3)
    6,650,367       5,816,660       3,613,527       3,429,480       4,017,584  
Average shareholders’ equity
    2,374,137       2,196,348       2,238,761       2,330,968       2,191,788  
Average total assets (2)
    31,432,746       28,971,701       26,063,281       28,126,386       28,589,244  
 
Key ratios and statistics
                                       

Margin analysis — as a % of average earnings assets
                                       
 
Interest income (4)
    4.89 %     5.35 %     6.23 %     7.58 %     8.13 %
 
Interest expense
    1.56       1.86       2.61       4.29       5.13  

Net interest margin (4)
    3.33 %     3.49 %     3.62 %     3.29 %     3.00 %

Return on average total assets
    1.27 %     1.29 %     1.24 %     0.48 %     1.13 %
Return on average total shareholders’ equity
    16.8       17.0       14.5       5.8       14.7  
Efficiency ratio (5)
    65.0       63.9       65.6       79.2       70.5  
Dividend payout ratio
    43.9       41.6       48.1       133.3       58.9  
Average shareholders’ equity to average assets (2)
    7.55       7.58       8.59       8.29       7.67  
Effective tax rate
    27.8       26.4       38.1       (41.2 ) (6)     28.1  
Tangible equity to asset (period end) (7)
    7.18       6.79       7.22       5.86       5.69  
Tier 1 leverage ratio
    8.42       7.98       8.51       7.16       6.85  
Tier 1 risk-based capital ratio (period end)
    9.08       8.53       8.34       7.02       7.13  
Total risk-based capital ratio (period end)
    12.48       11.95       11.25       10.07       10.29  
 
Other data
                                       

Full-time equivalent employees
    7,812       7,983       8,177       9,743       9,693  
Domestic banking offices
    342       338       343       481       508  

(1)  Due to the adoption of FASB Interpretation No. 46 for variable interest entities.
 
(2)  Period end total assets and average total assets were restated for prior periods due to the reclass of “Allowance for Unfunded Commitments and LOC”, from Allowance for loan and lease losses to the liability section of the balance sheet.
 
(3)  Includes Federal Home Loan Bank advances, other long-term debt, and subordinated notes.
 
(4)  On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(5)  Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains.
 
(6)  Reflects a $32.5 million reduction related to the issuance of $400 million REIT subsidiary preferred stock, of which $50 million was sold to the public.
 
(7)  Total equity minus intangible assets divided by total assets minus intangible assets.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION HUNTINGTON BANCSHARES INCORPORATED

AND R ESULTS OF O PERATIONS

INTRODUCTION

Huntington Bancshares Incorporated (Huntington or the Company) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, and discount brokerage services, as well as reinsuring credit life and disability insurance, and selling other insurance and financial products and services. Huntington’s banking offices are located in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Certain activities are also conducted in other states including Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, Pennsylvania, and Tennessee. Huntington has a foreign office in the Cayman Islands and a foreign office in Hong Kong. The Huntington National Bank (the Bank), organized in 1866, is Huntington’s only bank subsidiary.

The following discussion and analysis provides investors and others with information that Management believes to be necessary for an understanding of Huntington’s financial condition, changes in financial condition, results of operations, and cash flows, and should be read in conjunction with the financial statements, notes, and other information contained in this report.

The reader should note the following discussion is divided into key segments:

  –  INTRODUCTION  — Provides overview comments on important matters including risk factors, the Securities and Exchange Commission (SEC) investigation and banking regulatory agreements, and critical accounting policies and use of significant estimates. These are essential for understanding the Company’s performance and prospects.
 
  –  DISCUSSION OF RESULTS  — Reviews financial performance from a consolidated perspective. It also includes a Significant Factors Influencing Financial Performance Comparisons section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed in this section.
 
  –  RISK MANAGEMENT  — Discusses credit and market risks, including how these risks are managed, as well as performance trends. It also includes a discussion of liquidity policies, how funding is managed, 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 classifications.
 
  –  LINES OF BUSINESS DISCUSSION  — Provides an overview of financial performance for each major line of business and provides additional discussion of trends underlying consolidated financial performance.
 
  –  RESULTS FOR THE FOURTH QUARTER  — Provides a discussion of results for the 2004 fourth quarter compared with the year-earlier quarter.

A reading of each section is important for investors and others to achieve a full understanding of the nature of the Company’s financial performance and prospects.

Forward-Looking Statements

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements about Huntington. These include descriptions of products or services, plans or objectives of Management for future operations, including any pending acquisitions, and forecasts of revenues, earnings, cash flows, or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.

By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth under the heading “Business Risks” included in Item 1 of Huntington’s Annual Report on Form 10-K for the year ended December 31, 2004, and other factors described in this report and from time-to-time in other filings with the SEC.

Management encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. Huntington assumes 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.

Risk Factors

Huntington, like other financial companies, is subject to a number of risks, many of which are outside of Management’s control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1)  credit risk , which is the

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risk that loan and lease customers or other counter parties will be unable to perform their contractual obligations, (2)  market risk , which is the risk that changes in market rates and prices will adversely affect Huntington’s financial condition or results of operation, (3)  liquidity risk , which is the risk that Huntington and / or the Bank will have insufficient cash or access to cash to meet operating needs, and (4)  operational risk , which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. More information on risk is set forth under the heading “Business Risks” included in Item 1 of Huntington’s Annual Report on Form 10-K for the year ended December 31, 2004. The description of Huntington’s business contained in Item 1 of its Annual Report on Form 10-K, while not all-inclusive, discusses a number of business risks that, in addition to the other information in this report, readers should carefully consider.

Securities and Exchange Commission Formal Investigation and Formal Regulatory Supervisory Agreements

SEC FORMAL INVESTIGATION

On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff was conducting a formal investigation into certain financial accounting matters relating to fiscal years 2002 and earlier and certain related disclosure matters. On August 9, 2004, Huntington announced the Company was in negotiations with the staff of the SEC regarding a settlement of the formal investigation and disclosed that it expected that a settlement of this matter, which is subject to approval by the SEC, would involve the entry of an order requiring, among other possible matters, Huntington to comply with various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933, along with the imposition of a civil money penalty. At December 31, 2004, the Company had reserves related to the expectation of the imposition of a civil money penalty, which the Company viewed as sufficient given negotiations with the SEC. However, no assurances can be made that any assessed penalty may not exceed this amount.

Management continues to have ongoing discussions with the staff of the SEC regarding resolution of this matter. The final results of the investigation, however, are not known at the time of this filing and therefore, the impact to Huntington’s financial condition, results of operations, and cash flows is not known.

FORMAL REGULATORY SUPERVISORY AGREEMENTS

On March 1, 2005, Huntington announced that it had entered into formal written agreements with its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance its corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. They call for independent third-party reviews, as well as the submission of written plans and progress reports by management. These written agreements remain in effect until terminated by the banking regulators.

Management has been working with its banking regulators over the past several months and has been taking actions and devoting significant resources to address all of the issues raised. Management believes that the changes that it has already made, and is in the process of making, will address these issues fully and comprehensively. No assurances, however, can be provided as to the ultimate timing or outcome of these matters.

Critical Accounting Policies and Use of Significant Estimates

Huntington’s 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 Management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. Note 1 of the Notes to Consolidated Financial Statements included in this report lists significant accounting policies used by Management in the development and presentation of Huntington’s 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 that are necessary for an understanding and evaluation of the organization and its 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. Management has identified the following as the most significant accounting estimates and their related application. 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  — At December 31, 2004, the allowances for credit losses (ACL) totaled $304.4 million and represented the sum of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS HUNTINGTON BANCSHARES INCORPORATED

letters of credit (AULC). The determination of the amount of the ACL is based on Management’s current judgments regarding the quality of the loan portfolio, and considers all known relevant internal and external factors that affect loan collectibility. The ACL represents Management’s estimate as to the level of reserves appropriate to absorb probable inherent credit losses in the loan and lease portfolio, as well as unfunded loan commitments. Management believes 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 Management estimates, additional provision for credit losses could be required, which could adversely affect earnings or financial performance in future periods. At December 31, 2004, the ACL as a percent of total loans and leases was 1.29%. Based on the December 31, 2004 balance sheet, a 10 basis point increase in this ratio to 1.39% would require $23.6 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted 2004 net income by approximately $15.3 million or $0.07 per share. A discussion about the process used to estimate the ACL is presented in the Credit Risk section of Management’s Discussion and Analysis in this report.

–  MORTGAGE LOAN SERVICING RIGHTS  — At December 31, 2004, there were $77.1 million of mortgage servicing rights included in other assets. No active market exists with observable market prices for these financial instruments. To estimate fair values, Management estimates future prepayments on the loans serviced for others, future ancillary revenue, future costs to service these assets, adequate compensation for servicing the loans, and the appropriate discount rate to use. Note 5 of the Notes to Consolidated Financial Statements contains an analysis of the impact to the fair value of mortgage servicing rights resulting from changes in the estimates used by Management. A discussion about the process used to estimate the fair value of mortgage servicing rights is presented in the Non-Interest Income section of Management’s Discussion and Analysis in this report.
 
At December 31, 2004, the assumptions and the sensitivity of the current fair value of the Huntington’s mortgage servicing rights to immediate 10% and 20% adverse changes in those assumptions were:

                         
 
Pre-tax decline in
fair value due to

10%
adverse 20%
(in millions of dollars) Actual change adverse

Constant pre-payment rate
    21.70 %   $ (4.8 )   $ (9.1 )
Discount rate
    8.85       (2.2 )     (4.2 )

–  LEASE RESIDUAL VALUES UNDERLYING OPERATING LEASES  — At December 31, 2004, a total of $403.4 million of its investment in vehicles under operating leases represented Management’s estimate of the aggregate of each vehicle’s residual value, which is the predicted value of the vehicle at the end of the lease term. The Company depreciates the vehicles it leases under operating lease accounting to this residual value. The depreciation is recognized on a straight-line basis over the life of the lease. On a quarterly basis, Management reviews the expected future residual value losses for leased automobiles taking into consideration the insurance policy caps on insured losses. As a result of that review, Management determines how much impairment, if any, needs to be recognized on these operating leases and whether the residual value should be adjusted prospectively. When the estimate of this residual value declines, the Company increases its rate of depreciation to depreciate the vehicle to the new estimated residual value by the end of the lease term.

    To manage this risk, the Company purchased residual value insurance. The Company currently has one insurance policy in effect, covering operating leases originated between October 2000 and April 2002. This policy covers $298.0 million of residual values but has a $50 million cap on losses that it will cover. Based on current vehicle values, Management estimates total claims against this policy will be $11-$25 million, well below the cap. A total of $105.1 million of residual values relate to originations prior to October 2000 and are no longer covered by insurance. The insurance policy covering the residual values of these leases had a $120 million cap and claims under that policy have exceeded this cap. Management estimates that future losses from this portfolio could be $17-$28 million, of which $10 million has already been recognized through additional depreciation. Further discussion about the process used to estimate the risk of residual value losses on operating leases is presented in the Market Risk and Operating Lease Assets sections of Management’s Discussion and Analysis in this report. Notes 1 and 7 of the Notes to Consolidated Financial Statements included in this report explain the accounting for operating lease assets in more detail.

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Table 2 — Selected Annual Income Statements

                                                                           
Year Ended December 31,

Change from 2003 Change from 2002


(in thousands, except per share amounts) 2004 Amount % 2003 Amount % 2002 2001 2000

 
Interest income
  $ 1,347,315     $ 41,559       3.2 %   $ 1,305,756     $ 12,561       1.0 %   $ 1,293,195     $ 1,654,789     $ 1,833,388  
 
Interest expense
    435,941       (20,829 )     (4.6 )     456,770       (86,851 )     (16.0 )     543,621       939,501       1,163,278  

Net interest income
    911,374       62,388       7.3       848,986       99,412       13.3       749,574       715,288       670,110  
 
Provision for credit losses
    55,062       (108,931 )     (66.4 )     163,993       (30,433 )     (15.7 )     194,426       257,326       61,464  

Net interest income after provision for credit losses
    856,312       171,319       25.0       684,993       129,845       23.4       555,148       457,962       608,646  

 
Operating lease income
    287,091       (202,607 )     (41.4 )     489,698       (167,376 )     (25.5 )     657,074       691,733       623,835  
 
Service charges on deposit accounts
    171,115       3,275       2.0       167,840       14,276       9.3       153,564       165,012       161,426  
 
Trust services
    67,410       5,761       9.3       61,649       (402 )     (0.6 )     62,051       60,298       53,613  
 
Brokerage and insurance income
    54,799       (3,045 )     (5.3 )     57,844       (4,265 )     (6.9 )     62,109       75,013       60,530  
 
Bank owned life insurance income
    42,297       (731 )     (1.7 )     43,028       (95 )     (0.2 )     43,123       41,123       39,544  
 
Other service charges and fees
    41,574       128       0.3       41,446       (1,442 )     (3.4 )     42,888       48,217       43,883  
 
Mortgage banking
    32,296       (25,884 )     (44.5 )     58,180       26,147       81.6       32,033       54,518       32,772  
 
Securities gains
    15,763       10,505       N.M.       5,258       356       7.3       4,902       723       37,101  
 
Gain on sales of automobile loans
    14,206       (25,833 )     (64.5 )     40,039       40,039       N.M.                    
 
Gain on sale of branch offices
          (13,112 )     N.M.       13,112       13,112       N.M.                    
 
Gain on sale of Florida operations
                            (182,470 )     N.M.       182,470              
 
Merchant services gain
                            (24,550 )     N.M.       24,550              
 
Other
    92,047       988       1.1       91,059       14,119       18.4       76,940       63,305       70,498  

Total non-interest income
    818,598       (250,555 )     (23.4 )     1,069,153       (272,551 )     (20.3 )     1,341,704       1,199,942       1,123,202  

 
Personnel costs
    485,806       38,543       8.6       447,263       29,226       7.0       418,037       454,210       396,230  
 
Operating lease expense
    236,478       (156,792 )     (39.9 )     393,270       (125,700 )     (24.2 )     518,970       558,626       494,800  
 
Net occupancy
    75,941       13,460       21.5       62,481       2,942       4.9       59,539       76,449       75,197  
 
Outside data processing and other services
    72,115       5,997       9.1       66,118       (1,250 )     (1.9 )     67,368       69,692       62,011  
 
Equipment
    63,342       (2,579 )     (3.9 )     65,921       (2,402 )     (3.5 )     68,323       80,560       78,069  
 
Professional services
    36,876       (5,572 )     (13.1 )     42,448       9,363       28.3       33,085       32,862       22,721  
 
Marketing
    26,489       (1,001 )     (3.6 )     27,490       (421 )     (1.5 )     27,911       31,057       34,884  
 
Telecommunications
    19,787       (2,192 )     (10.0 )     21,979       (682 )     (3.0 )     22,661       27,984       26,225  
 
Printing and supplies
    12,463       (546 )     (4.2 )     13,009       (2,189 )     (14.4 )     15,198       18,367       19,634  
 
Amortization of intangibles
    817       1       0.1       816       (1,203 )     (59.6 )     2,019       41,225       39,207  
 
Restructuring reserve (releases) charges
    (1,151 )     5,515       (82.7 )     (6,666 )     (55,639 )     N.M.       48,973       79,957        
 
Loss on early extinguishment of debt
          (15,250 )     N.M.       15,250       15,250       N.M.                    
 
Other
    93,281       12,501       15.5       80,780       (11,283 )     (12.3 )     92,063       91,438       34,153  

Total non-interest expense
    1,122,244       (107,915 )     (8.8 )     1,230,159       (143,988 )     (10.5 )     1,374,147       1,562,427       1,283,131  

Income before income taxes
    552,666       28,679       5.5       523,987       1,282       0.2       522,705       95,477       448,717  
 
Provision (benefit) for income taxes  (3)
    153,741       15,447       11.2       138,294       (60,680 )     (30.5 )     198,974       (39,319 )     126,299  

Income before cumulative effect of change in accounting principle
    398,925       13,232       3.4       385,693       61,962       19.1       323,731       134,796       322,418  
Cumulative effect of change in accounting principle, net of tax (1)
          13,330       N.M.       (13,330 )     (13,330 )     N.M.                    

Net income
  $ 398,925     $ 26,562       7.1 %   $ 372,363     $ 48,632       15.0 %   $ 323,731     $ 134,796     $ 322,418  

Average common shares — basic
    229,913       512       0.2 %     229,401       (12,878 )     (5.3 )%     242,279       251,078       248,709  
Average common shares — diluted
    233,856       2,274       1.0       231,582       (12,430 )     (5.1 )     244,012       251,716       249,570  
 
Per common share:
                                                                       
 
Income before cumulative effect of change in accounting principle — basic
    $1.74       $0.06       3.6 %     $1.68       $0.34       25.4 %     $1.34       $0.54       $1.30  
 
Net income — basic
    1.74       0.12       7.4       1.62       0.28       20.9       1.34       0.54       1.30  
 
 
Income before cumulative effect of change in accounting principle — diluted
    1.71       0.04       2.4       1.67       0.34       25.6       1.33       0.54       1.29  
 
Net income — diluted
    1.71       0.10       6.2       1.61       0.28       21.1       1.33       0.54       1.29  
 
 
Cash dividends declared
    0.75       0.08       11.9       0.67       0.03       4.7       0.64       0.72       0.76  
 
Net interest income — fully taxable equivalent — FTE
                                                                       
Net interest income
  $ 911,374     $ 62,388       7.3 %   $ 848,986     $ 99,412       13.3 %   $ 749,574     $ 715,288     $ 670,110  
Tax equivalent adjustment (2)
    11,653       1,969       20.3       9,684       4,479       86.1       5,205       6,352       8,310  

Net interest income — FTE
  $ 923,027     $ 64,357       7.5 %   $ 858,670     $ 103,891       13.8 %   $ 754,779     $ 721,640     $ 678,420  

N.M., not a meaningful value.

(1)  Due to adoption of FASB Interpretation No. 46 for variable interest entities.
 
(2)  Calculated assuming a 35% tax rate.
 
(3)  2001 reflects a $32.5 million reduction related to the insurance of $400 million REIT subsidiary preferred stock, of which $50 million was sold to the public.

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DISCUSSION OF RESULTS

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

Summary

Huntington reported net income in 2004 of $398.9 million, or $1.71 per common share, up 7% and 6%, respectively, from 2003. Earnings in 2003 were $372.4 million, or $1.61 per common share, up from $323.7 million, or $1.33 per common share, in 2002. The returns on average total shareholders’ equity (ROE) for 2004, 2003, and 2002 were 16.8%, 17.0%, and 14.5%, respectively, with returns on average total assets (ROA) of 1.27%, 1.29%, and 1.24%, respectively. (See Tables 1 and 2.)

The period from 2001 to 2004 was one of significant transformation for the Company. During 2001, Management initiated a comprehensive strategic refocusing plan to improve competitiveness and long-term financial performance, which influenced results throughout this period. Actions taken included hiring new executive and other managerial leadership, changing the basic business model to one of local decision-making and refocusing on Midwest markets, as well as other activities such as reducing the overall credit risk profile and improving credit quality performance, all with the objective of improving overall financial performance. In 2001, the quarterly common stock dividend was reduced 20%, but reflecting the sufficient progress made, the dividend was increased 9% in 2003, and then another 14% in 2004, which restored the quarterly dividend to the level prior to the 2001 reduction. In 2003, a formal investigation was initiated by the SEC, which awaits resolution. (See the Significant Factors Influencing Financial Performance Comparisons section for a full discussion of the financial impact of strategic initiatives and other factors influencing financial performance and comparisons of financial results between reporting periods, as well as the SEC Formal Investigation and Formal Regulatory Supervisory Agreements sections.)

Earnings per common share in 2002 were $1.33, up from $0.54 in 2001. Earnings in 2002 were impacted by the completion of the sale of the Florida banking operations and restructuring of the Company’s Merchant Services business, both of which resulted in significant gains. Capital from these gains was used to repurchase 9% of common shares outstanding and to invest in a number of activities including improvements in customer service technology and the purchases of a small money management firm and a niche equipment leasing company. The Florida insurance operation was also sold, though this had no significant earnings impact. However, earnings were negatively impacted by additional restructuring charges as the 2001 strategic initiatives continued to be implemented. Average loans and deposits declined 4% and 11%, respectively, reflecting the impact of the sold Florida banking operations. The net interest margin declined during the second half of the year, reflecting a significant reduction in market interest rates, as interest rates on earning assets, both loans and investment securities, declined more rapidly than deposit rates. The yield on mortgage-backed securities declined sharply as the lower level of interest rates resulted in higher prepayments on the underlying mortgages, with the resultant cash flow reinvested in lower-yielding earning assets. Earnings benefited by a reduction in the provision for credit losses as the level of non-performing assets (NPAs) at year end declined 40% from the end of 2001.

Earnings per common share in 2003 were $1.61, up 21% from $1.33 reported for the prior year. Earnings benefited by growth in average loans and deposits of 15% and 6%, respectively. This benefit was partially offset by a decline in the net interest margin reflecting the continuation of pressure on the net interest margin and specifically, mortgage-related earning asset yields, as interest rates continued to decline through mid-year. Some of this pressure was relieved in the second half of the year as interest rates increased. Late in the year, a portion of high cost, long-term debt was repaid. This resulted in a charge to earnings, but lowered funding costs in future periods. In addition, 2003 reflected the release of certain restructuring reserves as the costs of implementing the strategic decisions made in 2001, and carried out through 2002 and 2003, were completed. The provision for credit losses declined as credit quality trends improved significantly. Loan concentrations continued to be lowered, aided by the sales of automobile loans and under-performing middle market commercial and industrial (C&I) and middle market commercial real estate (CRE) loans, including NPAs, among other strategies. NPAs ended the year near the lowest level in many years.

Earnings per common share in 2004 were $1.71, up 6% from $1.61 reported for the prior year. Earnings again benefited from strong growth in average loans and deposits of 11% and 7%, respectively. Once more, this benefit was partially offset by a decline in the net interest margin reflecting the continuation of overall declines in interest rates during the first half of the year, though there were periods of interest rate volatility. Importantly, the net interest margin stabilized in the second half of the year, such that more of the positive impact of loan growth in that period resulted in net interest income growth. A reduction in loan loss provision expense significantly benefited earnings. This reflected the maintenance of strong credit quality performance, as well as improved credit quality trends due to the continued reduction in the concentration of higher-risk loans and increase in lower-risk residential mortgages and

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home equity loans. It also reflected an improved economic outlook that resulted in a reduction in the relative level of the ALLL. Among other factors that impacted earnings negatively, were SEC-related expenses and accruals, as well as a property lease impairment in the fourth quarter of the year.

Results of Operations

Significant Factors Influencing Financial Performance Comparisons

Earnings comparisons among the three years ended December 31, 2004, are impacted by a number of factors, some related to changes in the economic and competitive environment, while others reflected specific Management strategies or changes in accounting practices. Those key factors are summarized below.

    1.  AUTOMOBILE LEASES ORIGINATED BEFORE MAY 2002 ARE ACCOUNTED FOR AS OPERATING LEASES  — Automobile leases originated before May 2002 are accounted for using the operating lease method of accounting because they do not qualify as direct financing leases. Operating leases are carried in other assets with the related rental income, other revenue, and credit recoveries reflected as operating lease income, a component of non-interest income. Under this accounting method, depreciation expenses, as well as other costs and charge-offs, are reflected as operating lease expense, a component of non-interest expense. With no new operating leases originated since April 2002, the operating lease assets have declined rapidly and will eventually become immaterial, as will the related operating lease income and expense. However, since operating lease income and expense represented a significant percentage of total non-interest income and expense, respectively, throughout these reporting periods, their downward trend influenced total non-interest income and non-interest expense trends.

    In contrast, automobile leases originated since April 2002 are accounted for as direct financing leases, an interest-bearing asset included in total loans and leases with the related income reflected as interest income and included in the calculation of the net interest margin. Credit charge-offs and recoveries are reflected in the ALLL, with related changes in the ALLL reflected in provision for credit losses. The relative newness and rapid growth of the direct financing lease portfolio has resulted in higher reported automobile lease growth rates than in a more mature portfolio. To better understand overall trends in automobile lease exposure, it is helpful to compare trends in the combined total of direct financing leases plus operating leases. (See Table 6.)

    2.  TRANSITION FROM A WEAK ECONOMIC ENVIRONMENT IN 2002 AND 2003 TO A SLOWLY RECOVERING ECONOMIC ENVIRONMENT IN 2004  — While difficult to quantify, Management believes the weak economic environment resulted in continued weak demand for C&I loans. This, when combined with strategies to lower the overall credit risk profile of the Company (see Factor 4 below) , contributed to generally declining C&I loans throughout this period until the second half of 2004.
 
    3.  DECLINING INTEREST RATES IN 2002 AND 2003 WITH GENERALLY INCREASING, THOUGH FLUCTUATING, INTEREST RATES IN 2004  — Interest rates impacted, among other factors, loan and deposit growth, the net interest margin, and the valuation of mortgage servicing rights (MSRs) and investment securities.

  –  The historically low interest rate environment of the last three years, despite a general increase in short-term rates during 2004, resulted in strong demand and growth in residential real estate, home equity, and CRE loans throughout this period. Mortgage banking revenue was also favorably impacted by significant mortgage origination activity most notably in 2003.
 
  –  As interest rates fell in 2003 to historically low levels, it became increasingly difficult to lower interest rates offered on deposit accounts commensurate with the overall decline in yields on earning assets. This created an extremely competitive environment in which to grow deposits and contributed to the decline in the net interest margin throughout 2003. Though short-term interest rates increased generally throughout 2004, they nevertheless remained at historically low levels, and the market for deposits remained very competitive. As a result, deposit rates in 2004 increased thus dampening the expansion in the net interest margin.
 
  –  Since the second quarter of 2002, the Company generally has retained the servicing on mortgage loans it originates and sells in the secondary market. This servicing asset, referred to as an MSR, is an interest only strip. Huntington is typically paid 0.25%-0.35% of the loan balance to service the loans. The MSR represents the present value of expected future net servicing income for the loan. The MSR asset is valued quarterly at the lower of cost or market, with impairment of the asset, or recovery of prior temporary impairment, recorded in mortgage banking income. Expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease

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  when mortgage interest rates rise. Thus, as interest rates decline, less future income is expected and the value of MSRs decreases and results in an MSR temporary impairment when the valuation is less than the recorded book value. Should interest rates rise, the opposite may happen; i.e. prepayments slow and the value of the MSR increases, which may result in an MSR temporary impairment recovery. The Company recognizes any temporary impairments or recoveries through a valuation reserve, but records a direct write-down of the book value of its MSRs for other-than-temporary declines in valuation. Changes and fluctuations in interest rate levels between periods resulted in some periods reporting an MSR temporary impairment, with others reporting recoveries. Such swings in MSR valuations have significantly impacted mortgage banking income throughout this period. (See Tables 3 and 8.)
 
  –  The Company uses gains or losses on investment securities, and beginning in 2004 gains or losses and net interest income on trading account assets, to offset MSR temporary valuation changes. Valuation of trading and investment securities generally react to interest rate changes in an opposite direction compared with MSR valuations. However, such valuation changes are not always of the same magnitude. As a result, changes in interest rate levels that impacted MSR valuations also resulted in securities or trading gains or losses. As such, in quarters where an MSR temporary impairment is recognized, investment securities and/or trading account assets were sold resulting in a gain on sale, and vice versa. Investment securities gains or losses are reflected in the income statement in a single non-interest income line item, whereas trading gains or losses are a component of other non-interest income on the income statement. The earnings impact of the MSR valuation change and the combination of securities and/or trading gains/losses may not exactly offset due to, among other factors, the difference in the timing of when the MSR valuation is determined and recorded, compared with when the securities are sold and any gain or loss is recorded. (See Table 3.)

    4.  MANAGEMENT STRATEGIES TO LOWER THE OVERALL CREDIT RISK PROFILE OF THE BALANCE SHEET  — Throughout this period, certain strategies were implemented to lower the overall credit risk profile of the loan portfolio with the objective of lowering the volatility of earnings.

  –  Automobile Loan Sales

  One strategy has been to lower the credit exposure to automobile loans and leases to 20% or less of total credit exposure, as manifested through the sale of automobile loans. These sales of higher-rate, higher-risk loans impacted results in a number of ways including: lower growth rates in automobile, total consumer, and total company loans; the generation of gains reflected in non-interest income; lower net interest income than otherwise would be the case if the loans were not sold; and lower net interest margin. (See Table 3.)

  –  Reduction in Large Individual C&I and CRE Credits

  This strategy resulted in the reduction of shared national credits, as well as other, mostly C&I, loans. In addition, the Company sold and charged-off lower-quality C&I and CRE credits in 2003 and 2004. This strategy was a contributing factor in the declines in C&I loan balances, NPAs, and the ALLL. In certain periods, this strategy contributed to higher C&I net charge-offs.

    5.  ADOPTION OF FIN 46  — Effective July 1, 2003, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. The adoption of FIN 46 resulted in the consolidation of $1.0 billion of securitized automobile loans and a $13.3 million after-tax charge in the 2003 third quarter for the cumulative effect of a change in accounting principle. (See Tables 1, 2 and 3.)
 
    6.  SALE OF FLORIDA BANKING AND INSURANCE OPERATIONS AND MERCHANT SERVICES RESTRUCTURING  — In February 2002, the Company completed the sale of its Florida banking operations. This resulted in a $182.5 million gain being recorded in non-interest income. The Florida banking operations sale eliminated $2.8 billion of loans and $4.8 billion of deposits from the 2002 balance sheet, thus affecting related comparisons with 2003. The Company also completed the sale of its Florida insurance operations in the 2002 second quarter, with no significant earnings impact. Combined, the Florida banking and insurance operations reported a net loss from operations of $1.5 million in 2002. In addition, in 2002, the Company restructured its interest in Huntington Merchant Services, L.L.C. (HMS), which resulted in a $24.6 million gain being recorded to non-interest income. (See Table 3 and Note 27 of the Notes to Consolidated Financial Statements.)
 
    7.  CORPORATE RESTRUCTURING CHARGES (RELEASES)  — The 2001 strategic refocusing plan included the intent to sell the Florida banking and insurance operations, credit-related and other actions to strengthen the balance sheet and financial performance, and the consolidation of numerous non-Florida banking offices. As a result, non-interest expense in 2002 was higher than it otherwise would have been, as it included net restructuring charges of $49.0 million based on estimated costs associated with implementing these strategic initiatives. In contrast, 2003 and 2004 non-interest expense reflected releases of

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  $6.7 million and $1.2 million, respectively, of previously established reserves, which were no longer needed, and which lowered 2003 and 2004 non-interest expense. (See Table 3 and Note 26 of the Notes to Consolidated Financial Statements.)

    8.  SINGLE COMMERCIAL RECOVERY  — A single commercial credit recovery of $11.1 million in 2004 on a loan previously charged-off in 2002 favorably impacted the 2004 loan loss provision expense, as well as C&I, total commercial, and total net charge-offs for the year. (See Tables 3 and 16.)
 
    9.  GAIN ON THE SALE OF WEST VIRGINIA BANKING OFFICES  — In the 2003 third quarter, the Company sold four banking offices in West Virginia, which resulted in a $13.1 million gain. (See Tables 1, 2 and 3.)

  10.  SEC FORMAL INVESTIGATION-RELATED EXPENSES AND ACCRUALS  — On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff was conducting a formal investigation into certain financial accounting matters relating to fiscal years 2002 and earlier and certain related disclosure matters. On August 9, 2004, Huntington announced the Company was in negotiations with the staff of the SEC regarding a settlement of the formal investigation and disclosed that it expected that a settlement of this matter, which is subject to approval by the SEC, would involve the entry of an order requiring, among other possible matters, Huntington to comply with various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933, along with the imposition of a civil money penalty. At December 31, 2004, the Company had reserves related to the expectation of the imposition of a civil money penalty, which the Company viewed as sufficient given negotiations with the SEC. However, no assurances can be made that any assessed penalty may not exceed this amount.

Management continues to have ongoing discussions with the staff of the SEC regarding resolution of this matter. The final results of the investigation, however, are not known at the time of this filing and therefore, the impact to Huntington’s financial condition, results of operations, and cash flows is not known.
 
In connection with this investigation, $13.6 million of expenses and accruals were recorded in 2004, following $6.9 million of such costs in 2003. (See Table 3 and Note 22 of the Notes to Consolidated Financial Statements.)

  11.  UNIZAN ACQUISITION SYSTEM CONVERSION EXPENSES  — On January 27, 2004, Huntington announced the signing of a definitive agreement to acquire Unizan Financial Corp. (Unizan), a financial holding company based in Canton, Ohio. On June 16, 2004, Huntington announced that the closing of the Unizan merger would be delayed beyond the early July 2004 targeted date as the FRBC had informed the Company it was extending its merger application review period to coordinate further with the staff of the SEC regarding the SEC’s formal investigation and to complete its review of the Community Reinvestment Act aspects of the merger. On November 3, 2004, Huntington announced that it was negotiating a one-year extension of its pending merger agreement with Unizan. It was also announced that Huntington was withdrawing its current application with the FRBC to acquire Unizan and intends to resubmit the application for regulatory approval of the merger once Huntington has successfully resolved the pending SEC and banking regulatory concerns. On November 11, 2004, Huntington and Unizan jointly announced they had entered into an amendment to their January 26, 2004 merger agreement. The amendment extends the term of the agreement for one year from January 27, 2005 to January 27, 2006.

Management remains in active dialogue with the SEC and banking regulators concerning these and related matters and is working diligently to resolve them in a full and comprehensive manner. No assurances, however, can be provided as to the ultimate timing or outcome of these matters.
 
In the 2004 third and fourth quarters, the Company recorded certain integration planning and system conversion expenses, which totaled $3.6 million, related to this pending acquisition. (See Table 3 and Note 23 of the Notes to Consolidated Financial Statements.)

  12.  PROPERTY LEASE IMPAIRMENT  — As a result of the 2004 fourth quarter property valuation review, a $7.8 million property lease impairment was recognized. (See Table 3.)
 
  13.  LONG-TERM DEBT EXTINGUISHMENT  — In the fourth quarter of 2003, the Company prepaid $250 million of high-cost, repurchase agreements, resulting in a $15.3 million loss being recorded in non-interest expense. This debt, which carried an average rate of 4.98% and matured in 2006, was replaced by funding at significantly lower rates. (See Table 3 and Note 13 of the Notes to Consolidated Financial Statements.)
 
  14.  ONE-TIME ADJUSTMENT TO CONSOLIDATED SECURITIZATION  — In the 2003 third quarter, an automobile securitization trust was consolidated with the adoption of FIN 46. Related to the trust were two foreign companies that were also consolidated. In the 2004 fourth quarter, the Company learned of adjustments related to earnings that these entities had realized on the invested cash that remains offshore. Since the residual earnings offset the funding cost of this structure, this one-time funding cost adjustment lowered interest expense by $3.7 million in the fourth quarter. (See Table 3.)

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The following table quantifies the earnings impact of the significant factors noted in #3-14 above on the specified periods.  

Table 3 — Significant Items Influencing Earnings Performance Comparison (1)

                                                   
Year Ended December 31,

2004 2003 2002

(in thousands of dollars) Pre-tax EPS Pre-tax EPS Pre-tax EPS

Income before income taxes — GAAP
  $ 552,666             $ 523,987             $ 522,705          
Earnings per share, after tax
          $ 1.71             $ 1.61             $ 1.33  
 
Change from prior year — $
            0.10               0.28               0.79  
 
Change from prior year — %
            6.2 %             20.9 %             N.M. %

Favorable (unfavorable) impact:
                                               
SEC related expenses and accruals
  $ (13,597 )   $ (0.05 )   $ (6,859 )   $ (0.02 )   $     $  
Investment securities gains
    15,763       0.04       5,258       0.01       4,902       0.01  
Gain on sale of automobile loans
    14,206       0.04       40,039       0.11              
Single commercial credit recovery
    11,095       0.03                          
Property lease impairment
    (7,846 )     (0.02 )                        
Mortgage servicing right (MSR) temporary (impairment)
recovery net of hedge related gains
    (7,174 )     (0.02 )     14,957       0.04       (13,395 )     (0.04 )
One-time adjustment to consolidated securitization
    3,682       0.01                          
Unizan system conversion expense
    (3,610 )     (0.01 )                        
Restructuring releases (charges)
    1,151       N.M.       6,666       0.02       (48,973 )     (0.13 )
Cumulative effect of change in accounting principle (2)
                n/a       (0.06 )            
Gain on sale of branch offices
                13,112       0.04              
Long-term debt extinguishment
                (15,250 )     (0.04 )            
Loss from Florida operations
                            (2,329 )     (0.01 )
Gain on sale of Florida operations
                            182,470       0.25  
Merchant services gain
                            24,550       0.07  

N.M., not a meaningful value.

n/a, not applicable.

(1)  See Significant Factors Influencing Financial Performance section.
 
(2)  Only reflected in the income statement on an after tax basis of $13.3 million.

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Table 4 — Consolidated Average Balance Sheet and Net Interest Margin Analysis

                                                                                   
Average Balances

Change from 2003 Change from 2002
Fully taxable equivalent basis (1)

(in millions of dollars) 2004 Amount % 2003 Amount % 2002 2001 2000

Assets
                                                                       
Interest bearing deposits in banks
  $ 66     $ 29       78.4 %   $ 37     $ 4       12.1 %   $ 33     $ 7     $ 6  
Trading account securities
    105       91       N.M.       14       7       N.M.       7       25       15  
Federal funds sold and securities purchased under resale agreements
    319       232       N.M.       87       15       20.8       72       107       87  
Loans held for sale
    243       (321 )     (56.9 )     564       242       75.2       322       360       109  
Investment securities:
                                                                       
 
Taxable
    4,425       892       25.2       3,533       674       23.6       2,859       3,144       4,316  
 
Tax-exempt
    412       78       23.4       334       199       N.M.       135       174       273  

       
Total investment securities
    4,837       970       25.1       3,867       873       29.2       2,994       3,318       4,589  

Loans and leases: (6)
                                                                       
 
Commercial:
                                                                       
   
Middle market commercial and industrial
    4,456       (177 )     (3.8 )     4,633       (177 )     (3.7 )     4,810       5,075       4,938  
   
Middle market real estate:
                                                                       
     
Construction
    1,420       201       16.5       1,219       68       5.9       1,151       1,040       976  
     
Commercial
    1,922       122       6.8       1,800       130       7.8       1,670       1,522       1,380  

       
Total middle market commercial real estate
    3,342       323       10.7       3,019       198       7.0       2,821       2,562       2,356  

     
Small business commercial and industrial and commercial real estate
    2,003       216       12.1       1,787       145       8.8       1,642       2,574       2,526  

         
Total commercial
    9,801       362       3.8       9,439       166       1.8       9,273       10,211       9,820  

 
Consumer:
                                                                       
   
Automobile loans
    2,285       (975 )     (29.9 )     3,260       516       18.8       2,744       N.M.       N.M.  
   
Automobile leases
    2,192       769       54.0       1,423       971       N.M.       452       N.M.       N.M.  

     
Automobile loans and leases
    4,477       (206 )     (4.4 )     4,683       1,487       46.5       3,196       2,839       3,123  

   
Home equity (3)(5)
    4,187       746       21.7       3,441       412       13.6       3,029       3,334       2,921  
   
Residential mortgage (4)
    3,212       1,186       58.5       2,026       588       40.9       1,438       1,048       1,379  
   
Other loans (5)
    450       15       3.4       435       (46 )     (9.6 )     481       654       599  

         
Total consumer
    12,326       1,741       16.4       10,585       2,441       30.0       8,144       7,875       8,022  

Total loans and leases
    22,127       2,103       10.5       20,024       2,607       15.0       17,417       18,086       17,842  

Allowance for loan and lease losses
    (298 )     32       (9.7 )     (330 )     14       (4.1 )     (344 )     (286 )     (256 )

Net loans and leases
    21,829       2,135       10.8       19,694       2,621       15.4       17,073       17,800       17,586  

Total earning assets
    27,697       3,104       12.6       24,593       3,748       18.0       20,845       21,903       22,648  

Operating lease assets
    897       (800 )     (47.1 )     1,697       (905 )     (34.8 )     2,602       2,970       2,751  
Cash and due from banks
    843       69       8.9       774       17       2.2       757       912       1,008  
Intangible assets
    216       (2 )     (0.9 )     218       (75 )     (25.6 )     293       736       709  
All other assets
    2,078       58       2.9       2,020       110       5.8       1,910       1,891       1,729  

Total Assets
  $ 31,433     $ 2,461       8.5 %   $ 28,972     $ 2,909       11.2 %   $ 26,063     $ 28,126     $ 28,589  

Liabilities and Shareholders’ Equity
                                                                       
Deposits:
                                                                       
 
Non-interest bearing deposits
  $ 3,230     $ 150       4.9 %   $ 3,080     $ 178       6.1 %   $ 2,902     $ 3,304     $ 3,421  
 
Interest bearing demand deposits
    7,207       1,014       16.4       6,193       1,032       20.0       5,161       5,005       4,291  
 
Savings deposits
    2,829       27       1.0       2,802       (51 )     (1.8 )     2,853       3,478       3,563  
 
Retail certificates of deposit
    2,417       (285 )     (10.5 )     2,702       (917 )     (25.3 )     3,619       4,980       4,930  
 
Other domestic time deposits
    602       (58 )     (8.8 )     660       (70 )     (9.6 )     730       903       942  

       
Total core deposits
    16,285       848       5.5       15,437       172       1.1       15,265       17,670       17,147  

Domestic time deposits of $100,000 or more
    865       63       7.9       802       (49 )     (5.8 )     851       1,280       1,502  
Brokered time deposits and negotiable CDs
    1,837       418       29.5       1,419       688       94.1       731       128       502  
Foreign time deposits
    508       8       1.6       500       163       48.4       337       283       539  

         
Total deposits
    19,495       1,337       7.4       18,158       974       5.7       17,184       19,361       19,690  

Short-term borrowings
    1,410       (190 )     (11.9 )     1,600       (256 )     (13.8 )     1,856       2,099       1,966  
Federal Home Loan Bank advances
    1,271       13       1.0       1,258       979       N.M.       279       19       13  
Subordinated notes and other long-term debt, including preferred capital securities
    5,379       820       18.0       4,559       1,224       36.7       3,335       3,411       4,005  

         
Total interest bearing liabilities
    24,325       1,830       8.1       22,495       2,743       13.9       19,752       21,586       22,253  

All other liabilities
    1,504       303       25.2       1,201       31       2.6       1,170       905       723  
Shareholders’ equity
    2,374       178       8.1       2,196       (43 )     (1.9 )     2,239       2,331       2,192  

Total Liabilities and Shareholders’ Equity
  $ 31,433     $ 2,461       8.5 %   $ 28,972     $ 2,909       11.2 %   $ 26,063     $ 28,126     $ 28,589  

Net interest income
                                                                       

Net interest rate spread
                                                                       
Impact of non-interest 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)  Home equity includes personal lines of credit and other consumer loans secured by first or junior mortgages on residential property originated and underwritten through the Company’s retail banking channel. Reclassification of prior period balances has been made to conform to this presentation, resulting in an increase to previously reported home equity loans and a decrease to previously reported residential mortgage loans.

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Interest Income/Expense Average Rate (2)

2004 2003 2002 2001 2000 2004 2003 2002 2001 2000

$ 0.7     $ 0.6     $ 0.8     $ 0.2     $ 0.3       1.05 %     1.53 %     2.38 %     3.43 %     5.03 %
  4.4       0.6       0.3       1.3       1.1       4.15       4.02       4.11       5.13       7.11  
  5.5       1.6       1.1       4.5       5.5       1.73       1.80       1.56       4.19       6.33  
  13.0       30.0       20.5       25.0       8.7       5.35       5.32       6.35       6.95       7.96  
  171.7       159.6       173.0       206.9       269.5       3.88       4.52       6.06       6.58       6.24  
  28.8       23.5       10.1       13.0       20.8       6.98       7.04       7.42       7.49       7.61  

  200.5       183.1       183.1       219.9       290.3       4.14       4.73       6.12       6.63       6.33  

  196.5       224.1       262.0       353.4       414.3       4.41       4.95       5.45       6.96       8.39  
  58.0       52.1       52.6       72.7       87.7       4.09       4.09       4.57       6.99       8.98  
  85.3       88.0       98.7       113.3       115.4       4.44       4.84       5.91       7.44       8.36  

  143.3       140.1       151.3       186.0       203.1       4.29       4.54       5.36       7.26       8.62  

  110.3       105.6       110.6       204.8       230.6       5.50       5.91       6.73       7.96       9.13  

  450.1       469.8       523.9       744.2       848.0       4.59       5.00       5.65       7.29       8.64  

  165.1       242.1       237.9       253.8       271.4       7.22       7.38       8.67       N.M       N.M  
  109.6       72.8       23.2       1.2       (0.5 )     5.00       5.09       5.14       N.M       N.M  

  274.7       314.9       261.1       255.0       270.9       6.14       6.68       8.17       8.94       8.67  

  205.4       174.1       180.6       274.5       249.0       4.91       5.14       5.96       8.23       8.52  
  175.9       111.4       91.4       81.6       107.1       5.48       5.85       6.55       8.19       8.00  
  28.7       29.5       35.6       54.9       60.7       6.38       6.71       7.40       8.40       10.14  

  684.7       629.9       568.7       666.0       687.7       5.56       5.93       6.98       8.44       8.57  

  1,134.8       1,099.7       1,092.6       1,410.2       1,535.7       5.11       5.49       6.27       7.79       8.61  



  1,358.9       1,315.6       1,298.4       1,661.1       1,841.6       4.89       5.35       6.23       7.58       8.13  

                                                         
  74.1       73.0       88.9       133.5       143.1       1.03       1.18       1.71       2.64       3.30  
  24.4       41.7       50.6       106.7       145.7       0.86       1.49       1.77       3.07       4.09  
  81.2       100.4       165.6       281.5       282.2       3.36       3.68       4.58       5.65       5.72  
  19.7       26.0       29.6       48.2       52.0       3.27       3.86       4.05       5.34       5.52  

  199.4       241.1       334.7       569.9       623.0       1.53       1.94       2.70       3.95       4.52  

  20.5       18.5       28.8       66.8       90.4       2.37       2.50       3.39       5.22       6.01  
  33.1       24.1       17.3       6.6       31.9       1.80       1.70       2.36       5.12       6.35  
  4.1       4.6       4.9       10.8       34.0       0.82       0.92       1.47       3.82       6.31  

  257.1       288.3       385.7       654.1       779.3       1.58       1.91       2.69       4.06       4.77  

  13.0       15.7       29.0       95.8       113.1       0.93       0.98       1.56       4.57       5.75  
  33.3       24.4       5.6       1.2       0.8       2.57       1.94       2.00       6.17       6.32  
  132.5       128.5       123.3       188.4       270.0       2.46       2.82       3.70       5.52       6.74  

  435.9       456.9       543.6       939.5       1,163.2       1.79       2.03       2.75       4.34       5.22  


                             
$ 923.0     $ 858.7     $ 754.8     $ 721.6     $ 678.4                                          

                             
                                          3.10       3.32       3.48       3.24       2.91  
                                          0.23       0.17       0.14       0.05       0.09  

                                          3.33 %     3.49 %     3.62 %     3.29 %     3.00 %

(4)  Residential mortgage includes loans secured by first mortgages on residential property originated and underwritten through the Company’s mortgage banking channel. Reclassification of prior period balances has been made to conform to this presentation, resulting in an increase to previously reported home equity loans and a decrease to previously reported residential mortgage loans.
 
(5)  Effective December 31, 2004, unsecured personal credit lines were reclassified from “home equity loans” to “other loans” in all periods presented.
 
(6)  For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS HUNTINGTON BANCSHARES INCORPORATED

Net Interest Income

(This section should be read in conjunction with Significant Factors 1-6 and 14.)

The Company’s primary source of revenue is net interest income, which is the difference between interest income on earning assets, primarily loans, direct financing leases, and securities and interest expense on funding sources, including 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 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.

Table 4 shows average annual balance sheets and net interest margin analysis for 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 represent the net interest margin.

Table 5 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. The change in interest income or expense not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amount of the change in volume and rate.  

Table 5 — Change in Net Interest Income Due to Changes in Average Volume and Interest Rates (1)

                                                 
2004 2003

Increase (Decrease) From Increase (Decrease) From
Previous Year Due To Previous Year Due To

Fully tax equivalent basis (2) Yield/ Yield/
(in millions of dollars) Volume Rate Total Volume Rate Total

Loans and direct financing leases
  $ 110.8     $ (75.7 )   $ 35.1     $ 152.4     $ (145.3 )   $ 7.1  
Securities
    42.1       (24.7 )     17.4       46.7       (46.7 )      
Other earning assets
    1.4       (10.5 )     (9.1 )     12.7       (2.6 )     10.1  

Total interest income in earning assets
    154.3       (110.9 )     43.4       211.8       (194.6 )     17.2  

Deposits
    21.5       (52.7 )     (31.2 )     20.5       (117.9 )     (97.4 )
Short-term borrowings
    (1.8 )     (0.9 )     (2.7 )     (3.5 )     (9.8 )     (13.3 )
Federal Home Loan Bank advances
    0.3       8.6       8.9       19.0       (0.2 )     18.8  
Subordinated notes and other long-term debt, including capital securities
    21.6       (13.9 )     7.7       216.9       (211.7 )     5.2  

Total interest expense in interest-bearing liabilities
    41.6       (58.9 )     (17.3 )     252.9       (339.6 )     (86.7 )

Net interest income before funding cost adjustment
    112.7       (52.0 )     60.7       (41.1 )     145.0       103.9  
Funding cost adjustment
          3.7       3.7                    

Net interest income
  $ 112.7     $ (48.3 )   $ 64.4     $ (41.1 )   $ 145.0     $ 103.9  

(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.

2004 versus 2003 Performance

Fully taxable equivalent net interest income increased $64.4 million, or 7%, in 2004 from 2003. This reflected the benefit of a 13% increase in average earning assets, partially offset by the negative impact of an effective 5% decline in the net interest margin to 3.33% from 3.49%.

The net interest margin declined in the first half of 2004 and primarily reflected the impact from the sale of higher-margin automobile loans. Such sales totaled $1.4 billion in the first half of 2004 but only $0.2 billion in the 2004 third quarter. The decline in the net interest margin in the first half of the year also reflected, to a lesser degree, the growth in lower-margin investment securities, as well as

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS HUNTINGTON BANCSHARES INCORPORATED

the impact of rising interest rates. The net interest margin stabilized in the second half of the year as automobile loan sales diminished and lower cost deposit growth was strong.

2003 versus 2002 Performance

Fully taxable equivalent net interest income increased $103.9 million, or 14%, in 2003 from 2002. This reflected the benefit of an 18% increase in average earning assets, partially offset by the negative impact of an effective 4% decline in the net interest margin to 3.49% from 3.62%.

The decline in the net interest margin reflected the impact of declining loan portfolio rates due to lower rates on variable-rate loan products, as well as prepayments and repayments of fixed-rate loans, most notably mortgages. The rate on the securities portfolio also declined, reflecting the same prepayments and repayments of mortgage-related securities, with resultant reinvestment at lower market rates. Deposit rates declined to a lesser degree than loan or securities rates reflecting competitive pressures in the deposit markets. Two other factors contributing to a lower net interest margin were the growth of lower-yielding investment securities and the shift to lower-yield, but lower-risk, loans.

Balance Sheet

(This section should be read in conjunction with Significant Factors 1-6.)

TOTAL CREDIT EXPOSURE PORTFOLIO MIX

An overall corporate objective is to maintain a relative balance between the various credit portfolios so as to avoid undue concentrations. As shown in Table 6, at December 31, 2004, total credit exposure was $24.1 billion. Of this amount, $13.3 billion, or 55%, represented total consumer loans, $10.3 billion, or 43%, total commercial loans, and $0.6 billion, or 2%, operating lease assets.

Related to the overall corporate objective, a specific objective has been to reduce the relative level of total automobile exposure (the sum of automobile loans, automobile leases, and operating lease assets) from its 33% level at the end of 2002. As shown in Table 6, the total automobile exposure at December 31, 2004 was 21%.

In contrast, another related specific objective was to increase the relative level of lower-risk residential mortgages and home equity loans. Progress was made on this objective as well. At December 31, 2004, such loans represented 35% of total credit exposure, up from 22% at the end of 2002.

Since the end of 2002, the level of total commercial loans and leases has remained relatively constant at 42%-43% of total credit exposure. However, C&I loans declined to 19% at year end 2004 from 22% at December 31, 2002, reflecting weak demand, but also a specific objective to reduce exposure to large individual credits, as well as a strategy to focus commercial lending to customers with existing or potential relationships within the Company’s primary markets. Conversely, since the end of 2002, small business loans increased to 9% from 8%, reflecting strategies to grow this important targeted business segment. (See Table 6 .)

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M ANAGEMENT’S D ISCUSSION AND A NALYSIS HUNTINGTON BANCSHARES INCORPORATED

Table 6 — Loan and Lease Portfolio Composition

                                                                                         
At December 31,

(in millions of dollars) 2004 2003 2002 2001 2000

Commercial (1)
                                                                               
 
Middle market commercial and industrial
  $ 4,666       19.3 %   $ 4,416       19.7 %   $ 4,757       21.7 %   $ 4,922       21.7 %   $ 5,030       22.9 %
 
Middle market real estate:
                                                                               
   
Construction
    1,602       6.6       1,264       5.7       983       4.5       1,150       5.1       999       4.6  
   
Commercial
    1,917       7.9       1,919       8.6       1,896       8.7       1,575       6.9       1,484       6.8  

     
Total middle market real estate
    3,519       14.5       3,183       14.3       2,879       13.2       2,725       12.0       2,483       11.4  

 
Small business commercial and industrial and commercial real estate
    2,118       8.8       1,887       8.4       1,695       7.7       2,607       11.5       2,581       11.8  

       
Total commercial
    10,303       42.6       9,486       42.4       9,331       42.6       10,254       45.2       10,094       46.1  

Consumer:
                                                                               
 
Automobile loans
    1,949       8.1       2,992       13.4       3,042       13.9       2,853       12.6       2,480       11.3  
 
Automobile leases
    2,443       10.1       1,902       8.5       874       4.0       110       0.5       147       0.7  
 
Home equity
    4,555       18.9       3,734       16.7       3,142       14.3       3,518       15.5       2,098       9.6  
 
Residential mortgage
    3,829       15.9       2,531       11.3       1,746       8.0       1,129       5.0       1,058       4.8  
 
Other loans
    481       2.0       430       1.9       452       2.1       607       2.7       1,746       8.0  

       
Total consumer
    13,257       55.0       11,589       51.8       9,256       42.3       8,217       36.3       7,529       34.4  

Total loans and direct financing leases
    23,560       97.6       21,075       94.2       18,587       84.9       18,471       81.5       17,623       80.5  

Operating lease assets
    587       2.4       1,260       5.6       2,201       10.0       3,006       13.2       2,934       13.4  
Securitized loans
                37       0.2       1,119       5.1       1,225       5.4       1,371       6.3  

Total credit exposure
  $ 24,147       100.0 %   $ 22,372       100.0 %   $ 21,907       100.0 %   $ 22,702       100.0 %   $ 21,928       100.0 %

Total automobile exposure (2)
  $ 4,979       20.6 %   $ 6,191       27.7 %   $ 7,236       33.0 %   $ 7,194       31.7 %   $ 6,932       31.6 %

(1)  There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
 
(2)  Total loans and leases, operating lease assets, and securitized loans.

AVERAGE BALANCE SHEET DISCUSSION — LOANS, LEASES, AND OTHER EARNING ASSETS

2004 versus 2003 Performance

Growth in average total loans and leases accounted for most of the 13% increase in earning assets, though investment securities also increased reflecting the reinvestment of a portion of the proceeds from automobile loan sales.

Average total loans and leases increased 11% from the prior year. Most of this increase reflected growth in average total consumer loans where the strong growth in residential mortgage and home equity loans was only partially offset by a decline in automobile loans reflecting the sale of $1.5 billion of automobile loans in 2004. Average total commercial loans increased 4% reflecting growth in CRE and small business loans, partially offset by a decline in average C&I loans.

2003 versus 2002 Performance

Growth in average total loans and leases accounted for most of the 18% increase in average earning assets, though investment securities also increased reflecting the reinvestment of a portion of the proceeds from automobile loan sales.

Average total loans and leases increased 15% from the prior year. Most of this increase reflected growth in average total consumer loans where the growth in automobile loans and leases, residential mortgages, and home equity loans was strong. The growth in average automobile loans and leases reflected $2.8 billion of new automobile loan originations, as well as the consolidation of $1.0 billion of securitized automobile loans due to the adoption of FIN 46, partially offset by the impact from the sale of $2.1 billion of automobile loans. Average total commercial loans increased only 2% reflecting good growth in CRE and small business loans, partially offset by a decline in average C&I loans.

AVERAGE BALANCE SHEET DISCUSSION — DEPOSITS AND OTHER FUNDING

2004 versus 2003 Performance

Average total deposits in 2004 increased 7% from the prior year, primarily reflecting 5% growth in average core deposits. Growth in interest-bearing demand deposits, and to a lesser degree noninterest-bearing deposits, accounted for virtually all of the growth in average core deposits, as average retail certificates of deposits (CDs) declined. With interest rates near historical low levels, demand for retail CDs was greatly diminished in the first half of 2004. However, retail CDs grew in the second half of the year as interest rates and
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M ANAGEMENT’S D ISCUSSION AND A NALYSIS HUNTINGTON BANCSHARES INCORPORATED

customer demand for retail CDs increased. In addition to growth in average core deposits, the increase in average total deposits also reflected a 29% increase in brokered time deposits and negotiable CDs, which, in comparison with rates on retail CDs, remained a relatively lower cost of funds.

Management uses the non-core funding ratio (total liabilities less core deposits and accrued expenses and other liabilities divided by total assets) to measure the extent to which funding is dependent on wholesale deposits and borrowing sources. For 2004, the average non-core funding ratio was 36%, up from 35% in 2003. The average non-core funding ratio reached a peak of 38% in the first quarter of 2004 as strong loan growth outpaced core deposit growth. Subsequent loan sales, as well as successful core deposit growth initiatives, reduced average non-core funding requirements to 34% by the 2004 fourth quarter.

2003 versus 2002 Performance

Average total deposits in 2003 increased 6% from the prior year, primarily reflecting 94% growth in average brokered time deposits and negotiable CDs, which were relatively lower in cost compared with retail CDs. Average total core deposits increased only 1%, reflecting 20% growth in average interest-bearing demand deposits virtually offset by a 25% decline in average retail CDs, which became a relatively expensive source of funds, especially in the first half of 2003. Reflecting this, interest-bearing demand deposits were emphasized in deposit growth initiatives, whereas retail CDs were de-emphasized.

For 2003, the average non-core funding ratio was 35%, up from 28% in 2002. This reflected the fact that balance sheet growth during 2003 exceeded that of core deposits and, therefore, required funding through brokered CDs, Federal Home Loan Bank (FHLB) advances, and other long-term debt. Though it had no significant impact on average balances, $250 million of secured long-term debt was extinguished in the fourth quarter of 2003.

Provision for Credit Losses

(This section should be read in conjunction with Significant Factor 4 and the Credit Risk section.)

The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at a level adequate to absorb Management’s estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments.

Provision expense for 2004 was $55.1 million, down $108.9 million, or 66%, from $164.0 million in 2003, which in turn declined $30.4 million, or 16%, from 2002. The declines in both years reflected the significant improvement in overall credit quality as reflected by a combination of factors including lower net charge-offs, including a recovery of $11.1 million in 2004 and lower levels of non-performing assets (NPAs), as well as the overall lower risk inherent in the loan and lease portfolio resulting from strategies to lower the overall risk profile of the balance sheet, partially offset by additional provision expense related to loan growth.

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Non-Interest Income

(This section should be read in conjunction with Significant Factors 1, 3, 4, 6, and 9.)

Non-interest income for the three years ended December 31, 2004 was as follows:

Table 7 — Non-Interest Income

                                                         
Year Ended December 31,

 
Change from 2003 Change from 2002


(in thousands of dollars) 2004 Amount % 2003 Amount % 2002

Service charges on deposit accounts
  $ 171,115     $ 3,275       2.0 %   $ 167,840     $ 14,276       9.3 %   $ 153,564  
Trust services
    67,410       5,761       9.3       61,649       (402 )     (0.6 )     62,051  
Brokerage and insurance income
    54,799       (3,045 )     (5.3 )     57,844       (4,265 )     (6.9 )     62,109  
Bank owned life insurance income
    42,297       (731 )     (1.7 )     43,028       (95 )     (0.2 )     43,123  
Other service charges and fees
    41,574       128       0.3       41,446       (1,442 )     (3.4 )     42,888  
Mortgage banking
    32,296       (25,884 )     (44.5 )     58,180       26,147       81.6       32,033  
Securities gains
    15,763       10,505       N.M.       5,258       356       7.3       4,902  
Other
    92,047       988       1.1       91,059       14,119       18.4       76,940  

Sub-total before operating lease income
    517,301       (9,003 )     (1.7 )     526,304       48,694       10.2       477,610  
Operating lease income
    287,091       (202,607 )     (41.4 )     489,698       (167,376 )     (25.5 )     657,074  

Sub-total including operating lease income
    804,392       (211,610 )     (20.8 )     1,016,002       (118,682 )     (10.5 )     1,134,684  

Gain on sales of automobile loans
    14,206       (25,833 )     (64.5 )     40,039       40,039       N.M.        
Gain on sale of branch offices
          (13,112 )     N.M.       13,112       13,112       N.M.        
Gain on sale of Florida operations
                            (182,470 )     N.M.       182,470  
Merchant services gain
                            (24,550 )     N.M.       24,550  

Total non-interest income
  $ 818,598     $ (250,555 )     (23.4 )%   $ 1,069,153     $ (272,551 )     (20.3 )%   $ 1,341,704  

N.M., not a meaningful value.

 
Table 8 — Mortgage Banking Income

                                                           
Year Ended December 31,

Change from 2003 Change from 2002


(in thousands of dollars) 2004 Amount % 2003 Amount % 2002

 
Origination fees
  $ 12,377     $ (4,895 )     (28.3 )%   $ 17,272     $ 6,725       63.8 %   $ 10,547  
 
Secondary marketing
    8,340       (15,267 )     (64.7 )     23,607       2,343       11.0       21,264  
 
Servicing fees
    21,696       4,790       28.3       16,906       5,476       47.9       11,430  
 
Amortization of capitalized servicing
    (19,019 )     6,947       (26.8 )     (25,966 )     (13,915 )     N.M.       (12,051 )
 
MSR recovery/(impairment)
    1,378       (13,579 )     (90.8 )     14,957       29,070       N.M.       (14,113 )
 
Other mortgage banking income
    7,524       (3,880 )     (34.0 )     11,404       (3,552 )     (23.7 )     14,956  

Total mortgage banking income
  $ 32,296     $ (25,884 )     (44.5 )%   $ 58,180     $ 26,147       81.6 %   $ 32,033  

Capitalized mortgage servicing rights (1)
  $ 77,107     $ 6,020       8.5 %   $ 71,087     $ 41,816       N.M. %   $ 29,271  
Total mortgages serviced for others (1)
    6,861,000       467,000       7.3       6,394,000       2,618,000       69.3       3,776,000  
 
MSR recovery/(impairment)
  $ 1,378     $ (13,579 )     (90.8 )%   $ 14,957     $ 29,070       N.M. %   $ (14,113 )
 
Net trading losses related to MSR hedging
    (10,002 )     (10,002 )     N.M.             (718 )     N.M.       718  
 
Net interest income related to MSR hedging
    1,450       1,450       N.M.                          

Net impact of MSRs/ MSR hedging
  $ (7,174 )   $ (22,131 )     N.M. %   $ 14,957     $ 28,352       N.M. %   $ (13,395 )

N.M., not a meaningful value.

(1)  At year end.

2004 versus 2003 Performance

Non-interest income for 2004 declined $250.6 million, or 23%, from 2003. Comparisons with prior-period results were heavily influenced by the decline in operating leases and related operating lease income. These declines are expected to continue, though diminish over time, as all automobile leases originated since April 2002 are direct financing leases with income reflected in net interest income, not non-interest income. Reflecting the run-off of the operating lease portfolio, operating lease income declined
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$202.6 million, or 41%, from 2003. Excluding operating lease income, non-interest income decreased $47.9 million, or 8%, from a year ago with the primary drivers being:

  –  $25.9 million decline in mortgage banking income reflected a combination of factors, all basically related to the lower level of mortgage originations as interest rates increased during 2004. Such factors included lower net secondary marketing revenue as sales declined, and a 91% reduction in MSR recovery.
 
  –  $25.8 million decline in gains on the sale of automobile loans reflecting both a decline in loan sales, $1.5 billion in 2004 vs. $2.1 billion in 2003, as well as lower relative gains on the sales. The spread between the average interest rate on the pool of sold loans and the current market rates at the time of the sale was narrower on the loan pools sold in 2004 than in 2003, thus resulting in lower gains.
 
  –  $13.1 million decline in gains on sale of branch offices reflecting no such sales in 2004.
 
  –  $3.0 million decline in brokerage and insurance income primarily due to lower title insurance-related fees, and reduced credit life insurance revenue, as well as a decline in annuity fee income due to a 6% decline in annuity sales.

Partially offset by:

  –  $10.5 million increase in securities gains primarily related to MSR temporary impairment hedging activity.
 
  –  $5.8 million increase in trust services income primarily due to higher personal trust income and proprietary mutual fund fees.
 
  –  $3.3 million increase in service charges on deposit accounts reflecting higher NSF and overdraft fees, partially offset by lower personal and commercial account maintenance charges.

2003 versus 2002 Performance

Non-interest income for 2003 declined $272.6 million, or 20%, from 2002. As noted above, comparisons with prior-period results were heavily influenced by the decline in operating leases and related operating lease income. Reflecting the run-off of the operating lease portfolio, operating lease income declined $167.4 million, or 25%, from 2002. Excluding operating lease income, non-interest income decreased $105.2 million, or 15%, from the prior year with the primary drivers being:

  –  $182.5 million related to the 2002 gain on the sale of the Florida banking operations.
 
  –  $24.6 million related to the 2002 gain on the Merchant Service restructuring.
 
  –  $4.3 million decline in brokerage and insurance income principally reflecting the loss of $6.9 million of revenue due to the 2002 sale of the Florida banking and insurance operations, partially offset by a $2.7 million increase in income generated by other areas, mostly related to insurance agency revenue from mortgage refinancing and title insurance fees.

Partially offset by:

  –  $40.0 million of gains on the sale of automobile loans compared with none in 2002 as this program was initiated in 2003.
 
  –  $26.1 million increase in mortgage banking income, including $29.1 million for recoveries of previously recognized MSR valuation temporary impairments. A record $6.1 billion of mortgages were originated in 2003 due to heavy refinancing activity as borrowers continued to take advantage of very low interest rates. (See Note 5 of the Notes to the Consolidated Financial Statements.)
 
  –  $14.3 million increase in deposit service charges. This increase reflected the growth in deposit accounts, as well as an increase in consumer NSF service charges and overdraft fees, partially offset by the loss of $4.2 million in service charge revenue due to the 2002 sale of the Florida banking operations.
 
  –  $14.1 million increase in other income reflecting a combination of items including higher lease termination income and fees, securitization income, fees from customer interest rate swaps, and customer trading gains.
 
  –  $13.1 million of gains related to the 2003 sale of banking offices in West Virginia.

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Non-Interest Expense

(This section should be read in conjunction with Significant Factors 1, 6, 7, 10, 11, 12 and 13.)

Non-interest expense for the three years ended December 31, 2004 was as follows:

Table 9 — Non-Interest Expense

                                                           
Year Ended December 31,

 
Change from 2003 Change from 2002


(in thousands of dollars) 2004 Amount % 2003 Amount % 2002

 
Salaries
  $ 376,268     $ 14,826       4.1 %   $ 361,442     $ 14,789       4.3 %   $ 346,653  
 
Benefits
    109,538       23,717       27.6       85,821       14,437       20.2       71,384  

Personnel costs
    485,806       38,543       8.6 %     447,263       29,226       7.0 %     418,037  

 
Net occupancy
    75,941       13,460       21.5       62,481       2,942       4.9       59,539  
 
Outside data processing and other services
    72,115       5,997       9.1       66,118       (1,250 )     (1.9 )     67,368  
 
Equipment
    63,342       (2,579 )     (3.9 )     65,921       (2,402 )     (3.5 )     68,323  
 
Professional services
    36,876       (5,572 )     (13.1 )     42,448       9,363       28.3       33,085  
 
Marketing
    26,489       (1,001 )     (3.6 )     27,490       (421 )     (1.5 )     27,911  
 
Telecommunications
    19,787       (2,192 )     (10.0 )     21,979       (682 )     (3.0 )     22,661  
 
Printing and supplies
    12,463       (546 )     (4.2 )     13,009       (2,189 )     (14.4 )     15,198  
 
Amortization of intangibles
    817       1       0.1       816       (1,203 )     (59.6 )     2,019  
 
Other
    93,281       12,501       15.5       80,780       (11,283 )     (12.3 )     92,063  

Sub-total before operating lease expense
    886,917       58,612       7.1       828,305       22,101       2.7       806,204  
 
Operating lease expense
    236,478       (156,792 )     (39.9 )     393,270       (125,700 )     (24.2 )     518,970  

Sub-total including operating lease expense     1,123,395       (98,180 )     (8.0 )     1,221,575       (103,599 )     (7.8 )     1,325,174  

 
Restructuring reserve (releases) charges
    (1,151 )     5,515       (82.7 )     (6,666 )     (55,639 )     N.M.       48,973  
 
Loss on early extinguishment of debt
          (15,250 )     N.M.       15,250       15,250       N.M.        

Total non-interest expense
  $ 1,122,244     $ (107,915 )     (8.8 )%   $ 1,230,159     $ (143,988 )     (10.5 )%   $ 1,374,147  

N.M., not a meaningful value.

2004 versus 2003 Performance

Non-interest expense declined $107.9 million, or 9%, from 2003. Comparisons with prior-period results were significantly influenced by the decline in operating lease expense as the operating lease portfolio continued to run-off. These declines are expected to continue, though diminish over time. Operating lease expense declined $156.8 million, or 40%, from 2003. Excluding operating lease expense, non-interest expense increased $48.9 million, or 6%, from 2003 reflecting:

  –  $38.5 million increase in personnel costs primarily related to higher retirement and insurance benefit expenses, and to a lesser degree, higher salaries.
 
  –  $13.5 million increase in net occupancy expense reflecting a $7.8 million property lease impairment, as well as higher depreciation and lower rental income.
 
  –  $12.5 million increase in other expense impacted by SEC-related expenses and accruals. (See discussion below.)
 
  –  $6.0 million increase in outside data processing expenses including Unizan-related expenses. (See discussion below.)
 
  –  $5.5 million decline in restructuring reserve releases, as such releases totaled $1.2 million in 2004, down from $6.7 million of such releases in 2003.

Partially offset by:

  –  $15.3 million related to the loss on the early extinguishment of debt in 2003.
 
  –  $5.6 million decline in professional services, primarily reflecting lower consulting expenses.

As mentioned above, SEC-related expenses and accruals, as well as expenses related to Unizan integration planning and systems conversions, contributed to the change in expense from 2003. Specifically, SEC-related expenses and accruals totaled $13.6 million in 2004 compared with $6.9 million in 2003. These expenses and accruals impacted the professional services and other expense

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categories. Unizan integration planning and systems conversion expenses totaled $3.6 million in 2004 and were none in 2003. In addition to impacting the data processing and other services expense category, a portion of these expenses was also spread across various other expense categories.

2003 versus 2002 Performance

Non-interest expense declined $144.0 million, or 10%, from 2002. Comparisons with prior-period results were significantly influenced by the decline in operating lease expense as previously noted. Operating lease expense declined $125.7 million, or 24%, from 2002. Excluding operating lease expense, non-interest expense declined $18.3 million, or 2%, from 2002 reflecting:

  –  $55.6 million decline in restructuring reserve charges as 2003 reflected a $6.7 million restructuring reserve recovery, compared with $49.0 million of restructuring reserve charges in 2002.
 
  –  $11.3 million decline in other expense including $1.1 million associated with the sold Florida banking and insurance operations, with the remaining $10.2 million decline reflecting lower operational losses, travel costs, and franchise taxes.

Partially offset by:

  –  $29.2 million increase in personnel costs consisting of higher incentive and sales commission expense, especially related to mortgage banking activity, as well as higher benefit and pension costs, partially offset by an $11.5 million decline associated with the sold Florida banking and insurance operations.
 
  –  $15.3 million of expense related to the early extinguishment of long-term debt.
 
  –  $9.4 million, or 28%, increase in professional services including $6.9 million of SEC-related costs.

Operating Lease Assets

(This section should be read in conjunction with the Critical Accounting Policies and Use of Significant Estimates, Significant Factor 1, and the Lease Residual Risk section.)

Operating lease assets represent automobile leases originated before May 2002. This operating lease portfolio will run-off over time since all automobile lease originations after April 2002 have been recorded as direct financing leases and are reported in the automobile loan and lease category in earning assets. As a result, the non-interest income and non-interest expenses associated with the operating lease portfolio will also decline over time.

Operating lease assets performance for the five years ended December 31, 2004 was as follows:  

Table 10 — Operating Lease Performance

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Year Ended December 31,