UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2005

Commission File Number   0-2525

Huntington Bancshares Incorporated

     
Maryland   31-0724920
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ       No o

There were 232,294,999 shares of Registrant’s without par value common stock outstanding on April 30, 2005.

 
 

 


Huntington Bancshares Incorporated

INDEX

     
Part I. Financial Information
   
 
   
Item 1. Financial Statements (Unaudited)
   
 
   
Condensed Consolidated Balance Sheets at March 31, 2005, December 31, 2004, and March 31, 2004
  3
 
   
Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004
  4
 
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2005 and 2004
  5
 
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
  6
 
   
Notes to Unaudited Condensed Consolidated Financial Statements
  7
 
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  16
 
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  70
 
   
Item 4. Controls and Procedures
  70
 
   
Part II. Other Information
   
 
   
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
  71
 
   
Item 6. Exhibits
  71
 
   
Signatures
  73
  Exhibit 10.A
  Exhibit 10.B
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2

2


Part 1. Financial Information

Item 1. Financial Statements

Huntington Bancshares Incorporated

Condensed Consolidated Balance Sheets

                         
 
    March 31,     December 31,     March 31,  
(in thousands, except number of shares)   2005     2004     2004  
 
    (Unaudited)             (Unaudited)  
Assets
                       
Cash and due from banks
  $ 914,699     $ 877,320     $ 766,432  
Federal funds sold and securities purchased under resale agreements
    144,980       628,040       224,841  
Interest bearing deposits in banks
    29,551       22,398       54,027  
Trading account securities
    100,135       309,630       16,410  
Loans held for sale
    252,932       223,469       230,417  
Investment securities
    4,052,875       4,238,945       5,458,347  
Loans and leases
    24,206,465       23,560,277       21,193,627  
Allowance for loan and lease losses
    (264,390 )     (271,211 )     (295,377 )
 
Net loans and leases
    23,942,075       23,289,066       20,898,250  
 
Operating lease assets
    466,550       587,310       1,070,958  
Bank owned life insurance
    973,164       963,059       938,156  
Premises and equipment
    354,979       355,115       351,073  
Goodwill and other intangible assets
    217,780       215,807       216,805  
Customers’ acceptance liability
    7,194       11,299       7,909  
Accrued income and other assets
    725,685       844,039       805,455  
 
 
                       
Total Assets
  $ 32,182,599     $ 32,565,497     $ 31,039,080  
 
 
                       
Liabilities and Shareholders’ Equity
                       
Liabilities
                       
Deposits
  $ 21,770,973     $ 20,768,161     $ 18,988,846  
Short-term borrowings
    1,033,496       1,207,233       1,076,302  
Federal Home Loan Bank advances
    903,871       1,271,088       1,273,000  
Other long-term debt
    3,138,626       4,016,004       4,478,599  
Subordinated notes
    1,025,612       1,039,793       1,066,705  
Allowance for unfunded loan commitments and letters of credit
    31,610       33,187       32,089  
Bank acceptances outstanding
    7,194       11,299       7,909  
Deferred federal income tax liability
    781,152       783,628       687,820  
Accrued expenses and other liabilities
    900,292       897,466       1,063,631  
 
Total Liabilities
    29,592,826       30,027,859       28,674,901  
 
 
                       
Shareholders’ equity
                       
Preferred stock — authorized 6,617,808 shares; none outstanding
                 
Common stock — without par value; authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 232,192,017; 231,605,281 and 229,410,043 shares, respectively
    2,484,832       2,484,204       2,482,342  
Less 25,674,238; 26,260,974 and 28,456,212 treasury shares, respectively
    (490,139 )     (499,259 )     (541,048 )
Accumulated other comprehensive income (loss)
    (18,686 )     (10,903 )     21,490  
Retained earnings
    613,766       563,596       401,395  
 
Total Shareholders’ Equity
    2,589,773       2,537,638       2,364,179  
 
 
                       
Total Liabilities and Shareholders’ Equity
  $ 32,182,599     $ 32,565,497     $ 31,039,080  
 

See notes to unaudited condensed consolidated financial statements

3


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Income
(Unaudited)

                 
    Three Months Ended  
    March 31,  
 
(in thousands, except per share amounts)   2005     2004  
 
Interest and fee income
               
Loans and leases
               
Taxable
  $ 325,668     $ 270,363  
Tax-exempt
    239       505  
Investment securities
               
Taxable
    38,000       47,169  
Tax-exempt
    4,307       4,490  
Other
    7,891       3,404  
 
Total interest income
    376,105       325,931  
 
Interest expenses
               
Deposits
    89,168       59,626  
Short-term borrowings
    4,828       3,313  
Federal Home Loan Bank advances
    8,683       8,041  
Subordinated notes and other long-term debt
    38,228       32,266  
 
Total interest expense
    140,907       103,246  
 
Net interest income
    235,198       222,685  
Provision for credit losses
    19,874       25,596  
 
Net interest income after provision for credit losses
    215,324       197,089  
 
Operating lease income
    46,732       88,867  
Service charges on deposit accounts
    39,418       41,837  
Trust services
    18,196       16,323  
Brokerage and insurance income
    13,026       15,197  
Bank owned life insurance income
    10,104       10,485  
Other service charges and fees
    10,159       9,513  
Mortgage banking
    12,061       (4,296 )
Securities gains
    957       15,090  
Gain on sales of automobile loans
          9,004  
Other income
    17,397       25,619  
 
Total non-interest income
    168,050       227,639  
 
Personnel costs
    123,981       121,624  
Operating lease expense
    37,948       70,710  
Net occupancy
    19,242       16,763  
Outside data processing and other services
    18,770       18,462  
Equipment
    15,863       16,086  
Professional services
    9,459       7,299  
Marketing
    6,454       7,839  
Telecommunications
    4,882       5,194  
Printing and supplies
    3,094       3,016  
Amortization of intangibles
    204       204  
Other expense
    18,380       18,457  
 
Total non-interest expense
    258,277       285,654  
 
Income before income taxes
    125,097       139,074  
Provision for income taxes
    28,578       34,901  
 
Net income
  $ 96,519     $ 104,173  
 
 
               
Average common shares — basic
    231,824       229,227  
Average common shares — diluted
    235,053       232,915  
 
               
Per common share
               
Net income — basic
  $ 0.42     $ 0.45  
Net income — diluted
    0.41       0.45  
Cash dividends declared
    0.20       0.175  

See notes to unaudited condensed consolidated financial statements

4


Condensed Consolidated Statements of Changes in Shareholders’ Equity

                                                         
                                    Accumulated              
                                    Other              
    Common Stock     Treasury Shares     Comprehensive     Retained        
(in thousands)   Shares     Amount     Shares     Amount     Income     Earnings     Total  
 
Three Months Ended March 31, 2004 (Unaudited):
                                                       
Balance, beginning of period
    257,866     $ 2,483,542       (28,858 )   $ (548,576 )   $ 2,678     $ 337,358     $ 2,275,002  
Comprehensive Income:
                                                       
Net income
                                            104,173       104,173  
Unrealized net holding gains on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income
                                    30,534               30,534  
Unrealized losses on derivative instruments used in cash flow hedging relationships
                                    (11,722 )             (11,722 )
 
                                                     
Total comprehensive income
                                                    122,985  
 
                                                     
Cash dividends declared ($0.175 per share)
                                            (40,136 )     (40,136 )
Stock options exercised
            (832 )     378       7,274                       6,442  
Other
            (368 )     24       254                       (114 )
 
 
                                                       
Balance, end of period (Unaudited)
    257,866     $ 2,482,342       (28,456 )   $ (541,048 )   $ 21,490     $ 401,395     $ 2,364,179  
 
 
                                                       
Three Months Ended March 31, 2005 (Unaudited):
                                                       
Balance, beginning of period
    257,866     $ 2,484,204       (26,261 )   $ (499,259 )   $ (10,903 )   $ 563,596     $ 2,537,638  
Comprehensive Income:
                                                       
Net income
                                            96,519       96,519  
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income
                                    (20,789 )             (20,789 )
Unrealized gains on derivative instruments used in cash flow hedging relationships
                                    13,006               13,006  
 
                                                     
Total comprehensive income
                                                    88,736  
 
                                                     
Cash dividends declared ($0.20 per share)
                                            (46,349 )     (46,349 )
Stock options exercised
            198       399       7,577                       7,775  
Other
            430       188       1,543                       1,973  
 
 
                                                       
Balance, end of period (Unaudited)
    257,866     $ 2,484,832       (25,674 )   $ (490,139 )   $ (18,686 )   $ 613,766     $ 2,589,773  
 

See notes to unaudited condensed consolidated financial statements.

5


Huntington Bancshares Incorporated

Condensed Consolidated Statements of Cash Flows
(Unaudited)

                 
    Three Months Ended  
    March 31,  
 
(in thousands of dollars)   2005     2004  
 
Operating Activities
               
Net Income
  $ 96,519     $ 104,173  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    19,874       25,596  
Depreciation on operating lease assets
    34,703       63,823  
Amortization of mortgage servicing rights
    4,761       5,351  
Other depreciation and amortization
    20,255       20,108  
Mortgage servicing rights impairment (recoveries) charges
    (3,760 )     10,121  
Deferred income tax expense
    2,195       28,818  
Decrease (increase) in trading account securities
    209,495       (8,821 )
Originations of loans held for sale
    (418,494 )     (363,121 )
Principal payments on and proceeds from loans held for sale
    389,031       359,433  
Gains on sales of investment securities
    (957 )     (15,090 )
Gains on sales of loans
          (9,004 )
Increase in cash surrender value of bank owned life insurance
    (10,104 )     (10,485 )
Increase in payable to investors in securitized loans
    12,304       48,672  
Other, net
    54,036       (65,708 )
 
Net Cash Provided by Operating Activities
    409,858       193,866  
 
 
               
Investing Activities
               
Increase in interest bearing deposits in banks
    (7,153 )     (20,400 )
Proceeds from:
               
Maturities and calls of investment securities
    110,100       243,282  
Sales of investment securities
    672,375       450,890  
Purchases of investment securities
    (629,508 )     (783,854 )
Proceeds from sales/securitizations of loans
          876,686  
Net loan and lease originations, excluding sales
    (678,043 )     (1,138,911 )
Purchases of operating lease assets
    (3,388 )     (1,556 )
Proceeds from sale of operating lease assets
    85,843       128,357  
Proceeds from sale of premises and equipment
    28       260  
Purchases of premises and equipment
    (12,708 )     (13,432 )
Proceeds from sales of other real estate
    37,347       1,562  
 
Net Cash Used for Investing Activities
    (425,107 )     (257,116 )
 
 
               
Financing Activities
               
Increase in deposits
    1,008,131       494,019  
Decrease in short-term borrowings
    (173,737 )     (376,002 )
Proceeds from issuance of subordinated notes
          148,830  
Maturity of subordinated notes
          (100,000 )
Proceeds from Federal Home Loan Bank advances
    7,789        
Maturity of Federal Home Loan Bank advances
    (375,006 )      
Proceeds from issuance of long-term debt
          175,000  
Maturity of long-term debt
    (860,000 )     (250,000 )
Dividends paid on common stock
    (45,384 )     (40,269 )
Net proceeds from issuance of common stock
    7,775       6,442  
 
Net Cash (Used for) Provided by Financing Activities
    (430,432 )     58,020  
 
Change in Cash and Cash Equivalents
    (445,681 )     (5,230 )
Cash and Cash Equivalents at Beginning of Period
    1,505,360       996,503  
 
 
               
Cash and Cash Equivalents at End of Period
  $ 1,059,679     $ 991,273  
 
 
               
Supplemental disclosures:
               
Income taxes paid
  $ 14,239     $ 849  
Interest paid
    123,706       98,694  
Non-cash activities
               
Mortgage loans securitized
          115,929  
Common stock dividends accrued, paid in subsequent quarter
    36,804       31,180  

See notes to unaudited condensed consolidated financial statements.

6


Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements of Huntington Bancshares Incorporated (Huntington or the Company) reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC or Commission) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in Huntington’s 2004 Annual Report on Form 10-K (2004 Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

     Certain amounts in the prior-year’s financial statements have been reclassified to conform to the 2005 presentation.

     For statement of cash flows purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” and “Federal funds sold and securities purchased under resale agreements.”

Note 2 – New Accounting Pronouncements

Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment (Statement 123R) – Statement 123R was issued in December 2004, requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123R replaces FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123), and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB 25, as long as the footnotes to financial statements disclosed pro forma net income under the preferable fair-value-based method. In its 2004 Form 10-K, Huntington disclosed adopting Statement 123R effective January 1, 2005. Subsequently however, new guidance was issued by the SEC that provides the option to postpone adoption of Statement 123R until the first annual reporting period that begins after June 15, 2005. As such, Huntington has postponed the adoption of Statement 123R until January 1, 2006. ( The impact of adopting Statement 123R is described in Note 9.)

Staff Accounting Bulletin No. 107, Share Based Payments (SAB 107) – On March 29, 2005, the SEC issued SAB 107 to provide public companies additional guidance in applying the provisions of Statement 123R. Among other things, SAB 107 describes the SEC staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of Statement 123R with certain existing SEC guidance. Huntington will adopt the provisions of SAB 107 in conjunction with the adoption of FAS 123R beginning January 1, 2006. (see Note 9.)

FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47) In March 2005, the FASB issued FIN 47, which clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations , refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 becomes effective for fiscal years ending after December 15, 2005. Huntington is currently evaluating the impact of adopting FIN 47.

Note 3 – Securities and Exchange Commission Formal Investigation

     On June 26, 2003, Huntington announced that the Securities and Exchange Commission 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

7


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.

     On April 25, 2005, Huntington announced that it has proposed a settlement to the staff of the Securities and Exchange Commission regarding the resolution of its previously announced formal investigation into certain financial accounting matters relating to fiscal years 2002 and earlier and certain related disclosure matters, and that the staff has agreed to recommend the proposed settlement offer to the Commission. The proposed settlement, which is subject to approval by the Commission, is expected to involve the entry of an order requiring Huntington; its chief executive officer, Thomas E. Hoaglin; its former vice chairman and chief financial officer, Michael J. McMennamin; and its former controller, John Van Fleet, to comply with various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933. The proposed settlement would call for the payment of a $7.5 million civil money penalty by the company, which, if approved, would be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. This civil money penalty would have no current period financial impact on Huntington’s results, as reserves for this amount were established and expensed prior to December 31, 2004. The proposed settlement would also require the disgorgement of $360,000 by Hoaglin in respect of his previously paid 2002 annual bonus, and disgorgement of previously paid bonuses and prejudgment interest for McMennamin and Van Fleet of $265,215 and $26,660, respectively. In addition, Hoaglin, McMennamin, and Van Fleet would pay civil money penalties of $50,000; $75,000; and $25,000; respectively. The proposed settlement would also impose certain other relief with respect to McMennamin and Van Fleet.

     No assurances can be made as to final timing or outcome.

Note 4 – 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. The agreements call for independent third-party reviews, as well as the submission of written plans and progress reports by Management and 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 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.

Note 5 – Pending Acquisition

     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 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.

8


Note 6 — Investment Securities

     Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of investment securities at March 31, 2005, December 31, 2004, and March 31, 2004:

                                                 
    March 31, 2005     December 31, 2004     March 31, 2004  
 
    Amortized             Amortized             Amortized        
(in thousands of dollars)   Cost     Fair Value     Cost     Fair Value     Cost     Fair Value  
 
U.S. Treasury
                                               
Under 1 year
  $     $     $     $     $ 2,491     $ 2,493  
1-5 years
    24,739       24,376       24,233       24,304       24,478       25,410  
6-10 years
    248       260       754       832       51,239       51,352  
Over 10 years
                                   
 
Total U.S. Treasury
    24,987       24,636       24,987       25,136       78,208       79,255  
 
Federal Agencies
                                               
Mortgage backed securities
                                               
Under 1 year
                                   
1-5 years
    17,649       17,296       1,362       1,390       17,487       17,939  
6-10 years
    20,835       20,442       38,814       38,589       183,551       187,976  
Over 10 years
    644,058       625,922       945,670       933,538       1,553,297       1,574,920  
 
Total mortgage-backed
    682,542       663,660       985,846       973,517       1,754,335       1,780,835  
 
Other agencies
                                               
Under 1 year
                500       503       106,087       107,195  
1-5 years
    535,760       522,427       535,502       530,670       779,563       798,034  
6-10 years
    450,231       430,329       450,952       441,072       403,006       403,441  
Over 10 years
                            73,625       73,625  
 
Total other agencies
    985,991       952,756       986,954       972,245       1,362,281       1,382,295  
 
 
                                               
Total U.S. Treasury and Federal Agencies
    1,693,520       1,641,052       1,997,787       1,970,898       3,194,824       3,242,385  
 
 
                                               
Municipal securities
                                               
Under 1 year
    63       63       5,997       6,032       8,235       8,258  
1-5 years
    361       362       9,990       10,392       20,834       21,240  
6-10 years
    82,923       81,932       83,102       83,771       79,852       81,643  
Over 10 years
    309,063       309,442       311,525       316,029       312,325       316,026  
 
Total municipal securities
    392,410       391,799       410,614       416,224       421,246       427,167  
 
Private Label CMO
                                               
Under 1 year
                                   
1-5 years
                                   
6-10 years
                                   
Over 10 years
    435,931       428,839       462,394       458,027       569,776       574,002  
 
Total Private Label CMO
    435,931       428,839       462,394       458,027       569,776       574,002  
 
Asset backed securities
                                               
Under 1 year
                                   
1-5 years
    30,000       30,000       30,000       30,000       30,000       30,075  
6-10 years
    6,385       6,419       8,084       8,155       11,780       11,783  
Over 10 years
    1,404,743       1,409,855       1,160,212       1,161,827       949,747       950,286  
 
Total asset backed securities
    1,441,128       1,446,274       1,198,296       1,199,982       991,527       992,144  
 
Other
                                               
Under 1 year
    2,100       2,109       2,100       2,118       500       742  
1-5 years
    11,005       11,219       9,102       9,384       9,317       9,724  
6-10 years
    2,655       2,622       2,913       2,980       3,259       3,391  
Over 10 years
    120,717       123,490       169,872       173,131       193,280       193,997  
Retained interest in securitizations
                            5,365       6,050  
Marketable equity securities
    5,190       5,471       5,526       6,201       7,479       8,745  
 
 
Total other
    141,667       144,911       189,513       193,814       219,200       222,649  
 
 
                                               
Total investment securities
  $ 4,104,656     $ 4,052,875     $ 4,258,604     $ 4,238,945     $ 5,396,573     $ 5,458,347  
 

9


     Based upon its assessment, Management does not believe any individual unrealized loss at March 31, 2005, represents an other-than-temporary impairment. In addition, Huntington has both the intent and ability to hold these securities for a time necessary to recover the amortized cost. There were no temporary impairments of any securities recognized in either of the three-month periods ended March 31, 2005 and 2004.

Note 7 – Other Comprehensive Income

     The components of Huntington’s Other Comprehensive Income in the three months ended March 31 were as follows:

                 
    Three Months Ended  
    March 31,  
(in thousands of dollars)   2005     2004  
 
Unrealized holding gains and losses on securities available for sale arising during the period:
               
Unrealized net (losses) gains
  $ (31,165 )   $ 62,066  
Related tax benefit (expense)
    10,998       (21,723 )
 
Net
    (20,167 )     40,343  
 
 
               
Reclassification adjustment for net gains from sales of securities available for sale realized during the period:
               
Realized net gains
    (957 )     (15,090 )
Related tax expense
    335       5,281  
 
Net
    (622 )     (9,809 )
 
 
               
Total unrealized holding (losses) gains on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income
    (20,789 )     30,534  
 
 
               
Unrealized gains and losses on derivatives used in cash flow hedging relationships arising during the period:
               
Unrealized net gains (losses)
    20,009       (18,034 )
Related tax (expense) benefit
    (7,003 )     6,312  
 
Net
    13,006       (11,722 )
 
 
               
Total Other Comprehensive (Loss) Income
  $ (7,783 )   $ 18,812  
 

     Activity in Accumulated Other Comprehensive Income for the three months ended March 31, 2005 and 2004 was as follows:

                                 
            Unrealized gains              
            and losses on              
            derivative              
    Unrealized gains     instruments used              
    and losses on     in cash flow              
    securities available     hedging     Minimum pension        
(in thousands of dollars)   for sale     relationships     liability     Total  
 
Balance, December 31, 2003
  $ 9,429     $ (5,442 )   $ (1,309 )   $ 2,678  
Period change
    30,534       (11,722 )           18,812  
 
Balance, March 31, 2004
  $ 39,963     $ (17,164 )   $ (1,309 )   $ 21,490  
 
 
                               
Balance, December 31, 2004
  $ (12,683 )   $ 4,252     $ (2,472 )   $ (10,903 )
Period change
    (20,789 )     13,006             (7,783 )
 
Balance, March 31, 2005
  $ (33,472 )   $ 17,258     $ (2,472 )   $ (18,686 )
 

10


Note 8 – Earnings per Share

     Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares upon the exercise of stock options. The calculation of basic and diluted earnings per share for each of the three months ended March 31 is as follows:

                 
    Three Months Ended  
    March 31,  
(in thousands of dollars, except per share amounts)   2005     2004  
 
Net Income
  $ 96,519     $ 104,173  
 
               
Average common shares outstanding
    231,824       229,227  
Dilutive effect of common stock equivalents
    3,229       3,688  
 
Diluted Average Common Shares Outstanding
    235,053       232,915  
 
 
               
Earnings Per Share
               
Basic
  $ 0.42     $ 0.45  
Diluted
    0.41       0.45  

     The average market price of Huntington’s common stock for the period was used in determining the dilutive effect of outstanding stock options. Common stock equivalents are computed based on the number of shares subject to stock options that have an exercise price less than the average market price of Huntington’s common stock for the period.

     Options on approximately 2.6 million and 2.8 million shares were outstanding at March 31, 2005 and 2004, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. The weighted average exercise price for these options was $26.96 per share and $26.74 per share at the end of the same respective periods.

     On January 7, 2005, Huntington released from escrow 86,118 shares of Huntington common stock to former shareholders of LeaseNet, Inc., which were previously issued in September 2002. A total of 373,896 common shares, previously held in escrow, was returned to Huntington. All shares in escrow had been accounted for as treasury stock.

Note 9 – Stock-Based Compensation

     Huntington’s stock-based compensation plans are accounted for based on the intrinsic value method promulgated by APB Opinion 25, Accounting for Stock Issued to Employees , and related interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant.

     The following pro forma disclosures for net income and earnings per diluted common share is presented as if Huntington had applied the fair value method of accounting of Statement No. 123 in measuring compensation costs for stock options. The fair values of the stock options granted were estimated using the Black-Scholes option-pricing model. This model assumes that the estimated fair value of the options is amortized over the options’ vesting periods and the compensation costs would be included in personnel expense on the income statement. The following table also includes the weighted-average assumptions that were used in the option-pricing model for options granted in each of the quarters presented:

11


                 
    Three Months Ended  
    March 31,  
    2005     2004  
 
Number of stock options granted during the period (in thousands)
    96.9       35.0  
 
               
Assumptions
               
Risk-free interest rate
    4.13 %     3.71 %
Expected dividend yield
    3.47       3.20  
Expected volatility of Huntington’s common stock
    26.3       30.9  
Expected option term (years)
    6.0       6.0  
 
               
Pro Forma Results (in millions of dollars)
               
Net income, as reported
  $ 96.5     $ 104.2  
Pro forma expense, net of tax, related to options granted
    (2.9 )     (2.9 )
 
Pro Forma Net Income
  $ 93.6     $ 101.3  
 
 
               
Net Income Per Common Share:
               
Basic, as reported
  $ 0.42     $ 0.45  
Basic, pro forma
    0.40       0.44  
Diluted, as reported
    0.41       0.45  
Diluted, pro forma
    0.40       0.43  

Note 10 – Benefit Plans

     Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory defined benefit pension plan covering substantially all employees. The Plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code. In addition, Huntington has an unfunded, defined benefit post-retirement plan (Post-Retirement Benefit Plan) that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage.

     The following table shows the components of net periodic benefit expense:

                                 
    Pension Benefits     Post Retirement Benefits  
    Three Months Ended     Three Months Ended  
    March 31,     March 31,  
(in thousands of dollars)   2005     2004     2005     2004  
 
Service cost
  $ 3,545     $ 3,038     $ 353     $ 324  
Interest cost
    4,753       4,370       778       802  
Expected return on plan assets
    (6,031 )     (5,381 )            
Amortization of transition asset
    (1 )           276       276  
Amortization of prior service cost
    1             94       145  
Settlements
          1,000              
Recognized net actuarial loss
    2,673       1,984              
               
Benefit Expense
  $ 4,940     $ 5,011     $ 1,501     $ 1,547  
     

     There is no expected minimum contribution for 2005 to the Plan. Although not required, Huntington made a contribution to the Plan of $63.7 million in April 2005. Expected contributions for 2005 for the Post-Retirement Benefit Plan are $4.0 million.

12


     Huntington also sponsors other retirement plans, the most significant being the Supplemental Executive Retirement Plan and the Supplemental Retirement Income Plan. These plans are nonqualified plans that provide certain former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law.

     Huntington has a defined contribution plan that is available to eligible employees. Matching contributions by Huntington equal 100% on the first 3%, then 50% on the next 2%, of participant elective deferrals. The cost of providing this plan was $2.5 million and $2.4 million for the three months ended March 31, 2005 and 2004, respectively.

Note 11 – Commitments and Contingent Liabilities

Commitments to extend credit :

     In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial statements. The contract amount of these financial agreements at March 31, 2005, December 31, 2004, and March 31, 2004, were as follows:

                         
    March 31,     December 31,     March 31,  
(in millions of dollars)   2005     2004     2004  
 
Contract amount represents credit risk
                       
Commitments to extend credit
                       
Commercial
    5,133       5,076       5,091  
Consumer
    3,095       2,928       2,729  
Commercial real estate
    880       340       668  
Standby letters of credit
    956       945       944  
Commercial letters of credit
    51       72       112  

     Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.

     Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $3.6 million, $4.1 million, and $3.4 million at March 31, 2005, December 31, 2004, and March 31, 2004, respectively.

     Commercial letters of credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The merchandise or cargo being traded normally secures these instruments.

Commitments to sell loans:

     Huntington entered into forward contracts, relating to its mortgage banking business. At March 31, 2005, December 31, 2004, and March 31, 2004, Huntington had commitments to sell residential real estate loans of $388.5 million, $311.3 million, and $414.5 million, respectively. These contracts mature in less than one year.

Litigation:

     In the ordinary course of business, there are various legal proceedings pending against Huntington and its subsidiaries. In the opinion of Management, the aggregate liabilities, if any, arising from such proceedings are not expected to have a material adverse effect on Huntington’s consolidated financial position. (see Note 3.)

13


Note 12 – Stock Repurchase Plan

     Effective April 27, 2004, the board of directors authorized a new share repurchase program (the 2004 Repurchase Program) which cancelled the 2003 Repurchase Program and authorized Management to repurchase not more than 7,500,000 shares of Huntington common stock. As of March 31, 2005, there have been no share repurchases made under the 2004 Repurchase Program. On April 25, 2005, Huntington announced that it intends to reactivate its share repurchase program upon approval by the Commission of the proposed settlement offer to resolve the SEC formal investigation. It expects to repurchase these shares from time-to-time in the open market or through privately negotiated transactions depending on market conditions.

Note 13 – Segment Reporting

     Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial Group (PFG). A fourth segment includes the Company’s Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around Huntington’s organizational and management structure and, accordingly, the results below are not necessarily comparable with similar information published by other financial institutions. An overview of this system is provided below, along with a description of each segment and discussion of financial results.

     The following provides a brief description of the four operating segments of Huntington:

Regional Banking: This segment provides products and services to consumer, small business, and commercial customers. These products and services are offered in seven operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky through the Company’s banking network of 335 branches, over 700 ATMs, plus Internet and telephone banking channels. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, small business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail products and services comprise 61% and 78%, of total regional banking loans and deposits, respectively. Commercial Banking serves middle market and large commercial banking relationships, which use a variety of banking products and services including, but not limited to, commercial loans, international trade, cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.

Dealer Sales: This segment serves more than 3,500 automotive dealerships within Huntington’s primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee. The segment finances the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles to consumers under long-term operating or direct finance leases, finances the dealership’s floor plan inventories, real estate, or working capital needs, and provides other banking services to the automotive dealerships and their owners.

Private Financial Group: This segment provides products and services designed to meet the needs of the Company’s higher net worth customers. Revenue is derived through trust, asset management, investment advisory, brokerage, insurance, and private banking products and services.

Treasury / Other: This segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or allocated to one of the other three business segments. Assets included in this segment include investment securities, bank owned life insurance, and mezzanine loans originated through Huntington Capital Markets.

Use of Operating Earnings to Measure Segment Performance

     Management uses earnings on an operating basis, rather than on a GAAP basis, to measure underlying performance trends for each business segment and to determine the success of strategies and future earnings capabilities. Operating earnings represent GAAP earnings adjusted to exclude the impact of the significant items listed in the reconciliation table below. For the three months ending March 31, 2005, operating earnings were the same as reported GAAP earnings.

14


     Listed below is certain operating basis financial information reconciled to Huntington’s first quarter 2005 and 2004 reported results by line of business.

                                         
    Three Months Ended March 31,  
Income Statements   Regional     Dealer             Treasury/     Huntington  
(in thousands of dollars)   Banking     Sales     PFG     Other     Consolidated  
 
2005
                                       
Net interest income
  $ 185,203     $ 37,907     $ 13,926     $ (1,838 )   $ 235,198  
Provision for credit losses
    (12,260 )     (6,825 )     300       (1,089 )     (19,874 )
Non-interest income
    71,353       53,143       31,106       12,448       168,050  
Non-interest expense
    (149,638 )     (56,599 )     (29,868 )     (22,172 )     (258,277 )
Income taxes
    (33,130 )     (9,669 )     (5,412 )     19,633       (28,578 )
 
Operating earnings and net income, as reported
  $ 61,528     $ 17,957     $ 10,052     $ 6,982     $ 96,519  
 
 
                                       
2004
                                       
Net interest income
  $ 157,325     $ 35,069     $ 12,416     $ 17,875     $ 222,685  
Provision for credit losses
    (2,105 )     (21,655 )     556       (2,392 )     (25,596 )
Non-interest income
    72,051       96,445       28,635       21,504       218,635  
Non-interest expense
    (146,915 )     (91,369 )     (29,461 )     (17,909 )     (285,654 )
Income taxes
    (28,125 )     (6,472 )     (4,251 )     7,098       (31,750 )
 
Operating earnings
    52,231       12,018       7,895       26,176       98,320  
Gain on sale of automobile loans, net of tax
          6,146             (293 )     5,853  
 
Net income, as reported
  $ 52,231     $ 18,164     $ 7,895     $ 25,883     $ 104,173  
 
                                                 
    Assets at     Deposits at  
Balance Sheets   March 31,     December 31,     March 31,     March 31,     December 31,     March 31,  
(in millions of dollars)   2005     2004     2004     2005     2004     2004  
     
Regional Banking
  $ 18,148     $ 17,809     $ 15,633     $ 17,523     $ 17,421     $ 15,937  
Dealer Sales
    6,091       6,100       6,609       69       75       76  
PFG
    1,655       1,649       1,491       1,139       1,176       1,061  
Treasury / Other
    6,289       7,007       7,306       3,040       2,096       1,915  
     
Total
  $ 32,183     $ 32,565     $ 31,039     $ 21,771     $ 20,768     $ 18,989  
     

15


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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. Selected financial services 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.

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 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 below and 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 (2004 Form 10-K), and other factors described in this report and from time-to-time in other filings with the Securities and Exchange Commission.

     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. Management strives to mitigate 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 operations, (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, or systems, or external events. The description of Huntington’s business contained in Item 1 of its 2004 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.

SEC Formal Investigation

     On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC or Commission) 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

16


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.

     On April 25, 2005, Huntington announced that it has proposed a settlement to the staff of the Securities and Exchange Commission regarding the resolution of its previously announced formal investigation into certain financial accounting matters relating to fiscal years 2002 and earlier and certain related disclosure matters, and that the staff has agreed to recommend the proposed settlement offer to the Commission. The proposed settlement, which is subject to approval by the Commission, is expected to involve the entry of an order requiring Huntington; its chief executive officer, Thomas E. Hoaglin; its former vice chairman and chief financial officer, Michael J. McMennamin; and its former controller, John Van Fleet, to comply with various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933. The proposed settlement would call for the payment of a $7.5 million civil money penalty by the company, which, if approved, would be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. This civil money penalty would have no current period financial impact on Huntington’s results, as reserves for this amount were established and expensed prior to December 31, 2004. The proposed settlement would also require the disgorgement of $360,000 by Hoaglin in respect of his previously paid 2002 annual bonus, and disgorgement of previously paid bonuses and prejudgment interest for McMennamin and Van Fleet of $265,215 and $26,660, respectively. In addition, Hoaglin, McMennamin, and Van Fleet would pay civil money penalties of $50,000; $75,000; and $25,000; respectively. The proposed settlement would also impose certain other relief with respect to McMennamin and Van Fleet.

     No assurances can be made as to final timing or outcome.

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. The agreements call for independent third-party reviews, as well as the submission of written plans and progress reports by Management and 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.

     As announced November 12, 2004, Huntington and Unizan Financial Corp. (Unizan) have entered into an amendment to their January 26, 2004 merger agreement extending the term of the agreement for one year from January 27, 2005 to January 27, 2006, and Huntington has withdrawn its application with the Federal Reserve to acquire Unizan. On March 1, 2005, Huntington announced that it intends to resubmit the application for regulatory approval of the merger once the regulatory written agreements have been terminated. No assurance, however, can be provided as to the ultimate timing or outcome of these matters.

17


SUMMARY DISCUSSION OF RESULTS

     Huntington’s 2005 first quarter earnings were $96.5 million, or $0.41 per common share, down 7% from $104.2 million, and down 9% from $0.45 per common share in the year-ago quarter. Compared with 2004 fourth quarter net income of $91.1 million and $0.39 per common share, 2005 first quarter earnings and earnings per share were up 6% and 5%, respectively.

     The return on average assets (ROA) and return on average equity (ROE) were 1.20% and 15.5%, respectively, in the current quarter, down from 1.36% and 18.4%, respectively, in the year-ago quarter, but up from 1.13% and 14.6%, respectively, in the 2004 fourth quarter. (see Table 1.)

Management’s Summary Review of 2005 First Quarter Performance versus 2004 First and Fourth Quarters

     First quarter earnings per share performance of $0.41 was slightly below Management’s expectations. Management was pleased with loan and deposit growth, and a stable net interest margin and expense levels, but was disappointed with the weakness in fee revenue and one significant commercial loan net charge-off.

     Loan growth grew strongly across all regions and loan categories. Deposits increased and the Company added new customers. Average total loans and leases were 11% higher than in the year-ago quarter. Compared with the 2004 fourth quarter, average total loans grew at a 14% annualized rate, reflecting 15% and 14% annualized growth in average total consumer and total commercial loans, respectively.

     Average core deposits were 10% higher than a year ago. Compared with the fourth quarter, average core deposits increased at a 3% annualized growth rate. A slow down in first quarter core deposit growth is typical due to seasonal factors. However, this year’s 3% linked quarter annualized increase compared very favorably to the 2% annualized decrease in the year-earlier quarter. Importantly, the number of the Company’s consumer demand deposit households and small business demand deposit relationships both continued their positive growth trends and were 3% and 9% higher than a year ago, respectively.

     Management was pleased with the relative stability of the net interest margin, as it declined only one basis point to 3.31% from the fourth quarter’s 3.38% level after taking into account a 6 basis point one-time positive impact to the fourth quarter net interest margin from a funding adjustment. The Company expects the net interest margin to improve slightly over the rest of the year from the current quarter’s level. This margin improvement, along with anticipated loan growth, is expected to be key drivers of higher revenue in coming quarters.

     Certain fee income categories declined from the prior period more than anticipated. In particular, other income declined, reflecting soft equity markets which resulted in lower equity investment gains in the current quarter compared with gains in the fourth quarter. In addition, both commercial and personal service charge income declined consistent with recent industry trends.

     Management was also pleased with overall credit quality performance, although annualized net charge-offs at 0.47% was higher than the 0.36% level in the 2004 fourth quarter, reflecting the negative impact from a single middle market commercial credit charge-off. Non-performing assets (NPAs) declined, as expected, and were only $73.3 million, or 0.30% of total loans and leases and other real estate at quarter-end, down from 0.46% at year end, and were the lowest level in many years. Improvement in the economic outlook and a reduction in specific reserves due to charge-offs resulted in a decline in the loan loss reserve ratio to 1.09% from 1.15% at year-end. In spite of this decline in the loan loss reserve ratio, the allowance strengthened in relation to the level of non-performing loans (NPL) as the NPL coverage ratio increased to 441%, up from 424% at the end of the fourth quarter, and remains among the highest in the Company’s peer group.

     The capital position continued to strengthen. At March 31, 2005, the tangible common equity to risk-weighted assets ratio was 7.83%, down from 7.86% at year-end.

18


Table 1 — Selected Quarterly Income Statement Data

                                                           
    2005     2004       1Q05 vs 1Q04
                     
(in thousands of dollars, except per share amounts)   First     Fourth     Third     Second     First       Amount     Percent  
           
Interest income
  $ 376,105     $ 359,215     $ 338,002     $ 324,167     $ 325,931       $ 50,174       15.4 %
Interest expense
    140,907       120,147       110,944       101,604       103,246         37,661       36.5  
           
Net interest income
    235,198       239,068       227,058       222,563       222,685         12,513       5.6  
Provision for credit losses
    19,874       12,654       11,785       5,027       25,596         (5,722 )     (22.4 )
           
Net interest income after provision for credit losses
    215,324       226,414       215,273       217,536       197,089         18,235       9.3  
           
Operating lease income
    46,732       55,106       64,412       78,706       88,867         (42,135 )     (47.4 )
Service charges on deposit accounts
    39,418       41,747       43,935       43,596       41,837         (2,419 )     (5.8 )
Trust services
    18,196       17,315       17,064       16,708       16,323         1,873       11.5  
Brokerage and insurance income
    13,026       12,879       13,200       13,523       15,197         (2,171 )     (14.3 )
Bank owned life insurance income
    10,104       10,484       10,019       11,309       10,485         (381 )     (3.6 )
Other service charges and fees
    10,159       10,617       10,799       10,645       9,513         646       6.8  
Mortgage banking
    12,061       8,822       4,448       23,322       (4,296 )       16,357       N.M.  
Securities gains (losses)
    957       2,100       7,803       (9,230 )     15,090         (14,133 )     (93.7 )
Gain on sales of automobile loans
                312       4,890       9,004         (9,004 )     N.M.  
Other income
    17,397       23,870       17,899       24,659       25,619         (8,222 )     (32.1 )
           
Total non-interest income
    168,050       182,940       189,891       218,128       227,639         (59,589 )     (26.2 )
           
Personnel costs
    123,981       122,738       121,729       119,715       121,624         2,357       1.9  
Operating lease expense
    37,948       48,320       54,885       62,563       70,710         (32,762 )     (46.3 )
Net occupancy
    19,242       26,082       16,838       16,258       16,763         2,479       14.8  
Outside data processing and other services
    18,770       18,563       17,527       17,563       18,462         308       1.7  
Equipment
    15,863       15,733       15,295       16,228       16,086         (223 )     (1.4 )
Professional services
    9,459       9,522       12,219       7,836       7,299         2,160       29.6  
Marketing
    6,454       5,581       5,000       8,069       7,839         (1,385 )     (17.7 )
Telecommunications
    4,882       4,596       5,359       4,638       5,194         (312 )     (6.0 )
Printing and supplies
    3,094       3,148       3,201       3,098       3,016         78       2.6  
Amortization of intangibles
    204       205       204       204       204                
Restructuring reserve releases
                (1,151 )                          
Other expense
    18,380       26,526       22,317       25,981       18,457         (77 )     (0.4 )
           
Total non-interest expense
    258,277       281,014       273,423       282,153       285,654         (27,377 )     (9.6 )
           
Income before income taxes
    125,097       128,340       131,741       153,511       139,074         (13,977 )     (10.1 )
Provision for income taxes
    28,578       37,201       38,255       43,384       34,901         (6,323 )     (18.1 )
           
Net income
  $ 96,519     $ 91,139     $ 93,486     $ 110,127     $ 104,173       $ (7,654 )     (7.3 )%
           
 
                                                         
Average common shares — diluted
    235,053       235,502       234,348       232,659       232,915         2,138       0.9 %
 
                                                         
Per common share
                                                         
Net income — diluted
  $ 0.41     $ 0.39     $ 0.40     $ 0.47     $ 0.45       $ (0.04 )     (8.9 )
Cash dividends declared
    0.200       0.200       0.200       0.175       0.175         0.025       14.3  
 
                                                         
Return on average total assets
    1.20 %     1.13 %     1.18 %     1.41 %     1.36 %       (0.16 )%     (11.8 )
Return on average total shareholders’ equity
    15.5       14.6       15.4       19.1       18.4         (2.9 )     (15.8 )
Net interest margin (1)
    3.31       3.38       3.30       3.29       3.36         (0.05 )     (1.5 )
Efficiency ratio (2)
    63.7       66.4       66.3       62.3       65.1         (1.4 )     (2.2 )
Effective tax rate
    22.8       29.0       29.0       28.3       25.1         (2.3 )     (9.2 )
 
                                                         
Revenue — fully taxable equivalent (FTE)
                                                         
Net interest income
  $ 235,198     $ 239,068     $ 227,058     $ 222,563     $ 222,685       $ 12,513       5.6  
FTE adjustment
    2,861       2,847       2,864       2,919       3,023         (162 )     (5.4 )
           
Net interest income (1)
    238,059       241,915       229,922       225,482       225,708         12,351       5.5  
Non-interest income
    168,050       182,940       189,891       218,128       227,639         (59,589 )     (26.2 )
           
Total revenue (1)
  $ 406,109     $ 424,855     $ 419,813     $ 443,610     $ 453,347       $ (47,238 )     (10.4 )%
           


N.M., not a meaningful value.

(1)     On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(2)     Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses).

19


Significant Factors Influencing Financial Performance Comparisons

     Earnings comparisons from the beginning of 2004 through the first three months of 2005 were 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 through April 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 allowance for loan and lease losses (ALLL), with related changes in the ALLL reflected in the 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 the Company’s 2004 Form 10-K for additional discussion).
 
  2.   Generally recovering economic environment throughout this period. This has been reflected in improving demand for loans, including middle market commercial and industrial (C&I) loans, most notably beginning in the second half of 2004, as well as contributing to good growth in other consumer portfolios. This recovering trend has also been a contributing factor to generally improving credit quality performance throughout this period.
 
  3.   Mortgage servicing rights (MSRs) and related hedging. Interest rate levels throughout this period have remained low by historical standards. Nevertheless, they have been generally increasing which has impacted the valuation of MSRs. MSRs are volatile when rates change.

  •   Since the second quarter of 2002, the Company generally has retained the servicing on mortgage loans it originates and sells. The mortgage servicing right (MSR) represents the present value of expected future net servicing income for the loan. MSR values are very sensitive to movements in interest rates. 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 when mortgage interest rates rise. Thus, as interest rates decline, less future income is expected and the value of MSRs declines and becomes impaired when the valuation is less than the recorded book value. The Company recognizes temporary impairment due to change in interest rates through a valuation reserve and 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 quarters resulted in some quarters reporting an MSR temporary impairment, with others reporting a recovery of previously reported MSR temporary impairment. Such swings in MSR valuations have significantly impacted quarterly mortgage banking income throughout this period.
 
  •   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 reacts to interest rate changes in an opposite direction compared with MSR valuations. 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 are sold resulting in a gain on sale, and vice versa. Investment securities gains or losses are reflected in the income statement in a

20


      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, valuation changes may differ in magnitude or the timing of when the MSR valuation is determined and recorded, may differ from when the securities are sold and any gain or loss is recorded. (see Table 2.)

  4.   The sale of automobile loans with the objective of lowering the volatility of earnings. A key strategy over this time period was to lower the credit exposure to automobile loans and leases to 20% or less of total credit exposure, primarily by selling automobile loans. These sales of higher-rate, higher-risk loans impact 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 2.)
 
  5.   Commercial charge-off and recovery. A single commercial credit recovery in the 2004 second quarter on a loan previously charged off in the 2002 fourth quarter favorably impacted the 2004 second quarter provision expense (see Table 11) , as well as middle-market commercial and industrial, total commercial, and total net charge-offs for the quarter. (see Table 12.) In addition, in the 2005 first quarter, a single commercial credit was charged-off. This impacted 2005 first quarter total net charge-offs as well as this quarter’s provision expense. (see Tables 2, 11, and 12.)
 
  6.   SEC formal investigation-related expenses and accruals. On June 26, 2003, Huntington announced that the Securities and Exchange Commission 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.
 
      On April 25, 2005, Huntington announced that it has proposed a settlement to the staff of the Securities and Exchange Commission regarding the resolution of its previously announced formal investigation into certain financial accounting matters relating to fiscal years 2002 and earlier and certain related disclosure matters, and that the staff has agreed to recommend the proposed settlement offer to the Commission. The proposed settlement, which is subject to approval by the Commission, is expected to involve the entry of an order requiring Huntington; its chief executive officer, Thomas E. Hoaglin; its former vice chairman and chief financial officer, Michael J. McMennamin; and its former controller, John Van Fleet, to comply with various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933. The proposed settlement would call for the payment of a $7.5 million civil money penalty by the company, which, if approved, would be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. This civil money penalty would have no current period financial impact on Huntington’s results, as reserves for this amount were established and expensed prior to December 31, 2004. The proposed settlement would also require the disgorgement of $360,000 by Hoaglin in respect of his previously paid 2002 annual bonus, and disgorgement of previously paid bonuses and prejudgment interest for McMennamin and Van Fleet of $265,215 and $26,660, respectively. In addition, Hoaglin, McMennamin, and Van Fleet would pay civil money penalties of $50,000; $75,000; and $25,000; respectively. The proposed settlement would also impose certain other relief with respect to McMennamin and Van Fleet.
 
      No assurances can be made as to final timing or outcome. (see Table 2.)
 
  7.   Banking regulatory formal written agreements. On March 1, 2005, Huntington announced that it had entered into formal written agreements with its banking regulators, the FRBC and the 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. The agreements call for independent third-party reviews, as well as the submission of written plans and progress reports by Management and remain in effect until terminated by the banking regulators.

21


      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. (see Table 2.) Management believes that the changes 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.
 
  8.   Unizan acquisition system conversion expenses. As announced November 12, 2004, Huntington and Unizan have entered into an amendment to their January 26, 2004 merger agreement extending the term of the agreement for one year from January 27, 2005 to January 27, 2006, and Huntington has withdrawn its application with the Federal Reserve to acquire Unizan. On March 1, 2005, Huntington announced that it intends to resubmit the application for regulatory approval of the merger once the regulatory written agreements have been terminated. No assurance, 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 Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements.)
 
  9.   Property lease impairment. As a result of the 2004 fourth quarter property valuation review, a $7.8 million property lease impairment was recognized in net occupancy expense. (see Table 2.)
 
  10.   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 funding cost adjustment lowered interest expense by $3.7 million in the fourth quarter. (see Table 2.)
 
  11.   Effective tax rate. The 2005 first quarter effective tax rate included the after-tax positive impact on net income due to a federal tax loss carry back, tax exempt income, bank owned life insurance, asset securitization activities, and general business credits from investment in low income housing and historic property partnerships. The lower effective tax rate is expected to impact each quarter of 2005. In 2006, the effective tax rate is anticipated to increase to a more typical rate slightly below 30%.

22


     Significant 2005 first quarter performance highlights included:

  •   $6.4 million after-tax ($0.03 earnings per share) positive impact on net income reflecting the recognition of the effect of federal tax refunds on income tax expense. These federal tax refunds resulted from the ability to carry back federal tax losses to prior-years.
 
  •   $6.4 million pre-tax ($0.02 earnings per share) unfavorable impact to provision expense, relating to a $14.2 million middle market commercial charge-off, net of $7.8 million of allocated reserves.
 
  •   $2.0 million pre-tax ($0.01 earnings per share) unfavorable impact from SEC and regulatory-related expenses.

     The following table quantifies the earnings impact of the significant factors noted in #3-11 above on the specified periods.

Table 2 — Significant Items Influencing Earnings Performance Comparisons

                 
    Impact (1)  
(in millions, except per share amounts)   Earnings (2)     EPS  
         
Three Months Ended:
               
 
               
March 31, 2005 - GAAP earnings (3)
  $ 125.1     $ 0.41  
Federal tax loss carry back
    6.4 (4)     0.03  
Single C&I charge-off impact, net of allocated reserves
    (6.4 )     (0.02 )
SEC and regulatory related expenses
    (2.0 )     (0.01 )
 
               
December 31, 2004 - GAAP earnings
  $ 128.3     $ 0.39  
SEC related expenses and accruals
    (6.5 )     (0.03 )
Property lease impairment
    (7.8 )     (0.02 )
Funding cost adjustment
    3.7       0.01  
 
               
March 31, 2004 - GAAP earnings
  $ 139.1     $ 0.45  
Gain of sale of $868 million of automobile loans
    9.0       0.03  
Mortgage servicing right temporary impairment
    (10.1 )     (0.03 )
Investment securities gain on sale
    15.1       0.04  


(1)     Favorable (unfavorable) impact on GAAP earnings
 
(2)     Pre-tax unless otherwise noted
 
(3)     Includes significant items with $0.01 EPS impact or greater
 
(4)     After-tax

RESULTS OF OPERATIONS

Net Interest Income

(This section should be read in conjunction with Significant Factors 1-4 and 10.)

2005 First Quarter versus 2004 First Quarter

     Fully taxable equivalent net interest income increased $12.4 million, or 5%, from the year-ago quarter, reflecting the favorable impact of an 8% increase in average earning assets, partially offset by a 5 basis point, or an effective 1%, decline in the net interest margin. The fully taxable equivalent net interest margin decreased to 3.31% from 3.36% in the year-ago quarter. The decline from the year-ago quarter reflected the impact of the strategic repositioning of portfolios to reduce automobile loans and increase the relative proportion of lower-rate, lower-risk, residential real estate-related loans.

23


     The net interest margin was also adversely impacted by higher-than-normal levels of short-term assets. These assets averaged $0.3 billion for the quarter and reduced net interest income by $0.4 million and reduced the net interest margin by 5 basis points. The excess short-term assets resulted from a decision made in the fourth quarter of 2004 to fund maturities of long-term debt in the first quarter of 2005, by issuing negotiable certificates of deposit and medium-term bank notes. Short-term assets at March 31, 2005, represents a level that Management expects for the remainder of 2005.

     Average total loans and leases increased $2.4 billion, or 11%, from the 2004 first quarter due primarily to a $1.5 billion, or 13%, increase in average consumer loans. Contributing to the consumer loan growth were a $1.2 billion, or 47%, increase in average residential mortgages and a $0.8 billion, or 20%, increase in average home equity loans.

     Average total automobile loans declined $1.0 billion, or 34%, from the year-ago quarter reflecting the sale of $1.5 billion of automobile loans over this 12-month period as part of a strategy of reducing automobile loan and lease exposure as a percent of total credit exposure. Partially offsetting the decline in automobile loans was growth in direct financing leases due to the migration from operating lease assets, which have not been originated since April 2002. Average direct financing leases increased $0.5 billion, or 24%, from the year-ago quarter.

     Average total commercial loans were $10.4 billion, up $0.9 billion, or 9%, from the year-ago quarter. This increase reflected a $0.4 billion, or 12%, increase in middle market real estate loans and a $0.3 billion, or 6%, increase in middle market commercial and industrial loans. Average small business loans, which include both commercial and industrial and commercial real estate loans, increased $0.2 billion, or 11%, reflecting continued success in meeting the needs of this targeted segment.

     Average total core deposits in the first quarter were $17.0 billion, up $1.6 billion, or 10%, from the year-ago quarter, reflecting a $1.3 billion, or 20%, increase in average interest bearing demand deposit accounts, and a $0.3 billion, or 10%, increase in non-interest bearing deposits.

     Tables 3 and 4 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities:

24


Table 3 — Condensed Consolidated Quarterly Average Balance Sheets

                                                           
    Average Balances       Change  
Fully taxable equivalent basis   2005     2004       1Q05 vs 1Q04  
(in millions of dollars)   First     Fourth     Third     Second     First       Amount     Percent  
             
Assets
                                                         
Interest bearing deposits in banks
  $ 53     $ 60     $ 55     $ 69     $ 79       $ (26 )     (32.9) %
Trading account securities
    200       228       148       28       16         184       N.M.  
Federal funds sold and securities purchased under resale agreements
    475       695       318       168       92         383       N.M.  
Loans held for sale
    203       229       283       254       207         (4 )     (1.9 )
Investment securities:
                                                         
Taxable
    3,932       3,858       4,340       4,861       4,646         (714 )     (15.4 )
Tax-exempt
    409       404       398       410       437         (28 )     (6.4 )
           
Total investment securities
    4,341       4,262       4,738       5,271       5,083         (742 )     (14.6 )
Loans and leases: (1)
                                                         
Commercial:
                                                         
Middle market commercial and industrial
    4,710       4,503       4,298       4,555       4,440         270       6.1  
Construction
    1,642       1,577       1,514       1,272       1,276         366       28.7  
Commercial
    1,883       1,852       1,913       1,919       1,873         10       0.5  
           
Middle market commercial real estate
    3,525       3,429       3,427       3,191       3,149         376       11.9  
Small business commercial and industrial and commercial real estate
    2,183       2,136       2,081       2,018       1,974         209       10.6  
           
Total commercial
    10,418       10,068       9,806       9,764       9,563         855       8.9  
           
Consumer:
                                                         
Automobile loans
    2,008       1,913       1,857       2,337       3,041         (1,033 )     (34.0 )
Automobile leases
    2,461       2,388       2,250       2,139       1,988         473       23.8  
           
Automobile loans and leases
    4,469       4,301       4,107       4,476       5,029         (560 )     (11.1 )
Home equity
    4,570       4,489       4,337       4,107       3,810         760       19.9  
Residential mortgage
    3,919       3,695       3,484       2,986       2,674         1,245       46.6  
Other loans
    480       479       461       434       426         54       12.7  
           
Total consumer
    13,438       12,964       12,389       12,003       11,939         1,499       12.6  
           
Total loans and leases
    23,856       23,032       22,195       21,767       21,502         2,354       10.9  
Allowance for loan and lease losses
    (282 )     (283 )     (288 )     (310 )     (313 )       31       9.9  
           
Net loans and leases
    23,574       22,749       21,907       21,457       21,189         2,385       11.3  
           
Total earning assets
    29,128       28,506       27,737       27,557       26,979         2,149       8.0  
           
Operating lease assets
    529       648       800       977       1,166         (637 )     (54.6 )
Cash and due from banks
    909       880       928       772       740         169       22.8  
Intangible assets
    218       216       216       216       217         1       0.5  
All other assets
    2,079       2,094       2,066       2,101       2,046         33       1.6  
           
Total Assets
  $ 32,581     $ 32,061     $ 31,459     $ 31,313     $ 30,835       $ 1,746       5.7 %
           
 
                                                         
Liabilities and Shareholders’ Equity
                                                         
Deposits:
                                                         
Non-interest bearing demand deposits
  $ 3,314     $ 3,401     $ 3,276     $ 3,223     $ 3,017       $ 297       9.8 %
Interest bearing demand deposits
    7,925       7,658       7,384       7,168       6,609         1,316       19.9  
Savings and other domestic time deposits
    3,309       3,395       3,436       3,439       3,456         (147 )     (4.3 )
Retail certificates of deposit
    2,496       2,454       2,414       2,400       2,399         97       4.0  
           
Total core deposits
    17,044       16,908       16,510       16,230       15,481         1,563       10.1  
Domestic time deposits of $100,000 or more
    1,249       990       886       795       788         461       58.5  
Brokered time deposits and negotiable CDs
    2,728       1,948       1,755       1,737       1,907         821       43.1  
Foreign time deposits
    442       465       476       542       549         (107 )     (19.5 )
           
Total deposits
    21,463       20,311       19,627       19,304       18,725         2,738       14.6  
Short-term borrowings
    1,179       1,302       1,342       1,396       1,603         (424 )     (26.5 )
Federal Home Loan Bank advances
    1,196       1,270       1,270       1,270       1,273         (77 )     (6.0 )
Subordinated notes and other long-term debt
    4,517       5,099       5,244       5,623       5,557         (1,040 )     (18.7 )
           
Total interest bearing liabilities
    25,041       24,581       24,207       24,370       24,141         900       3.7  
           
All other liabilities
    1,699       1,598       1,564       1,397       1,399         300       21.4  
Shareholders’ equity
    2,527       2,481       2,412       2,323       2,278         249       10.9  
           
Total Liabilities and Shareholders’ Equity
  $ 32,581     $ 32,061     $ 31,459     $ 31,313     $ 30,835       $ 1,746       5.7 %
           


N.M., not a meaningful value.

(1)     For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

25


Table 4 — Consolidated Quarterly Net Interest Margin Analysis

                                         
    Average Rates (2)  
    2005     2004  
Fully taxable equivalent basis (1)   First     Fourth     Third     Second     First  
     
Assets
                                       
Interest bearing deposits in banks
    1.88 %     1.61 %     0.91 %     1.05 %     0.71 %
Trading account securities
    4.14       4.15       4.44       3.02       3.98  
Federal funds sold and securities purchased under resale agreements
    2.36       1.99       1.53       1.21       1.41  
Loans held for sale
    5.55       5.69       5.25       5.17       5.33  
Investment securities:
                                       
Taxable
    3.87       3.77       3.83       3.83       4.06  
Tax-exempt
    6.73       6.89       7.06       7.07       6.88  
     
Total investment securities
    4.14       4.07       4.10       4.09       4.30  
Loans and leases: (3)
                                       
Commercial:
                                       
Middle market commercial and industrial
    5.02       4.80       4.46       4.05       4.33  
Construction
    5.13       4.65       4.13       3.73       3.68  
Commercial
    5.15       4.80       4.45       4.20       4.31  
     
Middle market commercial real estate
    5.14       4.73       4.31       4.02       4.05  
Small business commercial and industrial and commercial real estate
    5.81       5.67       5.45       5.33       5.46  
     
Total commercial
    5.23       4.96       4.62       4.30       4.47  
     
Consumer:
                                       
Automobile loans
    6.83       7.31       7.65       7.20       6.93  
Automobile leases
    4.92       5.00       5.02       5.06       4.94  
     
Automobile loans and leases
    5.78       6.02       6.21       6.17       6.14  
Home equity
    5.60       5.30       4.84       4.75       4.69  
Residential mortgage
    5.55       5.53       5.48       5.40       5.51  
Other loans
    6.42       6.87       6.54       6.21       5.83  
     
Total consumer
    5.67       5.66       5.54       5.49       5.52  
     
Total loans and leases
    5.48       5.34       5.12       4.95       5.04  
     
Total earning assets
    5.21 %     5.05 %     4.89 %     4.76 %     4.89 %
     
 
                                       
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Non-interest bearing demand deposits
    %     %     %     %     %
Interest bearing demand deposits
    1.45       1.21       1.06       0.94       0.88  
Savings and other domestic time deposits
    1.27       1.26       1.24       1.23       1.41  
Retail certificates of deposit
    3.43       3.38       3.32       3.27       3.47  
     
Total core deposits
    1.76       1.62       1.52       1.45       1.53  
Domestic time deposits of $100,000 or more
    2.92       2.51       2.40       2.37       2.14  
Brokered time deposits and negotiable CDs
    2.80       2.26       1.84       1.57       1.51  
Foreign time deposits
    1.41       0.98       0.83       0.76       0.72  
     
Total deposits
    1.99       1.73       1.58       1.48       1.53  
Short-term borrowings
    1.66       1.17       0.92       0.80       0.83  
Federal Home Loan Bank advances
    2.90       2.68       2.60       2.52       2.50  
Subordinated notes and other long-term debt
    3.39       2.67       2.62       2.24       2.33  
     
Total interest bearing liabilities
    2.27 %     1.94 %     1.82 %     1.66 %     1.71 %
     
Net interest rate spread
    2.94 %     3.11 %     3.07 %     3.10 %     3.18 %
Impact of non-interest bearing funds on margin
    0.37       0.27       0.23       0.19       0.18  
     
Net interest margin
    3.31 %     3.38 %     3.30 %     3.29 %     3.36 %
     


(1)     Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)     Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)     For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

26


2005 First Quarter versus 2004 Fourth Quarter

     Compared with the 2004 fourth quarter, fully taxable equivalent net interest income decreased $3.9 million, or 2%, reflecting a 7 basis point decrease in the net interest margin to 3.31% from 3.38% in the 2004 fourth quarter, partially offset by the favorable impact of a 2% increase in average earning assets. As previously disclosed, the 2004 fourth quarter net interest margin reflected a favorable 6 basis point impact from a $3.7 million funding cost adjustment.

     Compared with the 2004 fourth quarter, average total loans and leases in the 2005 first quarter increased $0.8 billion, or 4%. Average total consumer loans accounted for slightly more than half of this increase as they increased $0.5 billion, or 4%, reflecting a $0.2 billion, or 6%, increase in residential mortgages and a $0.1 billion, or 2%, increase in average home equity loans. These sequential quarterly growth rates for both residential mortgages and home equity loans have generally trended lower over the last four quarters due to interest rates trending upward. In addition, average automobile loans and leases increased $0.2 billion, or 4%, due to growth in automobile loans and, to a slightly lesser degree, growth in direct financing leases. Automobile loan production increased 20% from the 2004 fourth quarter, which had been the lowest production quarter in recent history, but was 25% below the year-ago quarter production. The lower overall automobile loan production reflected continued aggressive competition in this sector. Average total commercial loans increased $0.4 billion, or 3%, led by a $0.2 billion, or 5%, increase in middle market commercial and industrial loans, reflecting the continued growth in attracting targeted commercial clients, as well as higher utilization rates. Average middle market real estate loans increased 3%, while small business loans increased 2%.

     Reflecting typical seasonal factors, average total core deposits increased $0.1 billion, or 1%, from the fourth quarter with interest bearing demand deposits increasing $0.3 billion, or 3%, and non-interest bearing deposits decreasing $0.1 billion, or 3%. This linked quarter performance was better than in the comparable 2004 first quarter period when average total core deposits declined slightly.

Provision for Credit Losses

(This section should be read in conjunction with Significant Factor 5 and the Credit Risk section.)

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

     The provision for credit losses for the 2005 first quarter totaled $19.9 million, down $5.7 million, or 22%, from the year-ago quarter, but up $7.2 million from the 2004 fourth quarter. The decline from the year-ago quarter primarily reflected improved overall credit quality as reflected in the reduction in the relative level of each component of the ALLL. The increase from the 2004 fourth quarter primarily reflected the impact of a middle market commercial and industrial charge-off in excess of allocated reserves.

27


Non-Interest Income

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

     Table 5 reflects non-interest income detail for each of the past five quarters.

Table 5 — Non-Interest Income

                                                           
    2005   2004       1Q05 vs 1Q04  
(in thousands of dollars)   First     Fourth     Third     Second     First       Amount     Percent  
             
Service charges on deposit accounts
  $ 39,418     $ 41,747     $ 43,935     $ 43,596     $ 41,837       $ (2,419 )     (5.8 )%
Trust services
    18,196       17,315       17,064       16,708       16,323         1,873       11.5  
Brokerage and insurance income
    13,026       12,879       13,200       13,523       15,197         (2,171 )     (14.3 )
Mortgage banking
    12,061       8,822       4,448       23,322       (4,296 )       16,357       N.M.  
Other service charges and fees
    10,159       10,617       10,799       10,645       9,513         646       6.8  
Bank owned life insurance income
    10,104       10,484       10,019       11,309       10,485         (381 )     (3.6 )
Securities gains (losses)
    957       2,100       7,803       (9,230 )     15,090         (14,133 )     (93.7 )
Other income
    17,397       23,870       17,899       24,659       25,619         (8,222 )     (32.1 )
           
Sub-total before operating lease income
    121,318       127,834       125,167       134,532       129,768         (8,450 )     (6.5 )
Operating lease income
    46,732       55,106       64,412       78,706       88,867         (42,135 )     (47.4 )
           
Sub-total including operating lease income
    168,050       182,940       189,579       213,238       218,635         (50,585 )     (23.1 )
Gain on sales of automobile loans
                312       4,890       9,004         (9,004 )     N.M.  
             
Total non-interest income
  $ 168,050     $ 182,940     $ 189,891     $ 218,128     $ 227,639       $ (59,589 )     (26.2) %
             

N.M., not a meaningful value.

2005 First Quarter versus 2004 First Quarter

     Non-interest income decreased $59.6 million, or 26%, from the year-ago quarter. Reflecting the run-off of the operating lease portfolio, operating lease income declined $42.1 million, or 47%, from the 2004 first quarter. Excluding operating lease income, non-interest income decreased $17.5 million, or 13%, from the year-ago quarter with the primary drivers being:

  •   $14.1 million decline in investment securities gains with the current quarter reflecting only $1.0 million of such gains, compared with $15.1 million of such gains in the 2004 first quarter.
 
  •   $9.0 million gain on sale of automobile loans in the year-ago quarter, with no such gains in the current quarter.
 
  •   $8.2 million, or 32%, decline in other income primarily due to higher MSR hedge-related trading losses, lower investment banking income, and lower equity investment gains.
 
  •   $2.4 million, or 6%, decline in service charges on deposit accounts with declines in commercial service charges and consumer service charges equally contributing to the decrease. Lower commercial service charges reflected a combination of lower activity and a preference by commercial customers to pay for services with higher compensating balances rather than fees as interest rates increase. The decline in consumer service charges primarily reflected lower personal non-sufficient funds (NSF) and overdraft service charges.
 
  •   $2.2 million, or 14%, decline in brokerage and insurance income due to lower annuity sales.

Partially offset by:

  •   $16.4 million increase in mortgage banking income primarily reflecting a $3.8 million MSR temporary impairment recovery in the current quarter compared with a $10.1 million MSR temporary impairment in the year-ago quarter and higher net secondary marketing income.
 
  •   $1.9 million, or 11%, increase in trust services due to higher personal trust and mutual fund fees.

28


2005 First Quarter versus 2004 Fourth Quarter

     Compared with the 2004 fourth quarter, non-interest income declined $14.9 million, or 8%. Reflecting the run-off of the operating lease portfolio, operating lease income declined $8.4 million, or 15%, from the 2004 fourth quarter. Excluding operating lease income, non-interest income decreased $6.5 million, or 5%, from the 2004 fourth quarter with the primary drivers being:

  •   $6.5 million, or 27%, decrease in other income primarily reflecting lower equity investment gains and lower investment banking income.
 
  •   $2.3 million, or 6%, decrease in service charges on deposit accounts primarily reflecting seasonally lower personal NSF and overdraft service charges.
 
  •   $1.1 million decline in investment securities gains with the current quarter reflecting only $1.0 million of such gains, compared with $2.1 million of such gains in the 2004 fourth quarter.

Partially offset by:

  •   $3.2 million, or 37%, increase in mortgage banking income reflecting a $3.8 million MSR temporary impairment recovery in the current quarter, compared with a $0.7 million recovery in the 2004 fourth quarter.
 
  •   $0.9 million, or 5%, increase in trust income reflecting a 12% increase in Huntington Fund fees and 5% increase in personal trust income, partially offset by a 34% seasonal decline in corporate trust fees from the fourth quarter. The 2005 first quarter represented the sixth consecutive quarterly increase in trust income. Trust assets increased 2% from the end of last year.

29


Non-Interest Expense

(This section should be read in conjunction with Significant Factor 1 and 6-9.)

          Table 6 reflects non-interest expense detail for each of the last five quarters.

Table 6 — Non-Interest Expense

                                                           
    2005   2004       1Q05 vs 1Q04  
(in thousands of dollars)   First     Fourth     Third     Second     First       Amount     Percent  
           
Salaries
  $ 96,239     $ 94,658     $ 96,456     $ 92,169     $ 92,985       $ 3,254       3.5 %
Benefits
    27,742       28,080       25,273       27,546       28,639         (897 )     (3.1 )
           
Personnel costs
    123,981       122,738       121,729       119,715       121,624         2,357       1.9  
Net occupancy
    19,242       26,082       16,838       16,258       16,763         2,479       14.8  
Outside data processing and other services
    18,770       18,563       17,527       17,563       18,462         308       1.7  
Equipment
    15,863       15,733       15,295       16,228       16,086         (223 )     (1.4 )
Professional services
    9,459       9,522       12,219       7,836       7,299         2,160       29.6  
Marketing
    6,454       5,581       5,000       8,069       7,839         (1,385 )     (17.7 )
Telecommunications
    4,882       4,596       5,359       4,638       5,194         (312 )     (6.0 )
Printing and supplies
    3,094       3,148       3,201       3,098       3,016         78       2.6  
Amortization of intangibles
    204       205       204       204       204                
Other expense
    18,380       26,526       22,317       25,981       18,457         (77 )     (0.4 )
           
Sub-total before operating lease expense
    220,329       232,694       219,689       219,590       214,944         5,385       2.5  
Operating lease expense
    37,948       48,320       54,885       62,563       70,710         (32,762 )     (46.3 )
           
Sub-total including operating lease expense
    258,277       281,014       274,574       282,153       285,654         (27,377 )     (9.6 )
Restructuring reserve releases
                (1,151 )                          
           
Total non-interest expense
  $ 258,277     $ 281,014     $ 273,423     $ 282,153     $ 285,654       $ (27,377 )     (9.6 )%
           

2005 First Quarter versus 2004 First Quarter

          Non-interest expense decreased $27.4 million, or 10%, from the year-ago quarter. Reflecting the run-off of the operating lease portfolios, operating lease expense declined $32.8 million, or 46%, from the 2004 first quarter. Excluding operating lease expense, non-interest expense increased $5.4 million, or 3%, from the year-ago quarter reflecting:

  •   $2.5 million, or 15%, increase in net occupancy expense primarily reflecting a loss caused by a refinancing penalty of a real estate partnership minority interest, as well as lower rental income.
 
  •   $2.4 million, or 2%, increase in personnel costs due to higher salary and incentive plan expenses, partially offset by lower sales commissions.
 
  •   $2.2 million, or 30%, increase in professional services expenses primarily reflecting SEC investigation and regulatory-related expenses.

Partially offset by:

  •   $1.4 million, or 18%, decline in marketing expense primarily reflecting lower print and television advertising expenses.

2005 First Quarter versus 2004 Fourth Quarter

          Compared with the 2004 fourth quarter, non-interest expense decreased $22.7 million, or 8%. Reflecting the run-off of the operating lease portfolios, operating lease expense declined $10.4 million, or 21%, from the 2004 fourth quarter. Excluding operating lease expense, non-interest expense decreased $12.4 million, or 5%, from the prior quarter reflecting:

30


  •   $8.1 million, or 31%, decrease in other expense as the fourth quarter included a $5.5 million SEC-related accrual.
 
  •   $6.8 million, or 26%, decrease in net occupancy as the 2004 fourth quarter included $7.8 million in property lease impairment and write-down on vacated facilities.

Partially offset by:

  •   $1.2 million, or 1%, increase in personnel costs due to higher 2004 incentive plan expenses, partially offset by lower sales commissions.

Operating Lease Assets

(This section should be read in conjunction with Significant Factor 1 and Lease Residual Risk section.)

          Table 7 reflects operating lease assets performance detail for each of the last five quarters.

Table 7 — Operating Lease Performance

                                                           
    2005   2004       1Q05 vs 1Q04  
(in thousands of dollars)   First     Fourth     Third     Second     First       Amount     Percent  
           
Balance Sheet:
                                                         
Average operating lease assets outstanding
  $ 529,245     $ 647,970     $ 800,145     $ 976,626     $ 1,166,146       $ (636,901 )     (54.6 )%
           
 
                                                         
Income Statement:
                                                         
Net rental income
  $ 43,554     $ 51,016     $ 60,267     $ 72,402     $ 83,517       $ (39,963 )     (47.9 )%
Fees
    1,857       2,111       2,965       4,838       3,543         (1,686 )     (47.6 )
Recoveries — early terminations
    1,321       1,979       1,180       1,466       1,807         (486 )     (26.9 )
           
Total operating lease income
    46,732       55,106       64,412       78,706       88,867         (42,135 )     (47.4 )
           
 
                                                         
Depreciation and residual losses at termination
    34,703       45,293       49,917       57,412       63,823         (29,120 )     (45.6 )
Losses — early terminations
    3,245       3,027       4,968       5,151       6,887         (3,642 )     (52.9 )
           
Total operating lease expense
    37,948       48,320       54,885       62,563       70,710         (32,762 )     (46.3 )
           
Net earnings contribution
  $ 8,784     $ 6,786     $ 9,527     $ 16,143     $ 18,157       $ (9,373 )     (51.6 )%
           
 
                                                         
Earnings ratios (1)
                                                         
Net rental income
    32.9 %     31.5 %     30.1 %     29.7 %     28.6 %       4.3 %     15.0 %
Depreciation and residual losses at termination
    26.2       28.0       25.0       23.5       21.9         4.3       19.6  


(1)   As a percent of average operating lease assets, quarterly amounts annualized.

          Average operating lease assets in the 2005 first quarter were $0.5 billion, down $0.6 billion, or 55%, from the year-ago quarter and 18% from the 2004 fourth quarter. (For a discussion of operating lease accounting, residual value loss determination, and related residual value insurance, see the Operating Lease Assets section of the Company’s 2004 Form 10-K.)

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Provision for Income Taxes

          The provision for income taxes in the first quarter of 2005 was $28.6 million and represented an effective tax rate on income before taxes of 22.8%. The provision for income taxes decreased $6.4 million from the year-ago quarter, primarily due to a reduction in pre-tax earnings, as well as, the recognition of the effect of federal tax refunds on income tax expense. These federal tax refunds resulted from the ability to carry back federal tax losses to prior-years. The effective tax rates in the year-ago quarter and fourth quarter of 2004 were 25.1% and 29.0%, respectively.

          Pursuant to APB 28, taxes for the full year are estimated and year-to-date accrual adjustments are made. Revisions to the full-year estimate of accrued taxes occur periodically due to changes in the tax rates, audit resolution with taxing authorities, and newly enacted statutory, judicial, and regulatory guidance. These changes, when they occur, affect accrued taxes and can result in fluctuations in the quarterly effective tax rate. Management reviews the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of Huntington’s tax positions. In addition, Management relies on various tax opinions, recent tax audits, and historical experience.

          In accordance with FAS 109, Accounting for Income Taxes , no deferred income taxes are to be recorded when a company intends to reinvest permanently the earnings from a foreign activity. As of March 31, 2005, the Company intended to reinvest permanently the earnings from its foreign asset securitization activities of approximately $98.0 million. In accordance with FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Act of 2004 , at March 31, 2005, the range of possible amounts that Huntington is considering for repatriation in 2005 is between zero and $98.0 million. The related potential range of income tax is between zero and $5.1 million.

          During the first quarter of 2005, the Internal Revenue Service commenced the audit of Huntington’s consolidated federal income tax returns for tax years 2002 and 2003.

          In the ordinary course of business, the Company operates in various taxing jurisdictions and is subject to income tax. The effective tax rate is based in part on Management’s interpretation of the relevant current laws. Management believes the aggregate liabilities related to taxes are appropriately reflected in the consolidated financial statements.

          The 2005 first quarter effective tax rate included the after-tax positive impact on net income due to the federal tax loss carry back, tax-exempt income, bank owned life insurance, asset securitization activities, and general business credits from investment in low income housing and historic property partnerships. The lower effective tax rate is expected to impact each quarter in 2005. In 2006, the effective tax rate is anticipated to increase to a more typical rate, slightly below 30%.

32


CREDIT RISK

          Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed upon terms. The Company is subject to credit risk in lending, trading, and investment activities. The nature and degree of credit risk is a function of the types of transactions, the structure of those transactions, and the parties involved. The majority of the Company’s credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is incidental to trading activities and represents a limited portion of the total risks associated with the investment portfolio. Credit risk is mitigated through a combination of credit policies and processes and portfolio diversification. These include origination/underwriting criteria, portfolio monitoring processes, and effective problem asset management (see Credit Risk Management section of the Company’s 2004 Form 10-K for additional discussion).

Credit Exposure Composition

          Compared with the year-ago period, the composition of the loan and lease portfolio at March 31, 2005, had changed such that lower credit risk home equity loans and residential mortgages represented 19% and 16%, respectively, of total credit exposure, up from 18% and 12%, respectively, a year earlier. Conversely, higher risk automobile exposure, which consists of automobile loans and leases, as well as operating lease assets, declined from 24% to 20% at March 31, 2005.

          At the beginning of the 2004 second quarter, the criteria for categorizing commercial loans as either C&I loans or CRE loans were clarified. The new criteria are based on the purpose of the loan. Previously, the categorization was based on the nature of the collateral securing, or partially securing, the loan. Under this new methodology, as new loans are originated or existing loans renewed, loans secured by owner-occupied real estate are categorized as C&I loans (previously CRE loans) and unsecured loans for the purpose of developing real estate are categorized as CRE loans (previously C&I loans). As a result of this change, $282 million in C&I loans were reclassified to CRE loans effective June 30, 2004. Prior periods were not reclassified. In addition, this change had no impact on the underlying credit quality of total commercial loans. Other than this one-time impact, the on-going use of this new methodology has not had a material impact on reported C&I and/or CRE loan growth rates.

          Table 8 reflects period-end loan and lease portfolio mix by type of loan or lease, as well as by business segment:

33


Table 8 — Credit Exposure Composition

                                                                                 
    2005     2004  
(in thousands of dollars)   March 31,     December 31,     September 30,     June 30,     March 31,  
     
By Type
                                                                               
Commercial:
                                                                               
Middle market commercial and industrial
  $ 4,824,403       19.6 %   $ 4,660,141       19.3 %   $ 4,352,952       18.7 %   $ 4,270,282       18.8 %   $ 4,545,930       20.4 %
 
                                                                               
Construction
    1,647,999       6.7       1,592,125       6.6       1,538,135       6.6       1,501,248       6.6       1,282,420       5.8  
Commercial
    1,913,849       7.8       1,881,835       7.8       1,898,015       8.1       1,959,684       8.6       1,934,777       8.7  
     
Middle market commercial real estate
    3,561,848       14.5       3,473,960       14.4       3,436,150       14.7       3,460,932       15.2       3,217,197       14.5  
     
Small business commercial and industrial and commercial real estate
    2,204,278       8.9       2,168,877       8.9       2,124,602       9.2       2,060,259       9.1       1,988,818       8.9  
     
Total commercial
    10,590,529       43.0       10,302,978       42.6       9,913,704       42.6       9,791,473       43.1       9,751,945       43.8  
     
Consumer:
                                                                               
Automobile loans
    2,066,264       8.4       1,948,667       8.1       1,884,924       8.1       1,814,644       8.0       2,267,310       10.2  
Automobile leases
    2,476,098       10.0       2,443,455       10.1       2,316,801       9.9       2,184,633       9.6       2,065,883       9.3  
Home equity
    4,594,586       18.6       4,554,540       18.9       4,429,626       19.0       4,255,576       18.8       3,920,882       17.6  
Residential mortgage
    3,995,769       16.2       3,829,234       15.9       3,565,670       15.3       3,283,779       14.5       2,756,625       12.4  
Other loans
    483,219       1.9       481,403       2.0       476,534       2.0       445,564       2.1       430,982       1.8  
     
Total consumer
    13,615,936       55.1       13,257,299       55.0       12,673,555       54.3       11,984,196       53.0       11,441,682       51.3  
     
Total loans and direct financing leases
  $ 24,206,465       98.1     $ 23,560,277       97.6     $ 22,587,259       96.9     $ 21,775,669       96.1     $ 21,193,627       95.1  
     
 
                                                                               
Operating lease assets
    466,550       1.9       587,310       2.4       717,411       3.1       888,612       3.9       1,070,958       4.8  
Securitized loans
                                                    27,573       0.1  
 
                                                                               
     
Total credit exposure
  $ 24,673,015       100.0 %   $ 24,147,587       100.0 %   $ 23,304,670       100.0 %   $ 22,664,281       100.0 %   $ 22,292,158       100.0 %
     
 
                                                                               
     
Total automobile exposure (1)
  $ 5,008,912       20.3 %   $ 4,979,432       20.6 %   $ 4,919,136       21.1 %   $ 4,887,889       21.6 %   $ 5,431,724       24.4 %
     
 
                                                                               
By Business Segment (2)
                                                                               
Regional Banking:
                                                                               
Central Ohio
  $ 6,410,873       26.0 %   $ 6,239,021       25.8 %   $ 5,950,999       25.5 %   $ 5,655,836       25.0 %   $ 4,986,411       22.4 %
Northern Ohio
    2,910,071       11.8       2,857,746       11.8       2,810,332       12.1       2,696,268       11.9       2,682,743       12.0  
Southern Ohio / Kentucky
    2,023,243       8.2       1,895,180       7.8       1,825,652       7.8       1,758,808       7.8       1,703,006       7.6  
West Michigan
    2,335,578       9.5       2,271,682       9.4       2,236,001       9.6       2,216,170       9.8       2,154,994       9.7  
East Michigan
    1,475,868       6.0       1,430,169       5.9       1,387,543       6.0       1,359,098       6.0       1,340,679       6.0  
West Virginia
    887,239       3.6       882,016       3.7       867,271       3.7       812,929       3.6       809,714       3.6  
Indiana
    997,052       4.0       961,700       4.0       862,833       3.7       811,431       3.6       752,850       3.4  
     
Regional Banking
    17,039,924       69.1       16,537,514       68.4       15,940,631       68.4       15,310,540       67.7       14,430,397       64.7  
Dealer Sales
    5,955,634       24.1       5,920,270       24.5       5,765,188       24.7       5,832,367       25.7       6,396,727       28.7  
Private Financial Group
    1,496,408       6.1       1,487,800       6.2       1,395,047       6.0       1,380,538       6.1       1,322,259       5.9  
Treasury / Other
    181,049       0.7       202,003       0.9       203,804       0.9       140,836       0.5       142,775       0.7  
     
Total credit exposure
  $ 24,673,015       100.0 %   $ 24,147,587       100.0 %   $ 23,304,670       100.0 %   $ 22,664,281       100.0 %   $ 22,292,158       100.0 %
     


(1)   Sum of automobile loans and leases, operating lease assets, and securitized loans.
 
(2)   Prior period amounts have been reclassified to conform to the current period business segment structure.

34


Non-Performing Assets and Past Due Loans and Leases

(This section should be read in conjunction with Significant Factor 5.)

          Table 9 reflects period-end NPAs and past due loans and leases detail for each of the last five quarters:

Table 9 — Non-Performing Assets and Past Due Loans and Leases

                                         
2005            2004  
(in thousands of dollars)   March 31,     December 31,     September 30,     June 30,     March 31,  
     
Non-accrual loans and leases:
                                       
Middle market commercial and industrial
  $ 16,993     $ 24,179     $ 20,098     $ 24,336     $ 36,854  
Middle market commercial real estate
    6,682       4,582       14,717       11,122       16,097  
Small business commercial and industrial and commercial real estate
    16,387       14,601       12,087       12,368       12,124  
Residential mortgage
    12,498       13,545       13,197       13,952       12,052  
Home equity (1)
    7,333       7,055       7,685              
 
                                       
     
 
                                       
Total non-performing loans and leases
    59,893       63,962       67,784       61,778       77,127  
 
                                       
Other real estate, net:
                                       
Residential
    10,571       8,762       8,840       8,851       9,132  
Commercial (2)
    2,839       35,844       3,852       4,067       5,435  
     
Total other real estate, net
    13,410       44,606       12,692       12,918       14,567  
     
Total non-performing assets
  $ 73,303     $ 108,568     $ 80,476     $ 74,696     $ 91,694  
     
 
                                       
Non-performing loans and leases as a % of total loans and leases
    0.25 %     0.27 %     0.30 %     0.28 %     0.36 %
Non-performing assets as a % of total loans and leases and other real estate
    0.30       0.46       0.36       0.34       0.43  
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Non-performing loans and leases (NPLs)
    441       424       417       464       383  
Non-performing assets (NPAs)
    361       250       351       384       322  
 
                                       
Total allowances for credit losses (ACL) as % of:
                                       
Non-performing loans and leases
    494       476       461       515       425  
Non-performing assets
    404       280       389       426       357  
 
                                       
Accruing loans and leases past due 90 days or more (1)
  $ 50,086     $ 54,283     $ 53,456     $ 51,490     $ 59,697  
Accruing loans and leases past due 90 days or more as a percent of total loans and leases
    0.21 %     0.23 %     0.24 %     0.24 %     0.28 %


(1)   As of September 30, 2004, the Company adopted a policy, consistent with its policy for residential mortgage loans, of placing home equity loans and lines on non-accrual status when they become greater than 180 days past due. In prior quarters, these balances were included in “Accruing loans and leases past due 90 days or more.”
 
(2)   At December 31, 2004, other real estate owned included $35.7 million of properties that related to the work-out of $5.9 million of mezzanine loans. These properties were subject to $29.8 million of non-recourse debt to another financial institution. Both properties were sold in the first quarter of 2005.

35


          NPAs were $73.3 million at March 31, 2005, and represented only 0.30% of related assets, down $18.4 million from $91.7 million, or 0.43%, at the end of the year-ago quarter and down $35.3 million from $108.6 million, or 0.46%, at December 31, 2004. The decrease from the prior quarter reflected the expected first quarter sale of $35.7 million of other real estate owned (OREO) properties related to the previously disclosed workout of a troubled mezzanine financing relationship. Residential real estate NPAs, which historically have demonstrated less potential for subsequent losses, comprised 41% of total NPAs.

          Non-performing loans and leases (NPLs), which exclude OREO, were $59.9 million at March 31, 2005, down 22% from $77.1 million a year earlier and down 6% from the end of the fourth quarter including the impact of the sale of an $8.8 million pool of NPLs in the fourth quarter. Expressed as a percent of total loans and leases, NPLs were only 0.25% at March 31, 2005, down from 0.36% at March 31, 2004, and 0.27% at December 31, 2004.

          The over 90-day delinquent, but still accruing, ratio was 0.21% at March 31, 2005, down from 0.28% a year ago, and little changed from 0.23% at December 31, 2004.

Non-Performing Assets Activity

Table 10 — Non-Performing Asset Activity

                                         
2005          2004  
(in thousands of dollars)   First     Fourth     Third     Second     First  
     
Non-performing assets, beginning of period
  $ 108,568     $ 80,476     $ 74,696     $ 91,694     $ 87,386  
New non-performing assets (1) (2)
    33,607       61,684       22,740       25,727       27,208  
Returns to accruing status
    (3,838 )     (2,248 )           (1,493 )     (54 )
Loan and lease losses
    (17,281 )     (8,578 )     (5,424 )     (12,872 )     (10,463 )
Payments
    (10,404 )     (8,829 )     (10,202 )     (13,571 )     (10,717 )
Sales (2)
    (37,349 )     (13,937 )     (1,334 )     (14,789 )     (1,666 )
     
Non-performing assets, end of period
  $ 73,303     $ 108,568     $ 80,476     $ 74,696     $ 91,694  
     


(1)   As of September 30, 2004, the Company adopted a policy, consistent with its policy for residential mortgage loans, of placing home equity loans and lines on non-accrual status when they become greater than 180 days past due. In prior quarters, these balances were included in “Accruing loans and leases past due 90 days or more.”
 
(2)   At December 31, 2004, other real estate owned included $35.7 million of properties that related to the work-out of $5.9 million of mezzanine loans. These properties were subject to $29.8 million of non-recourse debt to another financial institution. Both properties were sold in the first quarter of 2005.

Allowances for Credit Losses (ACL) and Provision for Credit Losses

(This section should be read in conjunction with Significant Factor 1, 4-5, and the Credit Risk section.)

          The Company maintains two reserves, both of which are available to absorb possible credit losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments (AULC). When summed together, these reserves constitute the total allowances for credit losses (ACL). Table 11 reflects activity in the ALLL and AULC for the past five quarters:

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Table 11 — Allowances for Credit Losses

                                         
2005            2004  
(in thousands of dollars)    First     Fourth     Third     Second     First  
     
Allowance for loan and leases losses, beginning of period
  $ 271,211     $ 282,650     $ 286,935     $ 295,377     $ 299,732  
Loan and lease losses
    (37,213 )     (31,737 )     (26,366 )     (30,845 )     (37,167 )
Recoveries of loans previously charged off
    8,941       10,824       9,886       18,330       8,540  
     
Net loan and lease losses
    (28,272 )     (20,913 )     (16,480 )     (12,515 )     (28,627 )
     
Provision for loan and lease losses
    21,451       9,474       12,971       5,923       29,029  
Allowance of assets sold and securitized
                (776 )     (1,850 )     (4,757 )
     
Allowance for loan and lease losses, end of period
  $ 264,390     $ 271,211     $ 282,650     $ 286,935     $ 295,377  
     
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 33,187     $ 30,007     $ 31,193     $ 32,089     $ 35,522  
 
                                       
Provision for unfunded loan commitments and letters of credit losses
    (1,577 )     3,180       (1,186 )     (896 )     (3,433 )
     
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 31,610     $ 33,187     $ 30,007     $ 31,193     $ 32,089  
     
Total allowances for credit losses
  $ 296,000     $ 304,398     $ 312,657     $ 318,128     $ 327,466  
     
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Transaction reserve
    0.81 %     0.78 %     0.84 %     0.86 %     0.91 %
Economic reserve
    0.27       0.32       0.33       0.36       0.38  
Specific reserve
    0.01       0.05       0.08       0.10       0.10  
     
Total loans and leases
    1.09 %     1.15 %     1.25 %     1.32 %     1.39 %
 
                                       
Total allowances for credit losses (ACL) as % of total loans and leases
    1.22 %     1.29 %     1.38 %     1.46 %     1.55 %

          The March 31, 2005, ALLL was $264.4 million, down from $295.4 million a year earlier and $271.2 million at December 31, 2004. Expressed as a percent of period-end loans and leases, the ALLL ratio at March 31, 2005, was 1.09%, down from 1.39% a year ago and 1.15% at December 31, 2004. These declines reflected the improvement in the economic outlook, the change in the mix of the loan portfolio to lower-risk residential mortgages and home equity loans, and the reduction of specific reserves related to improved or resolved individual problem commercial credits. Table 11 shows the change in the ALLL ratio from the 2004 first quarter and 2004 fourth quarter.

          The ALLL as a percent of NPAs was 361% at March 31, 2005, up from 322% a year ago, and 250% at December 31, 2004.

          The March 31, 2005, AULC was $31.6 million, down slightly from $32.1 million at the end of the year-ago quarter, and down from $33.2 million at December 31, 2004.

          On a combined basis, the ACL as a percent of total loans and leases was 1.22% at March 31, 2005, compared with 1.55% a year earlier and 1.29% at the end of last quarter. Similarly, the ACL as a percent of NPAs was 404% at March 31, 2005, up from 357% a year earlier and 280% at December 31, 2004.

          The provision for credit losses in the 2005 first quarter was $19.9 million, a $5.7 million reduction from the year-ago quarter, but a $7.2 million increase from the 2004 fourth quarter. The reduction in provision expense from the year-ago quarter reflected overall improved portfolio quality performance and a stronger economic outlook, only partially offset by provision expense related to loan growth. The increase in provision expense from the fourth quarter primarily reflected an

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increase in the transaction reserve due to loan growth and higher net charge-offs. This increase was partially offset by improvement in the economic outlook.

          Management has an established process to determine the adequacy of the ALLL that relies on a number of analytical tools and benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. For determination purposes, the allowance is comprised of three components: the transaction reserve, specific reserve, and the economic reserve (see the Credit Risk section in the Company’s 2004 Form 10-K for additional discussion.)

  •   The transaction reserve – This ALLL component represents an estimate of loss based on characteristics of each commercial and consumer loan or lease in the portfolio. Each loan and lease is assigned a probability-of-default and a loss-in-event-of-default factor that are used to calculate the transaction reserve.
 
      For middle market commercial and industrial, middle market commercial real estate, and small business loans, the calculation involves the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The reserve factors applied to these portfolios were developed based on internal credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of the Company’s own portfolio and external industry data.
 
      In the case of more homogeneous portfolios, such as consumer loans and leases, and residential mortgage loans, the determination of the transaction component is conducted at an aggregate, or pooled, level. For such portfolios, the development of the reserve factors includes the use of forecasting models to measure inherent loss in these portfolios.
 
      Models and analyses are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in the loss mitigation or credit origination strategies. Adjustments to the reserve factors are made, as needed based on observed results of the portfolio analytics.
 
  •   The specific reserve – This ALLL component is associated only with the middle market commercial and industrial, middle market commercial real estate, and small business segments, and is the result of credit-by-credit reserve decisions for individual loans when it is determined that the calculated transaction reserve component is insufficient to cover the estimated losses. Individual non-performing and substandard loans over $250,000 are analyzed for impairment and possible assignment of a specific reserve. The impairment tests are done in accordance with applicable accounting standards and regulations.
 
  •   The economic reserve – Changes in the economic environment are a significant judgmental factor Management considers in determining the appropriate level of the ACL. The economic reserve incorporates Management’s determination of the impact of risks associated with the general economic environment on the portfolio. The economic reserve is designed to address economic uncertainties and is determined based on a variety of economic factors that are correlated to the historical performance of the loan portfolio.
 
      In an effort to be as quantitative as possible in the ALLL calculation, Management developed a revised methodology for calculating the economic reserve portion of the ALLL for implementation in 2004. The revised methodology is specifically tied to economic indices that have a high correlation to the Company’s historic charge-off variability. The indices currently in the model consist of the U.S. Index of Leading Economic Indicators, U.S. Profits Index, U.S. Unemployment Index, and the University of Michigan Current Consumer Confidence Index. Beginning in 2004, the calculated economic reserve was determined based upon the variability of credit losses over a credit cycle. The indices and time frame may be adjusted as actual portfolio performance changes over time. At the time of implementation, Management retained the capability to judgmentally adjust the calculated economic reserve amount by a maximum of +/– 20% to reflect, among other factors, differences in local versus national economic conditions. This adjustment capability was deemed necessary given the newness of the model and the continuing uncertainty of forecasting economic environment changes. At March 31, 2005, there was no judgmental adjustment made by Management to the economic reserve.

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          This methodology allows for a more meaningful discussion of Management’s view of the current economic conditions and the potential impact on the Company’s credit losses. The continued use of quantitative methodologies for the transaction reserve and the economic reserve may result in period-to-period fluctuation in the absolute and relative level of the ACL.

Net Loan and Lease Charge-Offs

(This section should be read in conjunction with Significant Factor 5.)

          Table 12 reflects net loan and lease charge-off detail for each of the last five quarters.

Table 12 — Net Loan and Lease Charge-Offs

                                         
2005            2004  
(in thousands of dollars)   First     Fourth     Third     Second     First  
     
Net charge-offs by loan and lease type:
                                       
Commercial:
                                       
Middle market commercial and industrial
  $ 14,092     $ 1,239     $ (102 )   $ (3,642 )   $ 4,425  
Construction
    (51 )     704       (19 )     276       1,504  
Commercial
    (152 )     1,834       1,490       2,222       (40 )
     
Middle market commercial real estate
    (203 )     2,538       1,471       2,498       1,464  
     
Small business commercial and industrial and commercial real estate
    2,283       1,386       1,195       1,281       1,704  
     
Total commercial
    16,172       5,163       2,564       137       7,593  
     
Consumer:
                                       
Automobile loans
    3,216       4,406       5,142       5,604       13,422  
Automobile leases
    3,014       3,104       2,415       2,159       3,159  
     
Automobile loans and leases
    6,230       7,510       7,557       7,763       16,581  
Home equity
    3,963       5,346       4,259       2,569       2,900  
Residential mortgage
    439       608       534       302       316  
Other loans
    1,468       2,286       1,566       1,744       1,237  
     
Total consumer
    12,100       15,750       13,916       12,378       21,034  
     
Total net charge-offs
  $ 28,272     $ 20,913     $ 16,480     $ 12,515     $ 28,627  
     
 
                                       
Net charge-offs — annualized percentages:
                                       
Commercial:
                                       
Middle market commercial and industrial
    1.20 %     0.11 %     (0.01 )%     (0.32 )%     0.40 %
Construction
    (0.01 )     0.18       (0.01 )     0.09       0.47  
Commercial
    (0.03 )     0.40       0.31       0.46       (0.01 )
     
Middle market commercial real estate
    (0.02 )     0.30       0.17       0.31       0.19  
     
Small business commercial and industrial and commercial real estate
    0.42       0.26       0.23       0.25       0.35  
     
Total commercial
    0.62       0.21       0.10       0.01       0.32  
     
Consumer:
                                       
Automobile loans
    0.64       0.92       1.11       0.96       1.77  
Automobile leases
    0.49       0.52       0.43       0.40       0.64  
     
Automobile loans and leases
    0.56       0.70       0.74       0.69       1.32  
Home equity
    0.35       0.48       0.39       0.25       0.30  
Residential mortgage
    0.04       0.07       0.06       0.04       0.05  
Other loans
    1.22       1.91       1.36       1.62       1.17  
     
Total consumer
    0.36       0.49       0.45       0.41       0.70  
     
Net charge-offs as a % of average loans
    0.47 %     0.36 %     0.30 %     0.23 %     0.53 %
     

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2005 First Quarter versus 2004 First Quarter and 2004 Fourth Quarter

     Total net charge-offs for the 2005 first quarter were $28.3 million, or an annualized 0.47% of average total loans and leases. This was comparable to $28.6 million, or 0.53%, in the year-ago quarter but represented an increase from $20.9 million, or an annualized 0.36% of average total loans and leases, in the 2004 fourth quarter. The current quarter included a single $14.2 million middle market commercial charge-off related to a commercial leasing company with significant exposure to a service provider that declared bankruptcy. The 0.47% net charge-off ratio for average total loans and leases in the first quarter included 24 basis points related to this single credit.

     Total commercial net charge-offs in the first quarter were $16.2 million, or an annualized 0.62%, up from $7.6 million, or an annualized 0.32%, in the year-ago quarter. As noted above, the current quarter included a $14.2 million middle market commercial charge-off, which represented 54 basis points of the 0.62% total commercial net charge-off ratio. Total commercial net charge-offs in the 2004 fourth quarter were $5.2 million, or an annualized 0.21%.

     Total consumer net charge-offs in the current quarter were $12.1 million, or an annualized 0.36% of related loans. This compared with $21.0 million, or 0.70%, in the year-ago quarter with the decline from the year-ago quarter heavily influenced by lower automobile loan and lease net charge-offs. Total automobile loan and lease net charge-offs in the 2005 first quarter were $6.2 million, or an annualized 0.56% of related loans and leases, down significantly from $16.6 million, or an annualized 1.32%, in the year-ago quarter. The year-ago quarter included 37 basis points from a one-time $4.7 million cumulative adjustment.

     Compared with the 2004 fourth quarter, first quarter total consumer net charge-offs decreased $3.7 million, primarily reflecting a $1.4 million decrease in home equity loan net charge-offs and a $1.3 million decrease in automobile loan and lease net charge-offs. Current quarter home equity loan net charge-offs were an annualized 0.35% of related loans, down from 0.48% in the fourth quarter, and current quarter automobile loan and lease net charge-offs of 0.56% declining from 0.70% of related loans and leases in the 2004 fourth quarter.

MARKET RISK

     Market risk represents the risk of loss due to changes in the market value of assets and liabilities. The Company incurs market risk in the normal course of business. Market risk arises when the Company extends fixed-rate loans, purchases fixed-rate securities, originates fixed-rate CDs, obtains funding through fixed-rate borrowings, and leases automobiles and equipment based on expected lease residual values. The Company has identified three primary sources of market risk: interest rate risk, lease residual risk, and price risk.

Interest Rate Risk

     Interest rate risk is the most significant market risk incurred by the Company. It results from timing differences in the repricing and maturity of assets and liabilities and changes in relationships between market interest rates and the yields on assets and rates on liabilities, including the impact of embedded options.

     Management seeks to minimize the impact of changing interest rates on net interest income and the fair value of assets and liabilities. The board of directors establishes broad policies regarding interest rate and market risk, liquidity risk, counter-party credit risk, and settlement risk. The Market Risk Committee (MRC) establishes specific operating limits within the parameters of the board of directors’ policies.

     Interest rate risk management is a dynamic process that encompasses monitoring loan and deposit flows, investment and funding activities, and assessing the impact of the changing market and business environment. Effective management of interest rate risk begins with understanding the interest rate characteristics of assets and liabilities and determining the appropriate interest rate risk posture given market expectations and policy objectives and constraints. The MRC regularly monitors position concentrations and the level of interest rate sensitivity to ensure compliance with board of directors approved risk tolerances.

     Interest rate risk modeling is performed monthly. Two broad approaches to modeling interest rate risk are employed: income simulation and economic value analysis. An income simulation analysis is used to measure the sensitivity of forecasted net interest income to changes in market rates over a one-year horizon. Although bank owned life insurance and automobile operating lease assets are classified as non-interest earning assets, and the income from these assets is in

40


non-interest income, these portfolios are included in the interest sensitivity analysis because both have attributes similar to fixed-rate interest earning assets. The economic value analysis (Economic Value of Equity or EVE) is calculated by subjecting the period-end balance sheet to changes in interest rates and measuring the impact of the changes in the value of the assets and liabilities.

     The models used for these measurements take into account prepayment speeds on mortgage loans, mortgage-backed securities, and consumer installment loans, as well as cash flows of other loans and deposits. Balance sheet growth assumptions are also considered in the income simulation model. The models include the effects of embedded options, such as interest rate caps, floors, and call options, and account for changes in relationships among interest rates.

     The baseline scenario for the income simulation analysis, with which all other scenarios are compared, is based on market interest rates implied by the prevailing yield curve as of the period end. Alternative interest rate scenarios are then compared with the baseline scenario. These alternative market rate scenarios include parallel rate shifts on both a gradual and immediate basis, movements in rates that alter the shape of the yield curve (i.e., flatter or steeper yield curve), and spot rates remaining unchanged for the entire measurement period. Scenarios are also developed to measure basis risk, such as the impact of LIBOR-based rates rising or falling faster than the prime rate.

     The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual 100 and 200 basis point increasing and decreasing parallel shifts in interest rates over the next 12-month period beyond the interest rate change implied by the current yield curve. The table below shows the results of the scenarios as of March 31, 2005, and December 31, 2004. All of the positions were well within the board of directors’ policy limits .

Table 13 — Net Interest Income at Risk

                                 
    Net Interest Income at Risk (%)  
 
Basis point change scenario
    -200       -100       +100       +200  
 
Board policy limits
    -4.0 %     -2.0 %     -2.0 %     -4.0 %
 
 
                               
March 31, 2005
    -1.8 %     -0.8 %     +0.6 %     +1.0 %
 
                               
December 31, 2004
    -1.2 %     -0.5 %     +0.2 %     +0.2 %

     The primary simulations for EVE risk assume an immediate and parallel increase in rates of +/- 100 and +/- 200 basis points beyond any interest rate change implied by the current yield curve. The table below outlines the results compared to the previous quarter and policy limits.

Table 14 — Economic Value of Equity at Risk

                                 
    Economic Value of Equity at Risk (%)  
 
Basis point change scenario
    -200       -100       +100       +200  
 
Board policy limits
    -12.0 %     -5.0 %     -5.0 %     -12.0 %
 
 
                               
March 31, 2005
    -1.3 %     -0.4 %     -2.0 %     -4.8 %
 
                               
December 31, 2004
    -3.0 %     -0.5 %     -1.0 %     -4.0 %

Lease Residual Risk

(This section should be read in conjunction with Significant Factor 1 and the Operating Lease Assets section.)

     Lease residual risk associated with retail automobile and commercial equipment leases is the potential for declines in the fair market value of the vehicle or equipment below the maturity value estimated at origination. Most of Huntington’s lease residual risk is in its automobile leases. Used car values are the primary factor in determining the magnitude of the risk exposure. Since used car values are subject to many factors, lease residual risk has been extremely volatile throughout the history of automobile leasing. Management mitigates lease residual risk by purchasing residual value insurance. Residual

41


value insurance provides for the recovery of a decline in the vehicle residual value as specified by the Automotive Lease Guide (ALG), an authoritative industry source, at the inception of the lease. As a result, the risk associated with market driven declines in used car values is mitigated.

     Currently, three distinct residual value insurance policies are in place to address the residual risk in the portfolio. Two residual value insurance policies cover all vehicles leased prior to May 2002, and have associated total payment caps of $120 million and $50 million, respectively. During the 2004 third quarter, the $120 million cap was exceeded on the first policy, and it is Management’s assessment that the $50 million cap remains sufficient to cover any expected losses. A third residual insurance policy covers all originations from May 2002 through April 2005, and does not have a cap. Huntington has negotiated a 30-day extension for this policy.

Price Risk

     Price risk represents the risk of loss from adverse movements in the non-interest related price of financing instruments that are carried at fair value. Price risk is incurred in the trading securities held by broker-dealer subsidiaries, in the foreign exchange positions that the Bank holds to accommodate its customers, in investments in private equity limited partnerships accounted for at fair value, and in the marketable equity securities available for sale held by insurance subsidiaries. To manage price risk, Management establishes limits as to the amount of trading securities that can be purchased, the foreign exchange exposure that can be maintained, and the amount of marketable equity securities that can be held by the insurance subsidiary.

LIQUIDITY RISK

     The objective of effective liquidity management is to ensure that cash flow needs can be met on a timely basis at a reasonable cost under both normal operating conditions and unforeseen circumstances. The liquidity of the Bank is used to originate loans and leases and to repay deposit and other liabilities as they become due or are demanded by customers. Liquidity risk arises from the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, asset and liability activities, investor perception of financial strength, and events unrelated to the Company such as war, terrorism, or financial institution market specific issues. (see Liquidity section in the Company’s 2004 Form 10-K for additional discussion.)

     The primary source of funding is core deposits from retail and commercial customers. (see Table 15.) As of March 31, 2005, core deposits totaled $17.1 billion, and represented 78% of total deposits. This compared with $15.8 billion, or 83% of total deposits, a year earlier. Most of the growth in core deposits was attributable to growth in interest bearing and non-interest bearing demand deposits.

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Table 15 — Deposit Composition

                                                                                 
    2005       2004  
(in thousands of dollars)   March 31,     December 31,     September 31,     June 30,     March 31,  
     
By Type
                                                                               
Non-interest bearing demand deposits
  $ 3,186,187       14.6 %   $ 3,392,123       16.3 %   $ 3,264,145       16.2 %   $ 3,327,426       17.1 %   $ 2,918,380       15.4 %
Interest bearing demand deposits
    7,848,458       36.1       7,786,377       37.5       7,471,779       37.2       7,124,144       36.6       6,866,174       36.2  
Savings and other domestic time deposits
    3,460,633       15.9       3,502,552       16.9       3,570,494       17.8       3,605,778       18.5       3,609,745       19.0  
Retail certificates of deposit
    2,555,241       11.7       2,466,965       11.9       2,441,387       12.1       2,412,178       12.4       2,394,940       12.6  
 
     
Total core deposits
    17,050,519       78.3       17,148,017       82.6       16,747,805       83.3       16,469,526       84.6       15,789,239       83.2  
Domestic time deposits of $100,000 or more
    1,311,495       6.0       1,081,660       5.2       997,952       5.0       808,415       4.2       791,320       4.2  
Brokered time deposits and negotiable CDs
    3,007,124       13.8       2,097,537       10.1       1,896,135       9.4       1,679,099       8.6       1,941,963       10.2  
Foreign time deposits
    401,835       1.9       440,947       2.1       467,133       2.3       508,106       2.6       466,324       2.4  
     
Total deposits
  $ 21,770,973       100.0 %   $ 20,768,161       100.0 %   $ 20,109,025       100.0 %   $ 19,465,146       100.0 %   $ 18,988,846       100.0 %
     
 
                                                                               
Total core deposits:
                                                                               
Commercial
  $ 5,218,482       30.6 %   $ 5,293,666       30.9 %   $ 5,227,613       31.2 %   $ 5,080,250       30.8 %   $ 4,611,258       29.2 %
Personal
    11,832,037       69.4       11,854,351       69.1       11,520,192       68.8       11,389,276       69.2       11,177,981       70.8  
     
Total core deposits
  $ 17,050,519       100.0 %   $ 17,148,017       100.0 %   $ 16,747,805       100.0 %   $ 16,469,526       100.0 %   $ 15,789,239       100.0 %
     
 
                                                                               
By Business Segment (1)
                                                                               
Regional Banking:
                                                                               
Central Ohio
  $ 4,748,903       21.8 %   $ 4,705,721       22.7 %   $ 4,406,854       21.9 %   $ 4,392,653       22.6 %   $ 4,389,011       23.1 %
Northern Ohio
    3,929,993       18.1       4,068,385       19.6       4,012,247       20.0       3,771,145       19.4       3,508,376       18.5  
Southern Ohio / Kentucky
    1,774,229       8.1       1,742,353       8.4       1,599,685       8.0       1,557,288       8.0       1,475,506       7.8  
West Michigan
    2,685,054       12.3       2,643,510       12.7       2,699,059       13.4       2,598,397       13.3       2,608,967       13.7  
East Michigan
    2,298,679       10.6       2,222,191       10.7       2,165,533       10.8       2,078,967       10.7       2,025,914       10.7  
West Virginia
    1,368,763       6.3       1,375,151       6.6       1,380,934       6.9       1,368,951       7.0       1,291,913       6.8  
Indiana
    717,877       3.3       663,927       3.2       665,368       3.3       667,501       3.4       637,090       3.4  
     
Regional Banking
    17,523,498       80.5       17,421,238       83.9       16,929,680       84.3       16,434,902       84.4       15,936,777       84.0  
Dealer Sales
    69,046       0.3       74,969       0.4       68,944       0.3       70,595       0.4       76,031       0.4  
Private Financial Group
    1,139,139       5.2       1,176,303       5.7       1,126,807       5.6       1,017,115       5.2       1,060,639       5.6  
Treasury / Other (2)
    3,039,290       14.0       2,095,651       10.0       1,983,594       9.8       1,942,534       10.0       1,915,399       10.0  
     
Total deposits
  $ 21,770,973       100.0 %   $ 20,768,161       100.0 %   $ 20,109,025       100.0 %   $ 19,465,146       100.0 %   $ 18,988,846       100.0 %
     


(1)   Prior period amounts have been reclassified to conform to the current period business segment structure.
 
(2)   Comprised largely of brokered deposits and negotiable CDs.

43


     Liquidity policies and limits are established by the board of directors, with operating limits set by the MRC, based upon analyses of the ratio of loans to deposits and the percentage of assets funded with non-core or wholesale funding. In addition, guidelines are established to ensure diversification of wholesale funding by type, source, and maturity and provide sufficient balance sheet liquidity to cover 100% of wholesale funds maturing within a six-month time period. A contingency funding plan is in place, which includes forecasted sources and uses of funds under various scenarios in order to prepare for unexpected liquidity shortages, including the implications of any rating changes. The MRC meets monthly to identify and monitor liquidity issues, provide policy guidance, and oversee adherence to, and the maintenance of, an evolving contingency funding plan.

     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 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.

     As a result of the formal SEC investigation and the banking regulatory supervisory agreements announced on November 3, 2004, the following rating agency actions were taken: (1) Moody’s reaffirmed their Negative outlook and placed all the ratings on review for possible downgrade, (2) Standard and Poor’s lowered their outlook from Stable to Negative, and (3) Fitch lowered their outlook from Stable to Negative. The cost of short-term borrowings was not materially affected by these actions.

On February 8, 2005, Moody’s announced the following rating actions:

         
    From   To
Huntington Bancshares Incorporated
       
Senior Unsecured Notes
  A2   A3
Subordinated Notes
  A3   Baa1
Short Term
  P-1   P-2
Outlook
  Negative   Stable
The Huntington National Bank
       
Senior Unsecured Notes
  A1   A2
Subordinated Notes
  A2   A3
Short Term (reaffirmed)
  P-1   P-1
Outlook
  Negative   Stable

On April 6, 2005, Standard and Poor’s announced the following rating actions:

         
    From   To
Huntington Bancshares Incorporated
       
Senior Unsecured Notes
  A-   BBB+
Subordinated Notes
  BBB+   BBB
Short Term (reaffirmed)
  A-2   A-2
Outlook
  Negative   Stable
The Huntington National Bank
       
Senior Unsecured Notes
  A   A-
Subordinated Notes
  A-   BBB+
Short Term
  A-1   A-2
Outlook
  Negative   Stable

44


     To date, these rating agency actions have had no significant adverse impact on rating triggers inherent in financial contracts. Management believes that sufficient liquidity exists to meet the funding needs of the Bank and the parent company. Credit ratings as of April 6, 2005, for the parent company and the Bank were:

Table 16 — Credit Rating Agency Ratings

                                 
    Senior Unsecured     Subordinated              
    Notes     Notes     Short-Term     Outlook  
 
Huntington Bancshares Incorporated
                               
Moody’s Investor Service
    A3     Baal     P-2     Stable
Standard and Poor’s
  BBB+   BBB     A-2     Stable
Fitch Ratings
    A       A-       F1     Negative
 
                               
The Huntington National Bank
                               
Moody’s Investor Service
    A2       A3       P-1     Stable
Standard and Poor’s
    A-     BBB+     A-2     Stable
Fitch Ratings
    A       A-       F1     Negative

OFF-BALANCE SHEET ARRANGEMENTS

     In the normal course of business, the Company enters into various off-balance sheet arrangements. These arrangements include financial guarantees contained in standby letters of credit issued by the Bank and commitments by the Bank to sell mortgage loans.

     Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. Approximately 46% of standby letters of credit are collateralized and nearly 97% are expected to expire without being drawn upon. There were $956 million, $945 million, and $944 million of outstanding standby letters of credit at March 31, 2005, December 31, 2004, and March 31, 2004, respectively. Non-interest income was recognized from the issuance of these standby letters of credit of $2.8 million for both the first three months of 2005 and 2004. The carrying amount of deferred revenue related to standby letters of credit at March 31, 2005, was $3.6 million. Standby letters of credit are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.

     The Bank enters into forward contracts relating to its mortgage banking business. At March 31, 2005, commitments to sell residential real estate loans totaled $388.5 million. These contracts mature in less than one year. The parent company and/or the Bank may also have liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of significant contractual arrangements under which the parent company and/or the Bank may be held contingently liable, including guarantee arrangements, is included in Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements.

     Through its credit process, Management monitors the credit risks of outstanding standby letters of credit. When it is probable that a standby letter of credit will be drawn and not repaid in full, losses are recognized in provision for credit losses. Management does not believe that its off-balance sheet arrangements will have a material impact on its liquidity or capital resources.

CAPITAL

     Capital is managed both at the parent and the Bank levels. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, and operation risks inherent in the Company’s business and to provide the flexibility needed for future growth and new business opportunities. Management places significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to the national markets under favorable terms, and enhances business growth and acquisition opportunities. The importance of managing capital is also recognized and Management continually strives to maintain an appropriate balance between capital adequacy and providing attractive returns to shareholders.

45


     Shareholders’ equity totaled $2.6 billion at March 31, 2005. This balance represented a $52 million increase from December 31, 2004. The growth in shareholders’ equity resulted from the retention of net income after dividends to shareholders of $50 million, and an increase of $8 million as a result of stock options exercised, offset slightly by a reduction in accumulated other comprehensive income of $8 million. The decline in accumulated other comprehensive income resulted from a decline in the market value of securities available for sale at March 31, 2005, compared with December 31, 2004.

     As of March 31, 2005, the Company had unused authority to repurchase up to 7.5 million common shares under an April 27, 2004, share repurchase authorization. On April 25, 2005, Huntington announced that it intended to reactivate its share repurchase program upon approval by the Commission of the proposed settlement offer to resolve the SEC formal investigation. It expects to repurchase these shares from time-to-time in the open market or through privately negotiated transactions depending on market conditions.

     On January 19, 2005, the board of directors declared a quarterly cash dividend on its common stock of $0.20 per common share. The dividend was payable April 1, 2005, to shareholders of record on March 17, 2005. On April 27, 2005, the board of directors declared a quarterly cash dividend on its common stock of $0.215 per common share, a 7.5% increase. The dividend is payable July 1, 2005, to shareholders of record on June 16, 2005.

     Average equity to average assets in the 2005 first quarter was 7.76%, up from 7.39% in the year ago quarter, and up from 7.74% for the 2004 fourth quarter. (see Table 17.) At March 31, 2005, the tangible equity to assets ratio was 7.42%, up from 6.97% a year ago, and 7.18% at December 31, 2004. At March 31, 2005, the tangible equity to risk-weighted assets ratio was 7.83%, up from 7.60% at the end of the year-ago quarter, and down from 7.86% at December 31, 2004. The increase in the tangible equity to risk-weighted assets ratio reflected primarily the positive impact resulting from reducing the overall risk profile of earning assets throughout this period, most notably a less risky loan portfolio mix.

Table 17 — Capital Adequacy

                                         
    2005     2004
(in millions of dollars)   March 31,     December 31,     September 30,     June 30,     March 31,  
     
Total risk-adjusted assets
  $ 30,276     $ 29,542     $ 28,679     $ 28,416     $ 28,247  
 
                                       
Tier 1 leverage ratio
    8.45 %     8.42 %     8.36 %     8.20 %     8.07 %
Tier 1 risk-based capital ratio
    9.03       9.08       9.10       8.98       8.74  
Total risk-based capital ratio
    12.32       12.48       12.53       12.56       12.13  
 
                                       
Tangible equity / asset ratio
    7.42       7.18       7.11       6.95       6.97  
Tangible equity / risk-weighted assets ratio
    7.83       7.86       7.83       7.64       7.60  
Average equity / average assets
    7.76       7.74       7.67       7.42       7.39  

46


Table 18 — Quarterly Common Stock Summary

                                         
    2005     2004  
(in thousands, except per share amounts)   First     Fourth     Third     Second     First  
     
Common stock price, per share
                                       
High (1)
  $ 24.780     $ 25.380     $ 25.150     $ 23.120     $ 23.780  
Low (1)
    22.150       23.110       22.700       20.890       21.000  
Close
    23.900       24.740       24.910       22.980       22.030  
Average closing price
    23.216       24.241       24.105       22.050       22.501  
 
                                       
Dividends, per share
                                       
Cash dividends declared on common stock
  $ 0.200     $ 0.200     $ 0.200     $ 0.175     $ 0.175  
 
                                       
Common shares outstanding
                                       
Average — basic
    231,824       231,147       229,848       229,429       229,227  
Average — diluted
    235,053       235,502       234,348       232,659       232,915  
Ending
    232,192       231,605       230,153       229,476       229,410  
Book value per share
  $ 11.16     $ 10.96     $ 10.69     $ 10.40     $ 10.31  
 
                                       
Common share repurchase program
                                       
Number of shares repurchased
                             


(1)   High and low stock prices are intra-day quotes obtained from NASDAQ.

     The Federal Reserve Board, which supervises and regulates the Company, sets minimum capital requirements for each of these regulatory capital ratios. In the calculation of these risk-based capital ratios, risk weightings are assigned to certain asset and off-balance sheet items such as interest rate swaps, loan commitments, and securitizations. Huntington’s Tier 1 Risk-based Capital, Total Risk-based Capital, Tier 1 Leverage ratios, and risk-adjusted assets for the recent five quarters are well in excess of minimum levels established for “well capitalized” institutions of 6.00%, 10.00%, and 5.00%, respectively. At March 31, 2005, the Company had regulatory capital ratios in excess of “well capitalized” regulatory minimums.

     The Bank is primarily supervised and regulated by the Office of the Comptroller of the Currency, which establishes regulatory capital guidelines for banks similar to those established for bank holding companies by the Federal Reserve Board. At March 31, 2005, the Bank had regulatory capital ratios in excess of “well capitalized” regulatory minimums.

47


LINES OF BUSINESS DISCUSSION

     This section reviews financial performance from a line of business perspective and should be read in conjunction with the Discussion of Results and other sections for a full understanding of the Company’s consolidated financial performance.

     Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial Group (PFG). A fourth segment includes the Company’s Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around Huntington’s organizational and management structure and, accordingly, the results below are not necessarily comparable with similar information published by other financial institutions. An overview of this system is provided below, along with a description of each segment and discussion of financial results.

Funds Transfer Pricing

     The Company uses a centralized funds transfer pricing (FTP) methodology to attribute appropriate net interest income to the business segments. The Treasury/Other business segment charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each line of business. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities). Deposits of an indeterminate maturity receive an FTP credit based on vintage-based pool rate. Other assets, liabilities, and capital are charged (credited) with a four-year moving average FTP rate. The intent of the FTP methodology is to eliminate all interest rate risk from the lines of business by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact of interest rate and liquidity risk for the Company in Treasury/Other.

     The FTP methodology also provides for a charge (credit) to the line of business when a fixed-rate loan is sold and the internal funding associated with the loan is extinguished. The charge (credit) to the line of business represents the cost (or benefit) to Treasury/Other of the early extinguishment of the internal fixed-rate funding. This charge (credit) has no impact on consolidated financial results.

Use of Operating Earnings

     Management uses earnings on an operating basis, rather than on a GAAP basis, to measure underlying performance trends for each business segment. Operating earnings represent GAAP earnings adjusted to exclude the impact of certain items discussed in the Significant Factors Influencing Financial Performance Comparisons section and Table 2. ( In addition to this discussion and Table 2, see Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements. ) Analyzing earnings on an operating basis is very helpful in assessing underlying performance trends, a critical factor used by Management to determine the success of strategies and future earnings capabilities.

48


Regional Banking

     Regional Banking provides products and services to consumer, small business, and commercial customers. These products and services are offered in seven operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky through the Company’s banking network of 335 branches, over 700 ATMs, plus Internet and telephone banking channels. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, small business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail products and services comprise 61% and 78%, of total regional banking loans and deposits, respectively. Commercial Banking serves middle market and large commercial banking relationships, which use a variety of banking products and services including, but not limited to, commercial loans, international trade, cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.

2005 First Quarter versus 2004 First Quarter

     Regional Banking contributed $61.5 million of the Company’s net operating earnings in first quarter 2005, up $9.3 million, or 18%, from 2004 first quarter. This increase primarily reflected a $27.9 million, or 18%, increase in net interest income resulting from strong loan and deposit growth, partially offset by a $10.1 million increase in provision for credit losses, a $2.7 million, or 2%, increase in non-interest expense, and a higher provision for income taxes.

     Total fully taxable equivalent revenue grew $27.2 million, or 12%, from the year-ago quarter, primarily reflecting an 18% increase in net interest income driven by a 19% increase in average loans and a 13% increase in average deposits, partially offset by a 1% decline in non-interest income.

     The $2.7 billion, or 19%, increase in average total loans and leases reflected a 56% increase in average residential mortgages, a 21% increase in average home equity loans and lines of credit, and a 29% increase in middle market construction CRE loans. Though interest rates increased during this period, the level of interest rates remained low on an absolute basis, which continued to impact demand favorably for real estate-related financing. Average small business loans increased 11% reflecting specific strategies to focus on this business segment.

     The $2.0 billion, or 13% increase in average total deposits, reflected strong growth in average interest bearing deposits, up 23%, domestic time deposits, up 11%, and non-interest bearing deposits, up 10%. Of the growth in average total deposits, Commercial Banking accounted for $1.0 billion, Retail Banking $0.8 billion, and Small Business $0.2 billion.

     Supporting the growth in deposits, and evidence of improved sales success, was a 14,260, or 3%, increase in period-end demand deposit (DDA) household relationships, as well as a 4,218, or 9%, increase in small business DDA relationships. The DDA is viewed as the primary banking relationship account as most additional services are cross-sold to customers within the first 90-days after establishing a DDA account. The consumer new 90-day cross-sell ratio increased 23% to 2.70 in the 2005 first quarter compared with the year-ago period, with the small business new 90-day cross-sell ratio up 12% to 2.29.

     Loan and deposit growth also reflected continued focus on customer service and delivery channel optimization. Since the prior-year quarter, five banking offices were opened, while two were closed. The number of on-line banking customers ended the first quarter 2005 at over 224,000, a 25% increase, and represented a relatively high 42% penetration of retail banking households, up from 34% a year earlier.

     Net interest margin in the 2005 first quarter was 4.43%, unchanged from the year-ago quarter. The deposit margin increased as interest rates rose, but this was offset by a decline in loan margin due to a shift in the loan portfolio mix to lower-margin but higher credit quality consumer residential mortgage and home equity loans.

     Total net charge-offs for the 2005 first quarter were $21.0 million, or an annualized 0.51% of average total loans and leases, up from $11.6 million, or 0.33%, in the year-ago quarter. The current quarter included 34 basis points related to a single $14.2 million middle market commercial charge-off. Consumer net charge-offs have remained little changed over the last five quarters and represented an annualized 0.27% of average loans and leases in the 2005 first quarter, unchanged from the year-ago quarter. Total NPAs declined 13% from the year-ago period. Despite steady credit quality performance, the provision for credit losses increased $10.2 million to $12.3 million, primarily reflecting the impact of the 2005 first quarter single commercial credit charge-off, and the strong growth in loans and leases. (See Credit Risk for additional discussion regarding charge-offs and allowance for loan loss reserve methodologies.)

49


     Non-interest income decreased $0.7 million, or 1%, compared with the first quarter of 2004. The decline was driven by declines in deposit service charges and other income of $2.3 million and $2.0 million, respectively, partially offset by increases in mortgage banking of $2.5 million and other service charges and fees of $0.6 million. The increase in mortgage banking income resulted from improved net marketing and higher net servicing fees. Personal service charges decreased $1.1 million, or 5%, primarily due to lower NSF activity. Commercial service charges declined $1.2 million, or 7%, as a result of lower transaction volumes, but was offset by higher commercial deposit balances. The $2.0 million decrease in other income was related to a one-time commercial mezzanine fee in the year-ago quarter. Mortgage income increased $2.5 million as a result of the 16% increase in the servicing portfolio.

     Non-interest expense increased $2.7 million, or 2%, compared with the year-ago quarter. Growth in non-personnel costs increased $2.3 million, or 3%, and reflected higher occupancy, outside services, and operating losses. Personnel costs declined slightly as full-time equivalent employees decreased 2% from a year ago. The efficiency ratio decreased to 58% compared to 64% in the first quarter 2004, reflecting revenue growth and continued focus on controlling expenses.

     The return on average assets and return on average equity for Regional Banking, were 1.39% and 25.0%, respectively, up from 1.38% and 20.9% in the 2004 first quarter.

2005 First Quarter versus 2004 Fourth Quarter

     Regional Banking earnings in the first quarter 2005 decreased $7.1 million, or 10%, from the 2004 fourth quarter driven primarily by increased provision for credit losses. Total revenue decreased $3.2 million as a result of seasonally lower deposit service charge income while expenses were essentially unchanged.

     Net interest income increased $0.7 million reflecting a 3% increase in average total loans and leases and 2% increase in average total deposits, partially offset by a 4 basis point decline in the net interest margin.

     The growth in average loans reflected strong growth in residential mortgages and commercial loans. Residential mortgages increased 6% while middle market C&I loans increased 5% and CRE and small business loans increased 3% and 2%, respectively.

     Average total deposits increased 2%, led by strong 4% growth in average interest bearing demand deposits and 6% growth in retail CD’s, partially offset by a 3% seasonal decline in non-interest bearing demand deposits. The 4 basis point decline in the net interest margin reflected pressure on commercial and consumer loan spreads partially offset by increased spread on deposits.

     The $7.9 million increase in provision for credit losses from the fourth quarter primarily reflected the impact of the one middle market C&I charge-off mentioned above. Total net charge-offs increased $11.3 million due to the single $14.2 million middle market commercial charge-off noted above. Consumer net charge-offs decreased to 27 basis points from 38 basis points in the prior quarter. Total NPAs as a percent of total loans and leases remained flat at 0.41% compared to the prior quarter.

     Non-interest income decreased $4.0 million, or 5%, primarily due to a $2.2 million decline in deposit service charges, primarily seasonal, and a $2.2 million decline in other income due to lower income from terminated equipment leases.

     Non-interest expense decreased $0.3 million reflecting a $1.8 million decline in personnel costs due to lower performance-based compensation, partially offset by a $1.2 million increase in other expenses, primarily occupancy and marketing. The efficiency ratio was 58% in the current quarter, essentially unchanged from the 2004 fourth quarter.

     The return on average assets and return on average equity for Regional Banking were down from 1.56% and 25.8% in the prior quarter.

50


Table 19 — Regional Banking (1)

                                         
    2005   2004   1Q05 vs. 1Q04
    First     Fourth     First     Amount     Percent  
         
INCOME STATEMENT (in thousands of dollars)
                                       
Net interest income
  $ 185,203     $ 184,470     $ 157,325     $ 27,878       17.7 %
Provision for credit losses
    12,260       4,323       2,105       10,155       N.M.  
         
Net interest income after provision for credit losses
    172,943       180,147       155,220       17,723       11.4  
         
Operating lease income
    964       700       49       915       N.M.  
Service charges on deposit accounts
    38,390       40,551       40,702       (2,312 )     (5.7 )
Brokerage and insurance income
    3,528       3,080       3,856       (328 )     (8.5 )
Trust services
    172       225       292       (120 )     (41.1 )
Mortgage banking
    8,578       8,464       6,033       2,545       42.2  
Other service charges and fees
    10,045       10,494       9,413       632       6.7  
Other income
    9,676       11,830       11,706       (2,030 )     (17.3 )
         
Total non-interest income before securities gains
    71,353       75,344       72,051       (698 )     (1.0 )
Securities gains
                            N.M.  
         
Total non-interest income
    71,353       75,344       72,051       (698 )     (1.0 )
         
Operating lease expense
    799       586       44       755       N.M.  
Personnel costs
    62,706       64,499       63,066       (360 )     (0.6 )
Other expense
    86,133       84,893       83,805       2,328       2.8  
         
Total non-interest expense
    149,638       149,978       146,915       2,723       1.9  
         
Income before income taxes
    94,658       105,513       80,356       14,302       17.8  
Provision for income taxes (2)
    33,130       36,930       28,125       5,005       17.8  
         
Net income — operating (1)
  $ 61,528     $ 68,583     $ 52,231     $ 9,297       17.8 %
         
 
                                       
Revenue — fully taxable equivalent (FTE)
                                       
Net interest income
  $ 185,203     $ 184,470     $ 157,325     $ 27,878       17.7 %
Tax equivalent adjustment (2)
    267       258       249       18       7.2  
         
Net interest income (FTE)
    185,470       184,728       157,574       27,896       17.7  
Non-interest income
    71,353       75,344       72,051       (698 )     (1.0 )
         
Total revenue (FTE)
  $ 256,823     $ 260,072     $ 229,625     $ 27,198       11.8 %
         
Total revenue excluding securities gains (FTE)
  $ 256,823     $ 260,072     $ 229,625     $ 27,198       11.8 %
         
 
                                       
SELECTED AVERAGE BALANCES (in millions of dollars)
                                       
Loans:
                                       
Commercial
                                       
Middle market commercial and industrial
  $ 3,398     $ 3,238     $ 3,293     $ 105       3.2 %
Middle market commercial real estate
                                       
Construction
    1,598       1,546       1,244       354       28.5  
Commercial
    1,586       1,551       1,566       20       1.3  
Small business loans
    2,183       2,136       1,974       209       10.6  
         
Total commercial
    8,765       8,471       8,077       688       8.5  
         
Consumer
                                       
Auto loans — indirect
    3       4       5       (2 )     (40.0 )
Home equity loans & lines of credit
    4,253       4,176       3,523       730       20.7  
Residential mortgage
    3,372       3,169       2,163       1,209       55.9  
Other loans
    379       385       348       31       8.9  
         
Total consumer
    8,007       7,734       6,039       1,968       32.6  
         
Total loans & leases
  $ 16,772     $ 16,205     $ 14,116     $ 2,656       18.8 %
         
 
                                       
Operating lease assets
  $ 15     $ 10     $     $ 15       N.M. %
 
                                       
Deposits:
                                       
Non-interest bearing deposits
  $ 3,064     $ 3,145     $ 2,783     $ 281       10.1 %
Interest bearing demand deposits
    7,195       6,914       5,853       1,342       22.9  
Savings deposits
    2,754       2,773       2,773       (19 )     (0.7 )
Domestic time deposits
    4,139       3,910       3,728       411       11.0  
Foreign time deposits
    402       416       423       (21 )     (5.0 )
         
Total deposits
  $ 17,554     $ 17,158     $ 15,560     $ 1,994       12.8 %
         


N.M., not a meaningful value.
 
(1)   Operating basis, see Lines of Business section for definition.
 
(2)   Calculated assuming a 35% tax rate.

51


Table 19 - Regional Banking (1)

                                         
    2005   2004   1Q05 vs. 1Q04
    First     Fourth     First     Amount     Percent  
         
PERFORMANCE METRICS
                                       
 
                                       
Return on average assets
    1.39 %     1.56 %     1.38 %     0.01 %        
Return on average equity
    25.0       25.8       20.9       4.1          
Net interest margin
    4.43       4.47       4.43                
Efficiency ratio
    58.3       57.7       64.0       (5.7 )        
 
                                       
CREDIT QUALITY (in thousands of dollars)
                                       
 
                                       
Net charge-offs by loan type
                                       
Commercial
                                       
Middle market commercial and industrial
  $ 13,396     $ 86     $ 4,408     $ 8,988       N.M. %
Middle market commercial real estate
    (35 )     896       1,464       (1,499 )     N.M.  
Small business loans
    2,283       1,386       1,704       579       34.0  
         
Total commercial
    15,644       2,368       7,576       8,068       N.M.  
         
Consumer
                                       
Auto loans
                            N.M.  
Home equity loans & lines of credit
    3,963       4,861       2,740       1,223       44.6  
Residential mortgage
    268       375       316       (48 )     (15.2 )
Other loans
    1,163       2,160       994       169       17.0  
         
Total consumer
    5,394       7,396       4,050       1,344       33.2  
         
Total net charge-offs
  $ 21,038     $ 9,764     $ 11,626     $ 9,412       81.0 %
         
Net charge-offs — annualized percentages
                                       
Commercial
                                       
Middle market commercial and industrial
    1.60 %     0.01 %     0.54 %     1.06 %        
Middle market commercial real estate
          0.12       0.21       (0.21 )        
Small business loans
    0.42       0.26       0.35       0.07          
         
Total commercial
    0.72       0.11       0.38       0.34          
         
Consumer
                                       
Auto loans
                               
Home equity loans & lines of credit
    0.38       0.46       0.31       0.07          
Residential mortgage
    0.03       0.05       0.06       (0.03 )        
Other loans
    1.24       2.23       1.15       0.09          
         
Total consumer
    0.27       0.38       0.27                
         
Total net charge-offs
    0.51 %     0.24 %     0.33 %     0.18 %        
         
 
                                       
Non-Performing Assets (NPA) (in millions of dollars)
                                       
Middle market commercial and industrial
  $ 15     $ 22     $ 30     $ (15 )     (50.0 )%
Middle market commercial real estate
    7       2       10       (3 )     (30.0 )
Small business loans
    16       15       12       4       33.3  
Residential mortgage
    12       12       11       1       9.1  
Home equity
    7       7             7       N.M.  
         
Total non-accrual loans
    57       58       63       (6 )     (9.5 )
Renegotiated loans
                            N.M.  
         
Total non-performing loans (NPL)
    57       58       63       (6 )     (9.5 )
Other real estate, net (OREO)
    12       9       16       (4 )     (25.0 )
         
Total non-performing assets
  $ 69     $ 67     $ 79     $ (10 )     (12.7 )%
         
 
Accruing loans past due 90 days or more
  $ 41     $ 43     $ 47     $ (6 )     (12.8 )%
 
                                       
Allowance for loan and lease losses (ALLL) (eop)
  $ 174     $ 176     $ 158     $ 16       10.1 %
ALLL as a % of total loans and leases
    1.02 %     1.07 %     1.10 %     (0.08 )%        
ALLL as a % of NPLs
    305.3       303.4       250.8       54.5          
ALLL + OREO as a % of NPAs
    269.6       276.1       220.3       49.3          
NPLs as a % of total loans and leases
    0.33       0.35       0.44       (0.11 )        
NPAs as a % of total loans and leases + OREO
    0.41       0.41       0.55       (0.14 )        


N.M., not a meaningful value.
 
eop — End of Period.
 
(1)   Operating basis, see Lines of Business section for definition.

52


Table 19 — Regional Banking (1)

                                         
    2005   2004   1Q05 vs. 1Q04
    First     Fourth     First     Amount     Percent  
         
SUPPLEMENTAL DATA
                                       
# employees — full-time equivalent (eop)
    4,726       4,746       4,824       (98 )     (2.0) %
 
                                       
Retail Banking
                                       
Average loans (in millions)
  $ 5,110     $ 4,993     $ 4,259     $ 851       20.0 %
Average deposits (in millions)
  $ 11,467     $ 11,311     $ 10,683     $ 784       7.3  
# employees — full-time equivalent (eop)
    3,379       3,395       3,407       (28 )     (0.8 )
# banking offices (eop)
    335       334       332       3       0.9  
# ATMs (eop)
    714       704       684       30       4.4  
# DDA households (eop)
    506,209       502,931       491,949       14,260       2.9  
# New relationships 90-day cross-sell (average)
    2.70       2.77       2.20       0.50       22.7  
# on-line customers (eop)
    224,663       211,392       179,681       44,982       25.0  
% on-line retail household penetration (eop)
    42 %     40 %     34 %     8 %        
 
                                       
Small Business
                                       
Average loans (in millions)
  $ 2,183     $ 2,136     $ 1,974     $ 209       10.6 %
Average deposits (in millions)
  $ 2,029     $ 2,106     $ 1,861     $ 168       9.0  
# employees — full-time equivalent (eop)
    275       270       270       5       1.9  
# business DDA relationships (eop)
    51,946       50,857       47,728       4,218       8.8  
# New relationships 90-day cross-sell (average)
    2.29       2.33       2.05       0.24       11.7  
 
                                       
Commercial Banking
                                       
Average loans (in millions)
  $ 6,619     $ 6,378     $ 6,144     $ 475       7.7 %
Average deposits (in millions)
  $ 3,897     $ 3,567     $ 2,867     $ 1,030       35.9  
# employees — full-time equivalent (eop)
    537       530       543       (6 )     (1.1 )
# customers (eop)
    5,071       5,513       5,527       (456 )     (8.3 )
 
                                       
Mortgage Banking
                                       
Average loans (in millions)
  $ 2,860     $ 2,698     $ 1,739     $ 1,121       64.5 %
Average deposits (in millions)
  $ 161     $ 174     $ 149     $ 12       8.1  
# employees — full-time equivalent (eop)
    535       551       604       (69 )     (11.4 )
Closed loan volume (in millions)
  $ 762     $ 948     $ 860     $ (98 )     (11.4 )
Portfolio closed loan volume (in millions)
    364       494       533       (169 )     (31.7 )
Agency delivery volume (in millions)
    335       404       342       (7 )     (2.0 )
Total servicing portfolio (in millions)
    10,980       10,755       9,442       1,538       16.3  
Portfolio serviced for others (in millions)
    6,896       6,861       6,523       373       5.7  
Mortgage servicing rights (in millions)
    81.0       77.1       60.4       20.6       34.1  


N.M., not a meaningful value.
 
eop — End of Period.
 
(1)   Operating basis, see Lines of Business section for definition.

53


Dealer Sales

     Dealer Sales serves more than 3,500 automotive dealerships within Huntington’s primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee. The segment finances the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles to consumers under long-term operating or direct finance leases, finances the dealership’s floor plan inventories, real estate, or working capital needs, and provides other banking services to the automotive dealerships and their owners.

     The accounting for automobile leases significantly impacts the presentation of Dealer Sales’ financial results. Residual values on leased automobiles, including the accounting for residual value losses, are also an important factor in the overall profitability of auto leases. Automobile leases originated prior to May 2002 are accounted for as operating leases, with leases originated since April 2002 accounted for as direct financing leases. This accounting treatment impacts a number of Dealer Sales’ financial performance results and trends including net interest income, non-interest income, and non-interest expense. (See the Operating Lease Assets section and Significant Factor 1.)

2005 First Quarter versus 2004 First Quarter

     Dealer Sales contributed $18.0 million of the Company’s net operating earnings in the first quarter, up $5.9 million, or 49%, from the 2004 first quarter. This increase primarily reflected the benefit of a decline in the provision for credit losses reflecting a combination of factors, most notably lower automobile loans as a result of planned sales. Partially offsetting this benefit was lower net income from loan and lease assets (net interest income plus operating lease income less operating lease expense) reflecting the impact of sold loans, as well as a decline in loan production given intense competition in the market place along with a decline in automobile sales from the year-ago quarter.

     Net interest income increased 8%, due to a higher net interest margin, as average total loans and leases declined 9% from the year-ago quarter. This decline reflected a $1.0 billion, or 34%, decline in average automobile loans as $1.5 billion of automobile loans were sold over this period as part of a planned strategy to lower the Company’s overall credit exposure to the automobile financing sector. Automobile loan and lease production in the current quarter was down 25% and 31%, respectively. The decline in average automobile loans was partially offset by a 24% increase in average automobile leases and a 3% increase in middle market floor plan C&I loans.

     The provision for credit losses declined $14.8 million, or 69%, from the year-ago quarter due to several factors. These factors included the impact of lower loan balances due to the sale of loans, improved credit quality, and the fact that provision expense in the year-ago quarter included a $4.7 million cumulative increase to correct the prior recording of insurance claims received.

     Non-interest income and non-interest expense declined $43.3 million, or 45%, and $34.8 million, or 38%, respectively, reflecting the 56% decline in average operating lease assets between periods, as the operating lease portfolio continued to run-off ( see Significant Factor 1 ). Other income declined $0.3 million reflecting lower fees earned from leases terminated early. Personnel costs decreased $0.2 million, or 4%, due to focused expense control.

     The return on average assets and return on average equity for Dealer Sales, were 1.20% and 19.5%, respectively, up from 0.66% and 10.8% in 2004.

2005 First Quarter versus 2004 Fourth Quarter

     Dealer Sales’ net operating earnings in the first quarter were up $2.7 million, or 18%, from the 2004 fourth quarter. A soft car market continued to have adverse impacts on the operating performance of this segment. However this negative impact was partially offset by the benefit of improved credit quality, as demonstrated by lower net charge-offs and related provision, along with lower levels of non-interest expenses. The net contribution from loan and lease assets (net interest income plus operating lease income less operating lease expense) increased slightly from the fourth quarter.

     Net interest income declined $1.7 million, or 4%, from the fourth quarter. The 2004 fourth quarter reflected a $3.7 million interest adjustment on an auto loan securitization. The net interest margin was also favorably impacted by the run-off of the operating lease assets due to the fact that all of the funding cost associated with these assets is reflected in interest expense, whereas the income is reflected in non-interest income.

54


     Average automobile loans increased 5% from the fourth quarter, with automobile leases increasing 3%. Also contributing to the growth in total loans and leases was a 5% increase in average middle market C&I loans, primarily dealer floor plan loans.

     The provision for credit losses decreased $1.9 million, or 21%, reflecting the impact of improved credit quality within the existing portfolio, as well as the continued focus on originating high credit quality loans and leases. Annualized total net charge-offs was 0.48%, down from 0.58% in the 2004 fourth quarter.

     Non-interest income decreased $9.4 million, or 15%, primarily reflecting an $8.6 million decline in operating lease income as that portfolio continued to run-off. Similarly, non-interest expense decreased $13.4 million, or 19%, reflecting a $10.6 million decline in operating lease expense, also reflecting the run-off of the operating lease portfolio. Other non-interest expense declined $2.4 million, or 15%, primarily due to lower residual value insurance costs, and personnel costs decreased 6% primarily due to lower headcounts and production related salary costs.

     The return on average assets and return on average equity for Dealer Sales, were 1.20% and 19.5%, respectively, up from 1.01% and 15.9% in the fourth quarter.

55


Table 20 - Dealer Sales (1)

                                         
    2005     2004     1Q05 vs. 1Q04  
    First     Fourth     First     Amount     Percent  
         
INCOME STATEMENT (in thousands of dollars)
                                       
Net interest income
  $ 37,907     $ 39,595     $ 35,069     $ 2,838       8.1 %
Provision for credit losses
    6,825       8,676       21,655       (14,830 )     (68.5 )
         
Net interest income after provision for credit losses
    31,082       30,919       13,414       17,668       N.M.  
         
Operating lease income
    45,768       54,406       88,818       (43,050 )     (48.5 )
Service charges on deposit accounts
    158       184       192       (34 )     (17.7 )
Brokerage and insurance income
    545       1,027       510       35       6.9  
Trust services
                            N.M.  
Mortgage banking
                            N.M.  
Other service charges and fees
    1       1             1       N.M.  
Other income
    6,671       6,891       6,925       (254 )     (3.7 )
         
Total non-interest income before securities gains
    53,143       62,509       96,445       (43,302 )     (44.9 )
Securities gains
                            N.M.  
         
Total non-interest income
    53,143       62,509       96,445       (43,302 )     (44.9 )
         
Operating lease expense
    37,149       47,734       70,666       (33,517 )     (47.4 )
Personnel costs
    5,666       5,996       5,901       (235 )     (4.0 )
Other expense
    13,784       16,223       14,802       (1,018 )     (6.9 )
         
Total non-interest expense
    56,599       69,953       91,369       (34,770 )     (38.1 )
         
Income before income taxes
    27,626       23,475       18,490       9,136       49.4  
Provision for income taxes (2)
    9,669       8,216       6,472       3,197       49.4  
         
Net income — operating (1)
  $ 17,957     $ 15,259     $ 12,018     $ 5,939       49.4 %
          
 
                                       
Revenue — fully taxable equivalent (FTE)
                                       
Net interest income
  $ 37,907     $ 39,595     $ 35,069     $ 2,838       8.1 %
Tax equivalent adjustment (2)
                            N.M.  
         
Net interest income (FTE)
    37,907       39,595       35,069       2,838       8.1  
Non-interest income
    53,143       62,509       96,445       (43,302 )     (44.9 )
         
Total revenue (FTE)
  $ 91,050     $ 102,104     $ 131,514     $ (40,464 )     (30.8 )%
          
Total revenue excluding securities gains (FTE)
  $ 91,050     $ 102,104     $ 131,514     $ (40,464 )     (30.8 )%
          
 
                                       
SELECTED AVERAGE BALANCES (in millions of dollars)
                                       
Loans:
                                       
Commercial
                                       
Middle market commercial and industrial
  $ 782     $ 747     $ 756     $ 26       3.4 %
Middle market commercial real estate
                                       
Construction
    6       6       8       (2 )     (25.0 )
Commercial
    65       70       81       (16 )     (19.8 )
         
Total commercial
    853       823       845       8       0.9  
         
Consumer
                                       
Auto leases - indirect
    2,461       2,388       1,988       473       23.8  
Auto loans - indirect
    2,005       1,909       3,036       (1,031 )     (34.0 )
Home equity loans & lines of credit
    0       0       0       0       N.M.  
Other loans
    91       84       70       21       30.0  
         
Total consumer
    4,557       4,381       5,094       (537 )     (10.5 )
         
Total loans & leases
  $ 5,410     $ 5,204     $ 5,939     $ (529 )     (8.9 )%
          
 
                                       
Operating lease assets
  $ 515     $ 638     $ 1,166     $ (651 )     (55.8 )%
 
                                       
Deposits:
                                       
Non-interest bearing deposits
  $ 65     $ 65     $ 65     $       %
Interest bearing demand deposits
    3       2       2       1       50.0  
Foreign time deposits
    3       5       4       (1 )     (25.0 )
         
Total deposits
  $ 71     $ 72     $ 71     $       %
          


N.M., not a meaningful value.
 
(1)   Operating basis, see Lines of Business section for definition.
 
(2)   Calculated assuming a 35% tax rate.

56


Table 20 — Dealer Sales (1)

                                         
    2005     2004     1Q05 vs. 1Q04  
    First     Fourth     First     Amount     Percent  
         
PERFORMANCE METRICS
                                       
 
                                       
Return on average assets
    1.20 %     1.01 %     0.66 %     0.54 %        
Return on average equity
    19.5       15.9       10.8       8.7          
Net interest margin
    2.83       3.01       2.37       0.46          
Efficiency ratio
    62.2       68.5       69.5       (7.3 )        
 
                                       
CREDIT QUALITY (in thousands of dollars)
                                       
 
                                       
Net charge-offs by loan type
                                       
Commercial
                                       
Middle market commercial and industrial
  $     $ (28 )   $ 1     $ (1 )     (100.0 )%
Middle market commercial real estate
                            N.M.  
         
Total commercial
          (28 )     1       (1 )     (100.0 )
         
Consumer
                                       
Auto leases
    3,014       3,104       3,159       (145 )     (4.6 )
Auto loans
    3,216       4,406       13,422       (10,206 )     (76.0 )
Home equity loans & lines of credit
                            N.M.  
Other loans
    175       123       211       (36 )     (17.1 )
         
Total consumer
    6,405       7,633       16,792       (10,387 )     (61.9 )
         
Total net charge-offs
  $ 6,405     $ 7,605     $ 16,793     $ (10,388 )     (61.9 )%
          
Net charge-offs — annualized percentages
                                       
Commercial
                                       
Middle market commercial and industrial
    %     (0.01 )%     %     %        
Middle market commercial real estate
                               
         
Total commercial
          (0.01 )                    
         
Consumer
                                       
Auto leases
    0.50       0.52       0.64       (0.14 )        
Auto loans
    0.65       0.92       1.78       (1.13 )        
Home equity loans & lines of credit
    N.M.       N.M.       N.M.       N.M.          
Other loans
    0.78       0.58       1.21       (0.43 )        
         
Total consumer
    0.57       0.69       1.33       (0.76 )        
         
Total net charge-offs
    0.48 %     0.58 %     1.14 %     (0.66 )%        
          
 
                                       
Non-performing Assets (NPA) (in millions of dollars)
                                       
Middle market commercial and industrial
  $     $     $     $       N.M. %
Middle market commercial real estate
                            N.M.  
         
Total non-accrual loans
                            N.M.  
Renegotiated loans
                            N.M.  
         
Total non-performing loans (NPL)
                            N.M.  
Other real estate, net (OREO)
                            N.M.  
         
Total non-performing assets
  $     $     $     $       N.M. %
          
 
                                       
Accruing loans past due 90 days or more
  $ 6     $ 7     $ 9     $ (3 )     (33.3 )%
 
                                       
Allowance for loan and lease losses (ALLL) (eop)
  $ 38     $ 37     $ 51     $ (13 )     (25.5 )%
ALLL as a % of total loans and leases
    0.69 %     0.69 %     0.96 %     (0.27 )%        
ALLL as a % of NPLs
    N.M.       N.M.       N.M.       N.M.          
ALLL + OREO as a % of NPAs
    N.M.       N.M.       N.M.       N.M.          
NPLs as a % of total loans and leases
                               
NPAs as a % of total loans and leases + OREO
                               


N.M., not a meaningful value.
 
eop — End of Period.
 
(1)   Operating basis, see Lines of Business section for definition.

57


Table 20 — Dealer Sales (1)

                                         
    2005     2004     1Q05 vs. 1Q04  
    First     Fourth     First     Amount     Percent  
         
SUPPLEMENTAL DATA
                                       
# employees — full-time equivalent (eop)
    397       406       433       (36 )     (8.3 )%
 
                                       
Automobile loans:
                                       
Production (in millions)
  $ 366.9     $ 306.1     $ 487.9       (121 )     (24.8 )%
% Production new vehicles
    47.9 %     34.9 %     52.7 %     (4.8 )%        
Average term (in months)
    65.0       64.4       64.7       0.3          
 
                                       
Automobile leases:
                                       
Production (in millions)
  $ 190.9     $ 270.5     $ 275.4       (85 )     (30.7 )%
% Production new vehicles
    99.1 %     99.4 %     98.9 %     0.2 %        
Average term (in months)
    53.3       52.0       53.4       (0.1 )        
Average residual %
    42.7 %     44.5 %     42.3 %     0.4 %        


eop — End of Period.
 
(1)   Operating basis, see Lines of Business section for definition.

58


Private Financial Group

     The Private Financial Group (PFG) provides products and services designed to meet the needs of the Company’s higher net worth customers. Revenue is derived through trust, asset management, investment advisory, brokerage, insurance, and private banking products and services. As of March 31, 2005, the trust division provides fiduciary services to more than 12,000 accounts with assets totaling $43.5 billion, with $10.0 billion managed by PFG, including approximately $600 million in assets managed by Haberer Registered Investment Advisor, which provides investment management services to nearly 600 customers.

     PFG also provides investment management and custodial services to the Company’s 29 proprietary mutual funds, including ten variable annuity funds, which represented more than $3 billion in total assets under management at March 31, 2005. The Huntington Investment Company offers brokerage and investment advisory services to both Regional Banking and PFG customers through more than 100 licensed investment sales representatives and 639 licensed personal bankers. This customer base has over $4.7 billion in mutual fund and annuity assets. PFG’s insurance entities provide a complete array of insurance products including individual life insurance products ranging from basic term life insurance, to estate planning, group life and health insurance, property and casualty insurance, mortgage title insurance, and reinsurance for payment protection products. Income and related expenses from the sale of brokerage and insurance products is shared with the line of business that generated the sale or provided the customer referral, most notably Regional Banking.

2005 First Quarter versus 2004 First Quarter

     The PFG contributed $10.1 million of the Company’s net operating earnings in the first quarter of 2005, up $2.2 million, or 27%, from the first quarter of 2004 primarily as a result of 10% growth in total revenue, achieved with only a 1% increase in total non-interest expense.

     Net interest income increased $1.5 million, or 12%, from the year-ago quarter as average total loans increased 13%, while average deposit balances remained essentially flat. Loan growth was largely reflective of PFG’s 2004 initiative to add relationship managers in several markets targeted for growth opportunities, most notably East and West Michigan and Central and Southern Ohio.

     Credit quality remained strong as indicated by a negative provision for credit losses for the first quarter of 2005. The negative provision for credit losses reflected the combination of very low charge-offs and the partial release of prior reserves as a result of a large pay down on a partially secured loan. The total annualized net charge-off ratio was only 0.06% in the first quarter and total NPA ratio was only 0.27%.

     Non-interest income, net of fees shared with other business units, increased $2.5 million, or 9%, from the year-ago quarter mainly due to growth in trust income. Trust income increased $2.0 million, or 12%, mainly due to revenue growth in personal trust and investment management business. Total trust assets grew 11% to $43.5 billion at March 31, 2005, from $39.1 billion a year earlier. For the same comparable periods, managed assets grew 9% from $9.2 billion to $10.0 billion. Revenue earned from services provided to the Huntington proprietary mutual funds increased as the total equity and fixed income fund assets increased by 11% and fee waivers were discontinued as a result of increased money market yields. Brokerage and insurance revenue decreased $1.9 million, or 18%, mainly due to decreased annuity sales. The decreased annuity sales reflected a lower demand for fixed annuity products resulting from the rising interest rate environment combined with less attractive rates. Insurance revenue decreased due to reduced sales of life insurance products through the branch banking offices, as well as fewer large premium policy sales of advanced market life insurance products. The $2.5 million increase in other non-interest income resulted mainly from the change in accounting methodology to recognize as gross revenue vendor marketing allowances that were previously offset with the related expenses.

     Non-interest expense increased $0.4 million, or 1%, from the 2004 first quarter. Increased expenses resulting from the aforementioned accounting methodology change were largely offset by reduced sales commissions as a result of the decreased brokerage and insurance revenue.

     The ROA and ROE for the 2005 first quarter were 2.48% and 35.8%, respectively, up from 2.15% and 27.1%, respectively, in the year-ago quarter.

59


2005 First Quarter versus 2004 Fourth Quarter

     PFG’s $10.1 million net contribution to the Company’s operating earnings in the first quarter of 2005 was up $3.0 million, or 42%, from the fourth quarter. The increased earnings resulted primarily from an 8% growth in total revenue and $2.4 million decrease in the provision for credit losses.

     Net interest income increased $0.1 million from the fourth quarter. Commercial and consumer loans both reflected double digit annualized growth during the quarter. The decline in deposit balances reflected both seasonality, as well as some redirection of sweep account balances to money market mutual funds. The net interest margin declined slightly from 3.64% in the prior quarter to 3.62% in the current quarter mainly as a result of a decline in spread rates on allocated capital. Spread rates on loans remained essentially unchanged, while spread rates on deposits continued to widen, as customer deposit rates have not increased as quickly as market rates.

     Provision for credit losses decreased $2.4 million from the prior quarter. The decrease was mainly due to lower net charge-offs combined with the partial release of a $0.7 million reserve established in the fourth quarter 2004 as a result of a significant pay down in the first quarter of 2005. The total annualized net charge-off ratio decreased to 0.06% from 0.32% and total NPAs declined to 0.27% from 0.40% of total loans outstanding.

     Non-interest income, net of fees shared with other business units and excluding securities gains, increased $3.4 million, or 12%, from the fourth quarter. Trust income increased $0.9 million, or 5% from the previous quarter, due in part to growth in managed assets from $9.8 billion to $10.0 billion in the first quarter. Revenue growth also reflected Huntington’s new role as Fund administrator and the impact of a $0.2 million reserve established in the fourth quarter 2004 for the potential rebate of certain administrative fees. Personal trust revenue also reflected $0.1 million in annual fees for tax services provided to certain trust accounts. Institutional trust revenue growth mainly resulted from a large $1.5 billion custody account acquired in fourth quarter and the expansion of a large institutional investment management account relationship. Corporate trust revenue declined reflecting normal seasonal timing of annual renewal fees. Brokerage and insurance revenue increased $0.2 million, or 2%, in the first quarter as a result of increased retail investment sales. Mutual fund and annuity sales volume increased 22%, which helped generate additional brokerage revenue of $1.0 million, or 11% in the current quarter. Insurance revenue declined $0.7 million, or 21%, as fourth quarter 2004 reflected the sale of several large advanced market policies and the annual renewals of several large policies. The $2.5 million increase in other non-interest income resulted mainly from the change in accounting methodology to recognize as gross revenue vendor marketing allowances that were previously offset with the related expenses.

     Non-interest expense increased $1.3 million, or 5%, from the prior quarter mainly due to the aforementioned accounting methodology change. Personnel expenses increased 3% as a result of increased benefit costs, mainly FICA and unemployment taxes.

     The ROA and ROE in the 2005 first quarter were 2.48% and 35.8%, respectively, up from 1.75% and 23.0%, respectively in the previous quarter.

60


Table 21 — Private Financial Group (1)

                                         
    2005     2004     1Q05 vs. 1Q04  
    First     Fourth     First     Amount     Percent  
         
INCOME STATEMENT (in thousands of dollars)
                                       
Net interest income
  $ 13,926     $ 13,798     $ 12,416     $ 1,510       12.2 %
Provision for credit losses
    (300 )     2,130       (556 )     256       (46.0 )
         
Net interest income after provision for credit losses
    14,226       11,668       12,972       1,254       9.7  
         
Service charges on deposit accounts
    866       1,008       933       (67 )     (7.2 )
Brokerage and insurance income
    8,748       8,605       10,616       (1,868 )     (17.6 )
Trust services
    18,024       17,090       16,031       1,993       12.4  
Mortgage banking
    (277 )     (233 )     (129 )     (148 )     N.M.  
Other service charges and fees
    113       122       100       13       13.0  
Other income
    3,632       1,156       1,084       2,548       N.M.  
         
Total non-interest income before securities gains
    31,106       27,748       28,635       2,471       8.6  
Securities gains
          (13 )                 N.M.  
         
Total non-interest income
    31,106       27,735       28,635       2,471       8.6  
         
Personnel costs
    17,113       16,676       17,800       (687 )     (3.9 )
Other expense
    12,755       11,893       11,661       1,094       9.4  
         
Total non-interest expense
    29,868       28,569       29,461       407       1.4  
         
Income before income taxes
    15,464       10,834       12,146       3,318       27.3  
Provision for income taxes (2)
    5,412       3,792       4,251       1,161       27.3  
         
Net income — operating (1)
  $ 10,052     $ 7,042     $ 7,895     $ 2,157       27.3 %
         
 
                                       
Revenue — fully taxable equivalent (FTE)
                                       
Net interest income
  $ 13,926     $ 13,798     $ 12,416     $ 1,510       12.2 %
Tax equivalent adjustment (2)
    14       10       9       5       55.6  
         
Net interest income (FTE)
    13,940       13,808       12,425       1,515       12.2  
Non-interest income
    31,106       27,735       28,635       2,471       8.6  
         
Total revenue (FTE)
  $ 45,046     $ 41,543     $ 41,060     $ 3,986       9.7 %
         
Total revenue excluding securities gains (FTE)
  $ 45,046     $ 41,556     $ 41,060     $ 3,986       9.7 %
         
 
                                       
SELECTED AVERAGE BALANCES (in millions of dollars)
                                       
Loans:
                                       
Commercial
                                       
Middle market commercial and industrial
  $ 404     $ 392     $ 321     $ 83       25.9 %
Middle market commercial real estate
                                       
Construction
    37       26       24       13       54.2  
Commercial
    178       177       165       13       7.9  
         
Total commercial
    619       595       510       109       21.4  
         
Consumer
                                       
Home equity loans & lines of credit
    317       313       287       30       10.5  
Residential mortgage
    547       526       511       36       7.0  
Other loans
    10       10       8       2       25.0  
         
Total consumer
    874       849       806       68       8.4  
         
Total loans & leases
  $ 1,493     $ 1,444     $ 1,316     $ 177       13.4 %
         
 
                                       
Deposits:
                                       
Non-interest bearing deposits
  $ 185     $ 191     $ 169     $ 16       9.5 %
Interest bearing demand deposits
    727       742       754       (27 )     (3.6 )
Savings deposits
    42       46       46       (4 )     (8.7 )
Domestic time deposits
    119       110       96       23       24.0  
Foreign time deposits
    21       26       21              
         
Total deposits
  $ 1,094     $ 1,115     $ 1,086     $ 8       0.7 %
         


N.M., not a meaningful value.

(1)   Operating basis, see Lines of Business section for definition.
 
(2)   Calculated assuming a 35% tax rate.

61


Table 21 — Private Financial Group (1)

                                         
    2005     2004     1Q05 vs. 1Q04  
    First     Fourth     First     Amount     Percent  
         
PERFORMANCE METRICS
                                       
 
                                       
Return on average assets
    2.48 %     1.75 %     2.15 %     0.33 %        
Return on average equity
    35.8       23.0       27.1       8.7          
Net interest margin
    3.62       3.64       3.61       0.01          
Efficiency ratio
    66.3       68.7       71.8       (5.5 )        
 
                                       
CREDIT QUALITY (in thousands of dollars)
                                       
 
                                       
Net charge-offs by loan type
                                       
Commercial
                                       
Middle market commercial and industrial
  $ (81 )   $ 191     $ 16     $ (97 )     N.M. %
Middle market commercial real estate
          250                   N.M.  
         
Total commercial
    (81 )     441       16       (97 )     N.M.  
         
Consumer
                                       
Home equity loans & lines of credit
          485       160       (160 )     (100.0 )
Residential mortgage
    171       233             171       N.M.  
Other loans
    130       3       32       98       N.M.  
         
Total consumer
    301       721       192       109       56.8  
         
Total net charge-offs
  $ 220     $ 1,162     $ 208     $ 12       5.8 %
         
Net charge-offs — annualized percentages
                                       
Commercial
                                       
Middle market commercial and industrial
    (0.08 )%     0.19 %     0.02 %     (0.10 )%        
Middle market commercial real estate
          0.49                      
         
Total commercial
    (0.05 )     0.29       0.01       (0.06 )        
         
Consumer
                                       
Home equity loans & lines of credit
          0.62       0.22       (0.22 )        
Residential mortgage
    0.13       0.18             0.13          
Other loans
    5.27       0.12       1.61       3.66          
         
Total consumer
    0.14       0.34       0.10       0.04          
         
Total net charge-offs
    0.06 %     0.32 %     0.06 %     %        
         
 
                                      &nb