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 September 30, 2005
Commission File Number 0-2525
Huntington Bancshares Incorporated
     
Maryland
(State or other jurisdiction of
incorporation or organization)
  31-0724920
(I.R.S. Employer
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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
There were 228,197,076 shares of Registrant’s without par value common stock outstanding on October 31, 2005.
 
 


Huntington Bancshares Incorporated
INDEX
         
Part I. Financial Information
       
 
       
Item 1. Financial Statements (Unaudited)
       
 
       
Condensed Consolidated Balance Sheets at September 30, 2005, December 31, 2004, and September 30, 2004
    3  
 
       
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004
    4  
 
       
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2005 and 2004
    5  
 
       
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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
    23  
 
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk
    83  
 
       
Item 4. Controls and Procedures
    83  
 
       
Part II. Other Information
       
 
       
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
    84  
 
       
Item 6. Exhibits
    84  
 
Signatures
    85  
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2

2


Part 1. Financial Information
Item 1. Financial Statements
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
                         
    September 30,   December 31,   September 30,
(in thousands, except number of shares)   2005   2004   2004
    (Unaudited)           (Unaudited)
Assets
                       
Cash and due from banks
  $ 803,425     $ 877,320     $ 1,053,358  
Federal funds sold and securities purchased under resale agreements
    78,325       628,040       838,833  
Interest bearing deposits in banks
    22,379       22,398       36,155  
Trading account securities
    191,418       309,630       120,334  
Loans held for sale
    449,096       223,469       205,913  
Investment securities
    4,304,898       4,238,945       4,150,044  
Loans and leases
    24,496,287       23,560,277       22,587,259  
Allowance for loan and lease losses
    (253,943 )     (271,211 )     (282,650 )
 
Net loans and leases
    24,242,344       23,289,066       22,304,609  
 
Operating lease assets
    274,190       587,310       717,411  
Bank owned life insurance
    993,407       963,059       954,911  
Premises and equipment
    358,876       355,115       356,438  
Goodwill and other intangible assets
    217,703       215,807       216,011  
Customers’ acceptance liability
    7,463       11,299       8,787  
Accrued income and other assets
    819,464       844,039       845,436  
 
Total assets
  $ 32,762,988     $ 32,565,497     $ 31,808,240  
 
 
                       
Liabilities and shareholders’ equity
                       
Liabilities
                       
Deposits
  $ 22,349,122     $ 20,768,161     $ 20,109,025  
Short-term borrowings
    1,502,566       1,207,233       1,215,887  
Federal Home Loan Bank advances
    1,155,656       1,271,088       1,270,454  
Other long-term debt
    2,795,431       4,016,004       4,094,185  
Subordinated notes
    1,034,343       1,039,793       1,040,901  
Allowance for unfunded loan commitments and letters of credit
    38,098       33,187       30,007  
Bank acceptances outstanding
    7,463       11,299       8,787  
Deferred federal income tax liability
    768,344       783,628       723,525  
Accrued expenses and other liabilities
    489,290       897,466       854,552  
 
Total liabilities
    30,140,313       30,027,859       29,347,323  
 
 
                       
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 229,005,823; 231,605,281 and 230,153,486 shares, respectively
    2,490,919       2,484,204       2,482,904  
Less 28,860,432; 26,260,974 and 27,712,769 treasury shares, respectively
    (575,941 )     (499,259 )     (526,967 )
Accumulated other comprehensive loss
    (21,839 )     (10,903 )     (13,812 )
Retained earnings
    729,536       563,596       518,792  
 
Total shareholders’ equity
    2,622,675       2,537,638       2,460,917  
 
Total liabilities and shareholders’ equity
  $ 32,762,988     $ 32,565,497     $ 31,808,240  
 
See notes to unaudited condensed consolidated financial statements

3


Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(in thousands, except per share amounts)   2005   2004   2005   2004
Interest and fee income
                               
Loans and leases
                               
Taxable
  $ 366,718     $ 285,042     $ 1,044,994     $ 824,056  
Tax-exempt
    154       222       509       929  
Investment securities
                               
Taxable
    38,507       41,588       114,097       135,348  
Tax-exempt
    5,523       4,431       14,171       13,503  
Other
    9,956       6,719       25,518       14,264  
 
Total interest income
    420,858       338,002       1,199,289       988,100  
 
Interest expenses
                               
Deposits
    119,376       64,812       313,103       183,810  
Short-term borrowings
    10,901       3,121       22,815       9,222  
Federal Home Loan Bank advances
    7,351       8,426       24,697       24,565  
Subordinated notes and other long-term debt
    41,593       34,585       119,939       98,197  
 
Total interest expense
    179,221       110,944       480,554       315,794  
 
Net interest income
    241,637       227,058       718,735       672,306  
Provision for credit losses
    17,699       11,785       50,468       42,408  
 
Net interest income after provision for credit losses
    223,938       215,273       668,267       629,898  
 
Operating lease income
    29,262       64,412       114,091       231,985  
Service charges on deposit accounts
    44,817       43,935       125,751       129,368  
Trust services
    19,671       17,064       56,980       50,095  
Brokerage and insurance income
    13,948       13,200       40,518       41,920  
Bank owned life insurance income
    10,104       10,019       30,347       31,813  
Other service charges and fees
    11,449       10,799       32,860       30,957  
Mortgage banking income
    21,116       4,448       30,801       23,474  
Securities gains
    101       7,803       715       13,663  
Gains on sales of automobile loans
    502       312       756       14,206  
Other income
    9,770       17,899       52,141       68,177  
 
Total non-interest income
    160,740       189,891       484,960       635,658  
 
Personnel costs
    117,476       121,729       365,547       363,068  
Operating lease expense
    22,823       54,885       89,650       188,158  
Net occupancy
    16,653       16,838       53,152       49,859  
Outside data processing and other services
    18,062       17,527       54,945       53,552  
Equipment
    15,531       15,295       47,031       47,609  
Professional services
    8,323       12,219       27,129       27,354  
Marketing
    6,779       5,000       20,674       20,908  
Telecommunications
    4,512       5,359       14,195       15,191  
Printing and supplies
    3,102       3,201       9,489       9,315  
Amortization of intangibles
    203       204       611       612  
Restructuring reserve releases
          (1,151 )           (1,151 )
Other expense
    19,588       22,317       57,042       66,755  
 
Total non-interest expense
    233,052       273,423       739,465       841,230  
 
Income before income taxes
    151,626       131,741       413,762       424,326  
Provision for income taxes
    43,052       38,255       102,244       116,540  
 
Net income
  $ 108,574     $ 93,486     $ 311,518     $ 307,786  
 
 
                               
Average common shares — basic
    229,830       229,848       231,290       229,501  
Average common shares — diluted
    233,456       234,348       234,727       233,307  
 
                               
Per common share
                               
Net income — basic
  $ 0.47     $ 0.41     $ 1.35     $ 1.34  
Net income — diluted
    0.47       0.40       1.33       1.32  
Cash dividends declared
    0.215       0.20       0.63       0.55  
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
Nine Months Ended September 30, 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
                                                    307,786       307,786  
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income
                                            (19,555 )             (19,555 )
Unrealized gains on derivative instruments used in cash flow hedging relationships
                                            3,065               3,065  
 
                                                               
Total comprehensive income
                                                            291,296  
 
                                                               
Cash dividends declared ($0.55 per share)
                                                    (126,352 )     (126,352 )
Stock options exercised
            (564 )     985       18,865                               18,301  
Other
            (74 )     160       2,744                               2,670  
 
 
                                                               
Balance, end of period (Unaudited)
    257,866     $ 2,482,904       (27,713 )   $ (526,967 )           $ (13,812 )   $ 518,792     $ 2,460,917  
 
 
                                                               
Nine Months Ended September 30, 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
                                                    311,518       311,518  
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income
                                            (18,304 )             (18,304 )
Unrealized gains on derivative instruments used in cash flow hedging relationships
                                            7,368               7,368  
 
                                                               
Total comprehensive income
                                                            300,582  
 
                                                               
Cash dividends declared ($0.63 per share)
                                                    (145,578 )     (145,578 )
Treasury shares purchased
                    (4,416 )     (108,610 )                             (108,610 )
Stock options exercised
            3,172       1,729       33,353                               36,525  
Other
            3,543       88       (1,425 )                             2,118  
 
 
                                                               
Balance, end of period (Unaudited)
    257,866     $ 2,490,919       (28,860 )   $ (575,941 )           $ (21,839 )   $ 729,536     $ 2,622,675  
 
See notes to unaudited condensed consolidated financial statements.

5


Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                                 
                 
    Nine Months Ended
    September 30,
(in thousands of dollars)   2005   2004
 
Operating activities
               
Net income
  $ 311,518     $ 307,786  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    50,468       42,408  
Depreciation on operating lease assets
    82,119       171,152  
Amortization of mortgage servicing rights
    14,574       13,866  
Other depreciation and amortization
    56,780       67,923  
Mortgage servicing rights impairment charges (recovery)
    (3,986 )     (640 )
Deferred income tax (benefit) expense
    (9,422 )     83,140  
Decrease (increase) in trading account securities
    118,212       (112,745 )
Originations of loans held for sale
    (1,603,271 )     (1,364,329 )
Principal payments on and proceeds from loans held for sale
    1,704,813       1,384,895  
Gains on sales of investment securities
    (715 )     (13,663 )
Gains on sales/securitizations of loans
    (756 )     (12,693 )
Increase of cash surrender value of bank owned life insurance
    (30,347 )     (31,813 )
(Decrease) increase in payable to investors in sold loans
    (128,469 )     33,053  
Other, net
    (228,596 )     (44,003 )
 
Net cash provided by operating activities
    332,922       524,337  
 
 
               
Investing activities
               
Decrease (increase) in interest bearing deposits in banks
    19       (2,528 )
Proceeds from:
               
Maturities and calls of investment securities
    333,605       746,386  
Sales of investment securities
    1,715,426       1,655,459  
Purchases of investment securities
    (2,146,993 )     (1,530,657 )
Proceeds from sales/securitizations of loans
          1,534,395  
Net loan and lease originations, excluding sales
    (1,332,014 )     (3,216,666 )
Purchases of operating lease assets
    (16,546 )     (11,479 )
Proceeds from sale of operating lease assets
    239,194       368,663  
Proceeds from sale of premises and equipment
    189       340  
Purchases of premises and equipment
    (42,069 )     (43,924 )
Proceeds from sales of other real estate
    47,755       9,800  
 
Net cash used for investing activities
    (1,201,434 )     (490,211 )
 
 
               
Financing activities
               
Increase in deposits
    1,587,653       1,610,167  
Increase (decrease) in short-term borrowings
    295,333       (236,417 )
Proceeds from issuance of subordinated notes
          148,830  
Maturity of subordinated notes
          (100,000 )
Proceeds from Federal Home Loan Bank advances
    809,589       454  
Maturity of Federal Home Loan Bank advances
    (925,021 )     (3,000 )
Proceeds from issuance of long-term debt
          675,000  
Maturity of long-term debt
    (1,308,145 )     (1,130,000 )
Dividends paid on common stock
    (142,422 )     (121,773 )
Repurchases of common stock
    (108,610 )      
Net proceeds from issuance of common stock
    36,525       18,301  
 
Net cash provided by financing activities
    244,902       861,562  
 
Change in cash and cash equivalents
    (623,610 )     895,688  
Cash and cash equivalents at beginning of period
    1,505,360       996,503  
 
Cash and cash equivalents at end of period
  $ 881,750     $ 1,892,191  
 
 
               
Supplemental disclosures:
               
Income taxes paid
  $ 146,911     $ 14,031  
Interest paid
    447,864       302,801  
Non-cash activities
               
Mortgage loans securitized
          115,929  
Common stock dividends accrued, paid in subsequent quarter
    39,167       36,254  
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. (Pro forma disclosures required by Statement 123 are provided in Note 10.)
     Statement 123R will require the immediate recognition at the grant date of the full share-based compensation expense for grants to retirement eligible employees, as the explicit vesting period is non-substantive. The estimated effect of applying the explicit vesting period approach versus the non-substantive approach is not material to any period presented.
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 Statement 123R beginning January 1, 2006.
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 . FIN 47 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 does not expect the impact of adopting FIN 47 will be significant.

7


Financial Accounting Standards Board (FASB) Statement No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement 154) – In May 2005, the FASB issued Statement 154, which replaces APB Opinion No. 20, Accounting Changes , and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements . Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.
FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2) – In December 2003, a law was enacted that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor postretirement benefit plans providing prescription drug coverage. FSP 106-2 specifies that any Medicare subsidy must be taken into account in measuring the employer’s postretirement health care benefit obligation and will also reduce the net periodic postretirement cost in future periods. During the first quarter of 2005, government authorities issued further clarification on certain aspects of the Medicare Act. Huntington will register for the Medicare subsidy and the expected impact of a $15.5 million reduction in the post retirement obligation will be recognized over a 10-year period beginning October 1, 2005.
Proposed FASB interpretation of FASB Statement No. 109 Accounting for Uncertain Tax Positions – In July 2005, the FASB issued an exposure draft of a proposed interpretation on accounting for uncertain tax positions under SFAS No. 109, Accounting for Income Taxes. The Exposure Draft contains proposed guidance on the recognition and measurement of uncertain tax positions. If adopted as proposed, the Company would be required to recognize, in its financial statements, the best estimate of the impact of a tax position, only if that tax position is probable of being sustained on audit based solely on the technical merits of the position. The proposed effective date for the Interpretation was originally scheduled for December 31, 2005 with a cumulative effect of a change in accounting principle to be recorded upon the initial adoption. The FASB now expects to issue a final Interpretation, which would include amendments to Statement 109, in the first quarter of 2006. The Company is currently evaluating the impact this proposed interpretation will have on its financial statements.
Note 3 – Securities and Exchange Commission Formal Investigation
     On June 2, 2005, Huntington filed a Form 8-K announcing that the Commission approved the settlement of its previously announced formal investigation into certain financial accounting matters. Huntington consented to pay a penalty of $7.5 million. This civil money penalty had no 2005 financial impact on Huntington’s results, as reserves for this amount were established and expensed in 2004.
Note 4 – Formal Regulatory Supervisory Agreements
     On March 1, 2005, Huntington announced that it had entered into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC) and that the Bank had entered into a formal written agreement with 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 called 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.
     On October 6, 2005, Huntington announced that the OCC had lifted its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. Huntington has been verbally advised that it is in full compliance with the financial holding company and financial subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This notification reflects that Huntington and the Bank meet both the well-capitalized and well-managed criteria under the GLB Act. Management believes that the changes it has already made, and is in the process of making, will address the FRBC issues fully and comprehensively. No assurances, however, can be provided as to the ultimate timing or outcome of this matter.

8


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 12, 2004, Huntington announced that it withdrew its application with the FRBC to acquire Unizan and that Huntington and Unizan jointly announced they had 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, with an automatic extension of three months if it is reasonably likely that regulatory approval will be received within three months after January 27, 2006. On October 6, 2005, Huntington announced that after consultation with the FRBC, that it planned to proceed with the filing of the application to acquire Unizan. The application was submitted to the FRBC on October 24, 2005. No assurances, however, can be provided as to the ultimate timing or outcome of this matter.
Note 6 – Loan Sales and Securitizations
Automobile loans
     Huntington sold $213.4 million and $149.6 million of automobile loans in the third quarter of 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, sales of automobile loans totaled $266.9 million and $1.5 billion, respectively. Pre-tax gains from the sales of automobile loans totaled $0.5 million and $0.3 million in third quarter of 2005 and 2004, respectively, and $0.8 million and $14.2 million for the nine months ended September 30, 2005 and 2004, respectively.
     A servicing asset is established based on the relative fair values of both assets sold and retained at the time of the loan sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely heavily on the predicted payoff assumption, and if actual payoff is quicker than expected, then future value would be impaired.
     Changes in the carrying value of automobile loan servicing rights for the three months and nine months ended September 30, 2005 and 2004, and the fair value at the end of each period were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(in thousands of dollars)   2005   2004   2005   2004
     
Carrying value, beginning of period
  $ 14,262     $ 25,922     $ 20,286     $ 17,662  
New servicing assets
    976       1,854       1,308       16,249  
Amortization
    (2,754 )     (3,918 )     (9,044 )     (10,053 )
Impairment charges
                (66 )      
     
Carrying value, end of period
  $ 12,484     $ 23,858     $ 12,484     $ 23,858  
     
 
Fair value, end of period
  $ 13,072     $ 24,990     $ 13,072     $ 24,990  
     
     Huntington has retained servicing responsibilities and receives annual servicing fees from 0.55% to 1.00% of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing assets, amounted to $3.8 million and $2.8 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, servicing income was $8.8 million and $7.2 million, respectively. There were no material pre-tax gains from automobile loan securitizations in 2005 or 2004.
Residential Mortgage Loans
     No sales or securitizations of residential mortgage loans held for investment were made in the first nine months of 2005. For the three months and nine months ended September 30, 2004, Huntington sold $156.1 million and $199.8 million of residential mortgage loans held for investment, resulting in a net pre-tax gain of $0.1 million and $0.5 million respectively. Huntington also securitized $115.9 million of residential mortgage loans in the first quarter of 2004, and

9


retained all of the resulting securities. Accordingly, the securitized amounts were reclassified from loans to investment securities.
     A mortgage servicing right (MSR) is established only when the loans are sold or when servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. The initial carrying value of the asset is established based on its fair value at the time of sale using assumptions that are consistent with assumptions used at the time to estimate the fair value of the total MSR portfolio. All servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and are included in other assets.
     Changes in the carrying value of mortgage servicing rights for the three months and nine months ended September 30, 2005 and 2004, and the fair value at the end of each period were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(in thousands of dollars)   2005   2004   2005   2004
     
Carrying value, beginning of period
  $ 71,150     $ 79,167     $ 77,107     $ 71,087  
New servicing assets
    8,959       5,960       19,541       18,742  
Amortization
    (4,626 )     (4,468 )     (14,574 )     (13,865 )
Temporary impairment (charges) recovery
    10,457       (4,119 )     3,986       640  
Sales
                (120 )     (64 )
     
Carrying value, end of period
  $ 85,940     $ 76,540     $ 85,940     $ 76,540  
     
 
                               
Fair value, end of period
  $ 100,242     $ 80,405     $ 100,242     $ 80,405  
     
     Servicing rights are evaluated quarterly for impairment based on the fair value of those rights, using a disaggregated approach. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. Temporary impairment is recognized in a valuation allowance against the mortgage servicing rights. Huntington also analyzes its mortgage servicing rights periodically for other-than-temporary impairment. Other-than-temporary impairment is recognized as a direct reduction of the carrying value of the mortgage servicing right and cannot be recovered. Servicing rights are amortized over the period of, and in proportion to, the estimated future net servicing revenue. Amortization is recorded as a reduction of servicing income, which is reflected in non-interest income in Huntington’s consolidated income statement.
     Changes in the impairment allowance of mortgage servicing rights for the three months and nine months ended September 30, 2005 and 2004, were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(in thousands of dollars)   2005   2004   2005   2004
     
Balance, beginning of period
  $ (11,246 )   $ (1,394 )   $ (4,775 )   $ (6,153 )
Impairment charges
    (4,308 )     (4,119 )     (15,719 )     (14,654 )
Impairment recovery
    14,765             19,705       15,294  
     
Balance, end of period
  $ (789 )   $ (5,513 )   $ (789 )   $ (5,513 )
     

10


Note 7 — 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 September 30, 2005, December 31, 2004, and September 30, 2004:
                                                 
    September 30, 2005   December 31, 2004   September 30, 2004
    Amortized           Amortized           Amortized    
(in thousands of dollars)   Cost   Fair Value   Cost   Fair Value   Cost   Fair Value
 
U.S. Treasury
                                               
Under 1 year
  $     $     $     $     $     $  
1-5 years
    23,951       23,501       24,233       24,304       24,230       24,551  
6-10 years
    249       260       754       832       754       842  
Over 10 years
                                   
 
Total U.S. Treasury
    24,200       23,761       24,987       25,136       24,984       25,393  
 
Federal Agencies
                                               
Mortgage-backed securities
                                               
Under 1 year
                                   
1-5 years
    32,779       32,129       1,362       1,390       2,773       2,831  
6-10 years
                38,814       38,589       100,827       101,157  
Over 10 years
    1,059,544       1,035,760       945,670       933,538       939,050       929,892  
 
Total mortgage-backed securities
    1,092,323       1,067,889       985,846       973,517       1,042,650       1,033,880  
 
Other agencies
                                               
Under 1 year
                500       503       499       510  
1-5 years
    535,147       519,494       535,502       530,670       564,302       562,705  
6-10 years
    73,848       70,258       450,952       441,072       317,312       307,070  
Over 10 years
                                   
 
Total other agencies
    608,995       589,752       986,954       972,245       882,113       870,285  
 
Total U.S. Treasury and federal agencies
    1,725,518       1,681,402       1,997,787       1,970,898       1,949,747       1,929,558  
 
Municipal securities
                                               
Under 1 year
    65       65       5,997       6,032       7,180       7,199  
1-5 years
    166       165       9,990       10,392       9,396       9,596  
6-10 years
    134,432       134,140       83,102       83,771       86,677       87,788  
Over 10 years
    404,542       405,519       311,525       316,029       293,322       297,519  
 
Total municipal securities
    539,205       539,889       410,614       416,224       396,575       402,102  
 
Private label CMO
                                               
Under 1 year
                                   
1-5 years
                                   
6-10 years
                                   
Over 10 years
    412,003       404,274       462,394       458,027       564,084       560,563  
 
Total private label CMO
    412,003       404,274       462,394       458,027       564,084       560,563  
 
Asset backed securities
                                               
Under 1 year
                                   
1-5 years
    32,970       32,970       30,000       30,000       30,000       29,944  
6-10 years
                8,084       8,155       9,725       9,838  
Over 10 years
    1,463,760       1,466,301       1,160,212       1,161,827       1,051,982       1,053,020  
 
Total asset backed securities
    1,496,730       1,499,271       1,198,296       1,199,982       1,091,707       1,092,802  
 
Other
                                               
Under 1 year
    400       400       2,100       2,118       1,601       1,612  
1-5 years
    11,604       11,774       9,102       9,384       9,612       9,968  
6-10 years
    1,555       1,536       2,913       2,980       2,253       2,351  
Over 10 years
    104,211       104,460       169,872       173,131       144,201       144,707  
Marketable equity securities
    61,545       61,892       5,526       6,201       5,965       6,381  
 
Total other
    179,315       180,062       189,513       193,814       163,632       165,019  
 
Total investment securities
  $ 4,352,771     $ 4,304,898     $ 4,258,604     $ 4,238,945     $ 4,165,745     $ 4,150,044  
 
Duration in years (1)
            2.8               2.8               3.0  
 
 
(1)   The average duration assumes a market driven pre-payment rate on securities subject to pre-payment.

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     Based upon its assessment, Management does not believe any individual unrealized loss at September 30, 2005, represents an other-than-temporary impairment. In addition, Huntington has both the intent and the ability to hold these securities for a time necessary to recover the amortized cost. There were no other-than-temporary impairments of any securities recognized in the nine-month period ended September 30, 2005. At September 30, 2004, Management determined that $11.0 million of equity securities, with unrealized losses of $0.9 million were other-than-temporarily impaired. Consequently, Huntington recognized the unrealized losses in the third quarter of 2004.
     There were no securities classified as held to maturity at September 30, 2005. Included in investment securities at December 31, 2004 and September 30, 2004 were $2.0 million and $2.9 million of municipal securities classified as held to maturity. These securities were accounted for at their historical cost.
Note 8 – Other Comprehensive Income
The components of Huntington’s other comprehensive income in the three and nine months ended September 30 were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(in thousands of dollars)   2005   2004   2005   2004
     
Unrealized holding gains and losses on securities available for sale arising during the period:
                               
Unrealized net (losses) gains
  $ (36,215 )   $ 58,167     $ (27,499 )   $ (16,588 )
Related tax benefit (expense)
    12,729       (20,484 )     9,660       5,914  
     
Net
    (23,486 )     37,683       (17,839 )     (10,674 )
     
 
                               
Reclassification adjustment for net gains from sales of securities available for sale realized during the period:
                               
Realized net gains
    (101 )     (7,803 )     (715 )     (13,663 )
Related tax expense
    35       2,731       250       4,782  
     
Net
    (66 )     (5,072 )     (465 )     (8,881 )
     
 
                               
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
    (23,552 )     32,611       (18,304 )     (19,555 )
     
 
                               
Unrealized gains and losses on derivatives used in cash flow hedging relationships arising during the period:
                               
Unrealized net gains (losses)
    3,743       (29,568 )     11,335       4,715  
Related tax (expense) benefit
    (1,310 )     10,349       (3,967 )     (1,650 )
     
Net
    2,433       (19,219 )     7,368       3,065  
     
 
Total other comprehensive (loss) income
  $ (21,119 )   $ 13,392     $ (10,936 )   $ (16,490 )
     
     Activity in accumulated other comprehensive income for the nine months ended September 30, 2005 and 2004 was as follows:
                                 
    Unrealized gains and   Unrealized gains and losses        
    losses on Securities   on derivative instruments   Minimum pension    
(in thousands of dollars)   available for sale   used in cash flow hedging   liability   Total
 
Balance, December 31, 2003
  $ 9,429     $ (5,442 )   $ (1,309 )   $ 2,678  
Period change
    (19,555 )     3,065             (16,490 )
 
Balance, September 30, 2004
  $ (10,126 )   $ (2,377 )   $ (1,309 )   $ (13,812 )
 
 
                               
Balance, December 31, 2004
  $ (12,683 )   $ 4,252     $ (2,472 )   $ (10,903 )
Period change
    (18,304 )     7,368             (10,936 )
 
Balance, September 30, 2005
  $ (30,987 )   $ 11,620     $ (2,472 )   $ (21,839 )
 

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Note 9 – 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 and nine months ended September 30 is as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
(in thousands of dollars, except per share amounts)   2005   2004   2005   2004
     
Net income
  $ 108,574     $ 93,486     $ 311,518     $ 307,786  
 
                               
Average common shares outstanding
    229,830       229,848       231,290       229,501  
Dilutive potential common shares
    3,626       4,500       3,437       3,806  
     
Diluted average common shares outstanding
    233,456       234,348       234,727       233,307  
     
 
                               
Earnings per share
                               
Basic
  $ 0.47     $ 0.41     $ 1.35     $ 1.34  
Diluted
    0.47       0.40       1.33       1.32  
     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 5.7 million and 2.5 million shares were outstanding at September 30, 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 $25.68 per share and $27.04 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 and had no impact on dilutive common shares outstanding. All shares in escrow had been accounted for as treasury stock.
Note 10 – 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 are 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 periods presented:

13


                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2005   2004   2005   2004
     
Number of stock options granted during the period (in thousands)
    3,203.8       3,029.6       3,328.2       3,124.6  
 
                               
Weighted-average fair value of options granted during the period
  $ 5.38     $ 5.78     $ 5.36     $ 5.78  
 
                               
Assumptions
                               
Risk-free interest rate
    4.05 %     3.78 %     4.05 %     3.78 %
Expected dividend yield
    3.29       3.19       3.30       3.19  
Expected volatility of Huntington’s common stock
    26.3       30.9       26.3       30.9  
Expected option term (years)
    6.0       6.0       6.0       6.0  
 
                               
Pro forma results (in millions of dollars)
                               
Net income, as reported
  $ 108.6     $ 93.5     $ 311.5     $ 307.8  
Pro forma expense, net of tax
    (2.9 )     (3.4 )     (8.7 )     (9.0 )
     
Pro forma net income
  $ 105.7     $ 90.1     $ 302.8     $ 298.8  
     
 
                               
Net income per common share:
                               
Basic, as reported
  $ 0.47     $ 0.41     $ 1.35     $ 1.34  
Basic, pro forma
    0.46       0.39       1.31       1.30  
Diluted, as reported
    0.47       0.40       1.33       1.32  
Diluted, pro forma
    0.45       0.38       1.29       1.28  
Note 11 — 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.

14


     The following table shows the components of net periodic benefit expense:
                                 
    Pension Benefits   Post Retirement Benefits
    Three Months Ended   Three Months Ended
    September 30,   September 30,
(in thousands of dollars)   2005   2004   2005   2004
     
Service cost
  $ 3,547     $ 3,040     $ 354     $ 326  
Interest cost
    4,754       4,371       777       802  
Expected return on plan assets
    (6,716 )     (5,383 )            
Amortization of transition asset
    (1 )           276       276  
Amortization of prior service cost
                95       146  
Settlements
    750       1,000              
Recognized net actuarial loss
    2,672       1,984              
     
Benefit expense
  $ 5,006     $ 5,012     $ 1,502     $ 1,550  
     
                                 
    Pension Benefits   Post Retirement Benefits
    Nine Months Ended   Nine Months Ended
    September 30,   September 30,
(in thousands of dollars)   2005   2004   2005   2004
     
Service cost
  $ 10,639     $ 9,118     $ 1,060     $ 976  
Interest cost
    14,259       13,112       2,333       2,406  
Expected return on plan assets
    (19,526 )     (16,147 )            
Amortization of transition asset
    (3 )           828       828  
Amortization of prior service cost
    1             284       437  
Settlements
    2,250       3,000              
Recognized net actuarial loss
    8,017       5,952              
     
Benefit expense
  $ 15,637     $ 15,035     $ 4,505     $ 4,647  
     
     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.
     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. The cost of providing these plans was $0.5 million for both three-month periods ended September 30, 2005 and 2004. For the respective nine-month periods, the cost was $1.6 million and $1.5 million.
     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 $2.4 million and $2.3 million for the three months ended September 30, 2005 and 2004, respectively. For the respective nine-month periods, the cost was $7.3 million and $7.0 million.

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Note 12 — 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 September 30, 2005, December 31, 2004, and September 30, 2004, were as follows:
                         
    September 30,     December 31,     September 30,  
(in millions of dollars)   2005     2004     2004  
 
Contract amount represents credit risk
                       
Commitments to extend credit
                       
Commercial
  $ 4,989     $ 5,076     $ 5,094  
Consumer
    3,177       2,928       2,869  
Commercial real estate
    1,369       854       1,392  
Standby letters of credit
    959       945       959  
Commercial letters of credit
    43       72       92  
     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 $3.7 million, $4.1 million, and $3.9 million at September 30, 2005, December 31, 2004, and September 30, 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 enters into forward contracts relating to its mortgage banking business. At September 30, 2005, December 31, 2004, and September 30, 2004, Huntington had commitments to sell residential real estate loans of $566.8 million, $311.3 million, and $351.5 million, respectively. These contracts mature in less than one year.
     During the 2005 second quarter, Huntington entered into a two-year agreement to sell a minimum of 50% of monthly automobile loan production, provided the production meets certain pricing, asset quality, and volume parameters. At September 30, 2005, approximately $52 million of automobile loans related to this commitment were classified as held for sale.
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.

16


Note 13 — Derivative Financial Instruments
     A variety of derivative financial instruments, principally interest rate swaps, are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivative financial instruments provide flexibility in adjusting the Company’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements. By using derivatives to manage interest rate risk, the effect is a smaller, more efficient balance sheet, with a lower wholesale funding requirement and a higher net interest margin. All derivatives are reflected at fair value in the consolidated balance sheet.
     Market risk, which is the possibility that economic value of net assets or net interest income will be adversely affected by changes in interest rates or other economic factors, is managed through the use of derivatives. Derivatives are used to meet customers’ financing needs and, like other financial instruments, contain an element of credit risk, which is the possibility that Huntington will incur a loss because its counter-party fails to meet the contractual obligations of the derivative. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contractual provisions.
Asset and Liability Management
     Derivatives that are used in asset and liability management are classified as fair value hedges or cash flow hedges and are required to meet specific criteria. To qualify as a hedge, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge. This includes identifying the item and risk being hedged, the derivative being used, and how the effectiveness of the hedge is being assessed. A derivative must be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. Correlation is evaluated on a retrospective and prospective basis using quantitative measures. If a hedge relationship is found to be ineffective, the derivative may no longer qualify as a hedge. Any excess gains or losses attributable to ineffectiveness are recognized in other income.
     For fair value hedges, deposits, short-term borrowings, and long-term debt are effectively converted to variable-rate obligations by entering into interest rate swap contracts whereby fixed-rate interest is received in exchange for variable-rate interest without the exchange of the contract’s underlying notional amount. Forward contracts, used primarily in connection with mortgage banking activities, settle in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. The changes in fair value of the hedged item and the hedging instrument are reflected in current earnings.
     For cash flow hedges, interest rate swap contracts are entered into that pay fixed-rate interest in exchange for the receipt of variable-rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its floating-rate debt to fixed-rate. This reduces the potentially adverse impact of increases in interest rates on future interest expense. In like fashion, certain LIBOR-based commercial and industrial loans are effectively converted to fixed-rate by entering into contracts that swap variable-rate interest for fixed-rate interest over the life of the contracts.
     To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings, but are reported as a component of accumulated other comprehensive income in shareholders’ equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in earnings.

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     Derivatives used to manage interest rate risk at September 30, 2005, are shown in the table below:
                                         
            Average           Weighted-Average
    Notional   Maturity   Fair   Rate
(in thousands of dollars)   Value   (years)   Value   Receive   Pay
 
Asset conversion swaps
                                       
Receive fixed — generic
  $ 350,000       2.6     $ (6,464 )     3.41 %     3.67 %
Pay fixed — generic
    50,000       1.8       393       3.92       3.83  
 
Total asset conversion swaps
    400,000       2.5       (6,071 )     3.47       3.69  
 
 
                                       
Liability conversion swaps
                                       
Receive fixed — generic
    1,480,000       5.9       2,664       4.22       3.91  
Receive fixed — callable
    726,250       3.0       (12,220 )     4.30       3.68  
Receive fixed — forwards
    10,000       5.5             4.38       N/A  
Pay fixed — generic
    1,501,000       2.1       21,613       3.74       3.23  
Pay fixed — forwards
    200,000       4.4       (215 )     N/A       4.57  
 
Total liability conversion swaps
    3,917,250       3.8       11,842       4.04       3.64  
 
Total swap portfolio
  $ 4,317,250       3.7     $ 5,771       3.98 %     3.64 %
 
N/A, not applicable
     These values must be viewed in the context of the overall financial structure of Huntington, including the aggregate net position of all on- and off-balance sheet financial instruments.
     As is the case with cash securities, the fair value of interest rate swaps is largely a function of financial market expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels. Management made no assumptions regarding future changes in interest rates with respect to the variable-rate information presented in the table above.
     The next table represents the gross notional value of derivatives used to manage interest rate risk at September 30, 2005, identified by the underlying interest rate-sensitive instruments. The notional amounts shown in the tables above and below should be viewed in the context of overall interest rate risk management activities to assess the impact on the net interest margin.
                         
    Fair Value   Cash Flow    
(in thousands of dollars)   Hedges   Hedges   Total
 
Instruments associated with:
                       
Investment securities
  $ 50,000     $ 25,000     $ 75,000  
Loans
          325,000       325,000  
Deposits
    766,250             766,250  
Federal Home Loan Bank advances
          776,000       776,000  
Subordinated notes
    500,000             500,000  
Other long-term debt
    950,000       925,000       1,875,000  
 
Total notional value at September 30, 2005
  $ 2,266,250     $ 2,051,000     $ 4,317,250  
 
     Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate the credit risk associated with both the derivatives used for asset and liability management and used in trading activities. At September 30, 2005 and 2004, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $15.1 million and $11.7 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.
     These derivative financial instruments were entered into for the purpose of altering the interest rate risk embedded in Huntington’s assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest

18


earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amount resulted in an increase to net interest income of $5.6 million and $7.0 million, for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, the impact to net interest income was an increase of $20.1 million and $17.0 million, respectively.
Derivatives Used in Mortgage Banking Activities
     Huntington also uses derivatives, principally loan sale commitments, in the hedging of its mortgage loan commitments and its mortgage loans held for sale. For derivatives that are used in hedging mortgage loans held for sale, ineffective hedge gains and losses are reflected in mortgage banking revenue in the income statement. Mortgage loan commitments and the related hedges are carried at fair value on the consolidated balance sheet with changes in fair value reflected in mortgage banking revenue. The following is a summary of the derivative assets and liabilities that Huntington used in its mortgage banking activities as of September 30, 2005 and 2004:
                 
    At September 30,  
(in thousands of dollars)   2005     2004  
 
Derivative assets:
               
Interest rate lock agreements
  $ 723     $ 1,183  
Forward trades
    1,732       169  
 
Total derivative assets
    2,455       1,352  
 
 
               
Derivative liabilities:
               
Interest rate lock agreements
    (1,314 )     (398 )
Forward trades
    (235 )     (2,642 )
 
Total derivative liabilities
    (1,549 )     (3,040 )
 
 
               
Net derivative asset (liability)
  $ 906     $ (1,688 )
 
Derivatives Used in Trading Activities
     Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities during the first nine months of 2005 and 2004 consisted predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but not credit risk. Purchased options contain both credit and market risk. They are used to manage fluctuating interest rates as exposure to loss from interest rate contracts changes.
     Supplying these derivatives to customers results in fee income. These instruments are carried at fair value in other assets with gains and losses reflected in other non-interest income. Total trading revenue for customer accommodation was $2.3 million and $1.6 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, total trading revenue was $6.0 million and $6.4 million respectively. The total notional value of derivative financial instruments used by Huntington on behalf of customers (for which the related interest rate risk is offset by third parties) was $4.4 billion and $4.7 billion at September 30, 2005 and 2004, respectively. Huntington’s credit risk from interest rate swaps used for trading purposes was $60.2 million and $62.1 million at the same dates.
     In connection with its securitization activities, interest rate caps were purchased with a notional value totaling $1.0 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.0 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income in accordance with accounting principles generally accepted in the United States.

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Note 14 — Shareholders’ Equity
Share Repurchase Program:
     Effective April 27, 2004, the board of directors authorized a new share repurchase program (the 2004 Repurchase Program) which cancelled the 2003 prior share repurchase program and authorized Management to repurchase not more than 7,500,000 shares of Huntington common stock. On June 9, 2005, Huntington reactivated its share repurchase program upon settlement of the SEC formal investigation. During the third quarter, Huntington repurchased 2,597,700 shares under the 2004 Repurchase Program.
                                 
                    Total Number of Shares   Maximum Number of
    Total Number   Average   Purchased as Part of   Shares that May Yet Be
    of Shares   Price Paid   Publicly Announced Plans   Purchased Under the
Period   Purchased   Per Share   or Programs (1)   Plans or Programs (1)
 
July 1, 2005 to July 31, 2005
    600,000     $ 25.24       2,418,000       5,082,000  
August 1, 2005 to August 31, 2005
    1,997,700     $ 24.65       4,415,700       3,084,300  
September 1, 2005 to September 30, 2005
                4,415,700       3,084,300  
 
Total
    2,597,700     $ 24.78       4,415,700       3,084,300  
 
(1)  Information is as of the end of the period.
     On October 18, 2005, the Company announced that the board of directors authorized a new program for the repurchase of up to 15 million shares (the 2005 Repurchase Program). The 2005 Repurchase Program expires upon the purchase of the maximum number of shares authorized under the program. The 2004 Repurchase Program, with 3.1 million shares remaining, was cancelled and replaced by the 2005 Repurchase Program. The Company expects to repurchase the shares from time-to-time in the open market or through privately negotiated transactions depending on market conditions.
Rights Agreement:
     Holders of Huntington common stock were entitled to certain rights as set forth in a Rights Agreement dated as of February 22, 1990 amended August 16, 1995 (the “Rights Agreement), between Huntington and The Huntington National Bank, successor to The Huntington Trust Company, N.A., as rights agent. These rights were evidenced by the certificates representing shares of Huntington common stock, each of which bore a legend referencing the rights. The Rights Agreement expired on August 16, 2005. With the expiration of the Rights Agreement, the legend on Huntington common stock certificates referencing the rights has no force or effect.

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Note 15 — Segment Reporting
     Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial and Capital Markets Group (PFCMG). 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 338 branches, over 900 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 Banking accounts for 61% and 79% 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, North Carolina, 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 and Capital Markets Group: The Private Financial division provides products and services designed to meet the needs of the Company’s higher net worth customers with revenue derived through trust, asset management, investment advisory, brokerage, insurance, and private banking products and services. The Capital Markets division focuses on financial solutions for corporate and institutional customers including investment banking, sales and trading of securities, mezzanine capital financing, and risk management products.
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 and bank owned life insurance.
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 and nine months ending September 30, 2005, operating earnings were the same as reported GAAP earnings.
     Listed below is certain operating basis financial information reconciled to Huntington’s third quarter and year-to-date 2005 and 2004 reported results by line of business.

21


                                         
    Three Months Ended September 30,
Income Statements   Regional   Dealer           Treasury/   Huntington
(in thousands of dollars)   Banking   Sales   PFCMG   Other   Consolidated
 
2005
                                       
Net interest income
  $ 197,435     $ 35,830     $ 18,423     $ (10,051 )   $ 241,637  
Provision for credit losses
    (10,834 )     (5,532 )     (1,333 )           (17,699 )
Non-interest income
    81,118       38,453       34,239       6,930       160,740  
Non-interest expense
    (146,467 )     (42,835 )     (32,789 )     (10,961 )     (233,052 )
Income taxes
    (42,438 )     (9,071 )     (6,489 )     14,946       (43,052 )
 
Operating earnings and net income, as reported
  $ 78,814     $ 16,845     $ 12,051     $ 864     $ 108,574  
 
 
                                       
2004
                                       
Net interest income
  $ 173,181     $ 37,241     $ 15,698     $ 938     $ 227,058  
Provision for credit losses
    (5,120 )     (6,108 )     (557 )           (11,785 )
Non-interest income
    77,673       72,826       29,731       9,349       189,579  
Non-interest expense
    (149,744 )     (77,147 )     (29,670 )     (18,013 )     (274,574 )
Income taxes
    (33,597 )     (9,384 )     (5,321 )     10,559       (37,743 )
 
Operating earnings
    62,393       17,428       9,881       2,833       92,535  
Gain on sale of automobile loans, net of tax
          384             (181 )     203  
Restructuring releases, net of taxes
                      748       748  
 
Net income, as reported
  $ 62,393     $ 17,812     $ 9,881     $ 3,400     $ 93,486  
 
                                         
    Nine Months Ended September 30,
Income Statements   Regional   Dealer           Treasury/   Huntington
(in thousands of dollars)   Banking   Sales   PFCMG   Other   Consolidated
 
2005
                                       
Net interest income
  $ 576,562     $ 110,624     $ 54,562     $ (23,013 )   $ 718,735  
Provision for credit losses
    (31,749 )     (17,027 )     (1,692 )           (50,468 )
Non-Interest income
    228,944       137,648       99,348       19,020       484,960  
Non-Interest expense
    (444,884 )     (147,254 )     (99,039 )     (48,288 )     (739,465 )
Provision for income taxes
    (115,105 )     (29,397 )     (18,613 )     60,871       (102,244 )
         
Operating earnings and net income, as reported
  $ 213,768     $ 54,594     $ 34,566     $ 8,590     $ 311,518  
         
 
                                       
2004
                                       
Net interest income
  $ 493,818     $ 110,196     $ 45,354     $ 22,938     $ 672,306  
Provision for credit losses
    (3,376 )     (36,065 )     (2,967 )           (42,408 )
Non-Interest income
    231,796       257,645       97,136       34,875       621,452  
Non-Interest expense
    (444,104 )     (254,279 )     (94,092 )     (49,906 )     (842,381 )
Provision for income taxes
    (97,348 )     (27,124 )     (15,901 )     29,208       (111,165 )
         
Operating earnings
    180,786       50,373       29,530       37,115       297,804  
Gain on sale of automobile loans, net of tax
          8,598             636       9,234  
Restructuring releases, net of taxes
                      748       748  
         
Net income, as reported
  $ 180,786     $ 58,971     $ 29,530     $ 38,499     $ 307,786  
         
                                                 
            Assets at                   Deposits at    
Balance Sheets   September 30,   December 31,   September 30,   September 30,   December 31,   September 30,
(in millions of dollars)   2005   2004   2004   2005   2004   2004
     
Regional Banking
  $ 19,014     $ 17,864     $ 17,253     $ 17,856     $ 17,411     $ 16,950  
Dealer Sales
    5,722       6,100       5,957       72       75       69  
PFCMG
    2,028       1,959       1,833       1,186       1,176       1,127  
Treasury / Other
    5,999       6,642       6,765       3,235       2,106       1,963  
     
Total
  $ 32,763     $ 32,565     $ 31,808     $ 22,349     $ 20,768     $ 20,109  
     

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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, North Carolina, 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.

23


SEC Formal Investigation
     On June 2, 2005, Huntington filed a Form 8-K announcing that the Commission approved the settlement of its previously announced formal investigation into certain financial accounting matters.
Formal Regulatory Supervisory Agreements and Pending Acquisition
     On March 1, 2005, Huntington announced that it had entered into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC) and that the Bank had entered into a formal written agreement with 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 called 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.
     On October 6, 2005, Huntington announced that the OCC had lifted its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. Huntington has been verbally advised that it is in full compliance with the financial holding company and financial subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This notification reflects that Huntington and the Bank meet both the well-capitalized and well-managed criteria under the GLB Act. Management believes that the changes it has already made, and is in the process of making, will address the FRBC issues fully and comprehensively.
     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 12, 2004, Huntington announced that it withdrew its application with the FRBC to acquire Unizan and that Huntington and Unizan jointly announced they had 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, with an automatic extension of three months if it is reasonably likely that regulatory approval will be received within three months after January 27, 2006. On October 6, 2005, Huntington announced that after consultation with the FRBC, that it planned to proceed with the filing of the application to acquire Unizan. The application was submitted to the FRBC on October 24, 2005.
     No assurances, however, can be provided as to the ultimate timing or outcome of these matters.

24


SUMMARY DISCUSSION OF RESULTS
     Earnings comparisons from the first quarter of 2004 through the third quarter of 2005 are impacted by a number of factors, some related to changes in the economic and competitive environment, while others reflected specific Management strategies or changes in accounting practices. Understanding the nature and implications of these factors on financial results is important in understanding the Company’s income statement, balance sheet, and credit quality trends and the comparison of the current quarter and year-to-date performance with comparable prior-year periods. The key factors impacting the current reporting period comparisons are more fully described in the Significant Factors Influencing Financial Performance Comparisons section, which follows the summary of results below.
2005 Third Quarter versus 2004 Third Quarter
     Net income for the third quarter of 2005 was $108.6 million, or $0.47 per common share, up 16% and 18%, respectively, from $93.5 million, or $0.40 per common share, in the year-ago quarter. This $15.1 million increase in net income primarily reflected:
    $40.4 million, or 15%, decline in non-interest expense, primarily reflecting a $32.1 million decline in operating lease expenses as that portfolio continued to run off, as all new automobile leases since April 2002 have been direct finance leases.
 
    $14.6 million, or 6%, increase in net interest income reflecting a 6% increase in average earning assets as the net interest margin was relatively unchanged at 3.31% compared with 3.30% in the year-ago quarter. The increase in average earning assets reflected 10% growth in average total loans and leases, including 12% growth in average consumer loans and 8% growth in average total commercial loans, partially offset by a 14% decline in average investment securities.
Partially offset by:
    $29.2 million, or 15%, decline in non-interest income, due primarily to a $35.2 million decline in operating lease income, as that portfolio continued to run-off, a $10.5 million increase in MSR related hedging losses, and a $7.7 million decline in security gains. These negative impacts were partially offset by a $16.7 million increase in mortgage banking income, reflecting a $10.5 million recovery of MSR temporary impairment in the current quarter compared with $4.1 million of MSR temporary impairment in the year-ago quarter. Other positive factors in non-interest income between quarters included growth in trust service income, deposit service charges, brokerage and insurance income, and other service charges and fees.
 
    $5.9 million increase in the provision for credit losses primarily due to loan growth as credit quality remained relatively stable between periods.
 
    $4.8 million increase in income tax expense. The effective tax rate in the 2005 third quarter was 28.4%, down from 29.0% in the year-ago quarter, reflecting higher pre-tax income and the net impact of repatriating foreign earnings, fully offset by the benefit of a federal tax loss carry back.
     The return on average assets (ROA) and return on average equity (ROE) in the 2005 third quarter were 1.32% and 16.5%, respectively, up from 1.18% and 15.4%, respectively, in the year-ago quarter. Period end capital was strong with a September 30, 2005, tangible equity to assets ratio of 7.39%, up from 7.11% at the end of the year-ago period.
2005 Third Quarter versus 2005 Second Quarter
     Compared with 2005 second quarter net income of $106.4 million, or $0.45 per common share, 2005 third quarter net income and earnings per share increased 2% and 4%, respectively. This $2.1 million, or $0.02 per common share, increase in net income primarily reflected:
    $15.1 million, or 6%, decline in non-interest expense, reflecting a $6.1 million decline in operating lease expenses, a $6.6 million decline in personnel costs, and a $1.0 million decline in professional services, as well as lower expenses in a number of other expense categories.
 
    $4.6 million increase in non-interest income, primarily reflecting a $23.5 million increase in mortgage banking income, as the current quarter included a $10.5 million MSR temporary impairment recovery in the current quarter

25


      compared with a $10.2 million MSR temporary impairment in the prior quarter, and a $3.3 million, or 8%, increase in service charges on deposit accounts. Also contributing to the increase in non-interest income from the prior quarter were increases in trust services income, and brokerage and insurance income. These benefits were partially offset by a $15.2 million decline in other income, which reflected $12.8 million of MSR-related trading hedge losses in the current quarter compared with $5.7 million of MSR-related trading gains in the prior quarter, and the absence of any equity investment write-offs in the current period compared with $2.1 million of such write-offs in the second quarter.
Partially offset by:
    $4.8 million increase in provision for credit losses, primarily reflecting the relatively stable credit quality in the current quarter compared with improving trends in the prior periods.
 
    $0.3 million decline in net interest income primarily reflecting a 5 basis point decline in the net interest margin to 3.31% from 3.36%, partially offset by slight growth in earning assets. Average loans and leases were little changed, reflecting a combination of factors. Average residential mortgages and home equity loans and lines increased 2% and 1%, respectively, from the prior quarter with average middle market commercial real estate (CRE) and small business commercial (C&I) and CRE up 2% and 1%, respectively. However, average middle market C&I declined 4%, driven mostly by a decline in dealer floor plan loans resulting from lower dealer automobile inventories due to the success of domestic automobile manufacturers’ “employee pricing” offers. In addition, average automobile loans and leases declined 1%, reflecting the sale of automobile loans as part of the ongoing strategy to sell 50% to 75% of originated automobile loans.
 
    $12.4 million increase in income tax expense as the effective tax rate in the 2005 third quarter was 28.4%, up from 22.3% in the 2005 second quarter. The higher effective tax rate reflected a combination of factors, including higher pre-tax income and the net impact of repatriating foreign earnings.
     The ROA and ROE in the 2005 second quarter were 1.31% and 16.3%, respectively, with a tangible equity to assets ratio of 7.36% at June 30, 2005. The ROA and ROE in the 2005 third quarter were 1.32% and 16.5%, respectively.
2005 First Nine Months versus 2004 First Nine Months
     Net income for the first nine months of 2005 was $311.5 million, or $1.33 per common share, both up 1% from $307.8 million, or $1.32 per common share, in the comparable year-ago period. This $3.7 million increase in net income primarily reflected:
    $101.8 million, or 12%, decline in non-interest expense, primarily reflecting a $98.5 million decline in operating lease expenses, a $9.7 million decrease in other expenses, including $5.8 million of costs related to investments in partnerships generating tax benefits in the year-ago period, partially offset by increases spread over several expense categories.
 
    $46.4 million, or 7%, increase in net interest income reflecting a 7% increase in average earning assets and a 2 basis point improvement in the net interest margin to 3.33% from 3.31%. The increase in average earning assets reflected 11% growth in average total loans and leases, including 13% growth in average consumer loans and 9% growth in average total commercial loans, partially offset by an 18% decline in average investment securities.
 
    $14.3 million decline in income tax expense as the effective tax rate for the first nine months of 2005 was 24.7%, down from 27.5% in the year-ago period. The lower 2005 income tax expense reflected a combination of factors including the benefit of a federal tax loss carry back, partially offset by the net impact of repatriating foreign earnings in 2005 and higher pre-tax income in 2004.
Partially offset by:
    $150.7 million, or 24%, decline in non-interest income. Contributing to the decrease were a $117.9 million decline in operating lease income, a $16.0 million decline in other income reflecting MSR-hedge related trading losses, lower gains from the sale of automobile loans, a decline in securities gains, and lower service charges on deposit accounts, brokerage and insurance income, and bank owned life insurance income. These declines were partially offset by increases in mortgage banking income, trust services income, and other service charges and fees.

26


    $8.1 million increase in the provision for credit losses, reflecting the benefit of a $9.7 million commercial loan recovery in the 2004 second quarter.
The ROA and ROE for the 2005 first nine months were 1.28% and 16.1%, respectively, down from 1.32% and 17.6%, respectively, in the year-ago period.

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Table 1 — Selected Quarterly Income Statement Data
                                                           
    2005   2004     3Q05 vs 3Q04
(in thousands of dollars, except per share amounts)   Third   Second   First   Fourth   Third     Amount   Percent
           
Interest income
  $ 420,858     $ 402,326     $ 376,105     $ 359,215     $ 338,002       $ 82,856       24.5 %
Interest expense
    179,221       160,426       140,907       120,147       110,944         68,277       61.5  
           
Net interest income
    241,637       241,900       235,198       239,068       227,058         14,579       6.4  
Provision for credit losses
    17,699       12,895       19,874       12,654       11,785         5,914       50.2  
           
Net interest income after provision for credit losses
    223,938       229,005       215,324       226,414       215,273         8,665       4.0  
           
Service charges on deposit accounts
    44,817       41,516       39,418       41,747       43,935         882       2.0  
Trust services
    19,671       19,113       18,196       17,315       17,064         2,607       15.3  
Brokerage and insurance income
    13,948       13,544       13,026       12,879       13,200         748       5.7  
Bank owned life insurance income
    10,104       10,139       10,104       10,484       10,019         85       0.8  
Other service charges and fees
    11,449       11,252       10,159       10,617       10,799         650       6.0  
Mortgage banking income (loss)
    21,116       (2,376 )     12,061       8,822       4,448         16,668       N.M.  
Securities gains (losses)
    101       (343 )     957       2,100       7,803         (7,702 )     (98.7 )
Gains on sales of automobile loans
    502       254                   312         190       60.9  
Other income
    9,770       24,974       17,397       23,870       17,899         (8,129 )     (45.4 )
           
Sub-total before operating lease income
    131,478       118,073       121,318       127,834       125,479         5,999       4.8  
Operating lease income
    29,262       38,097       46,732       55,106       64,412         (35,150 )     (54.6 )
           
Total non-interest income
    160,740       156,170       168,050       182,940       189,891         (29,151 )     (15.4 )
           
Personnel costs
    117,476       124,090       123,981       122,738       121,729         (4,253 )     (3.5 )
Net occupancy
    16,653       17,257       19,242       26,082       16,838         (185 )     (1.1 )
Outside data processing and other services
    18,062       18,113       18,770       18,563       17,527         535       3.1  
Equipment
    15,531       15,637       15,863       15,733       15,295         236       1.5  
Professional services
    8,323       9,347       9,459       9,522       12,219         (3,896 )     (31.9 )
Marketing
    6,779       7,441       6,454       5,581       5,000         1,779       35.6  
Telecommunications
    4,512       4,801       4,882       4,596       5,359         (847 )     (15.8 )
Printing and supplies
    3,102       3,293       3,094       3,148       3,201         (99 )     (3.1 )
Amortization of intangibles
    203       204       204       205       204         (1 )     (0.5 )
Restructuring reserve releases
                            (1,151 )       1,151       N.M.  
Other expense
    19,588       19,074       18,380       26,526       22,317         (2,729 )     (12.2 )
           
Sub-total before operating lease expense
    210,229       219,257       220,329       232,694       218,538         (8,309 )     (3.8 )
Operating lease expense
    22,823       28,879       37,948       48,320       54,885         (32,062 )     (58.4 )
           
Total non-interest expense
    233,052       248,136       258,277       281,014       273,423         (40,371 )     (14.8 )
           
Income before income taxes
    151,626       137,039       125,097       128,340       131,741         19,885       15.1  
Provision for income taxes
    43,052       30,614       28,578       37,201       38,255         4,797       12.5  
           
Net income
  $ 108,574     $ 106,425     $ 96,519     $ 91,139     $ 93,486       $ 15,088       16.1 %
           
 
                                                         
Average common shares — diluted
    233,456       235,671       235,053       235,502       234,348         (892 )     (0.4 )%
 
                                                         
Per common share
                                                         
Net income — diluted
  $ 0.47     $ 0.45     $ 0.41     $ 0.39     $ 0.40       $ 0.07       17.5  
Cash dividends declared
    0.215       0.215       0.200       0.200       0.200         0.015       7.5  
 
                                                         
Return on average total assets
    1.32 %     1.31 %     1.20 %     1.13 %     1.18 %       0.14 %     11.9  
Return on average total shareholders’ equity
    16.5       16.3       15.5       14.6       15.4         1.1       7.1  
Net interest margin (1)
    3.31       3.36       3.31       3.38       3.30         0.01       0.3  
Efficiency ratio (2)
    57.4       61.8       63.7       66.4       66.3         (8.9 )     (13.4 )
Effective tax rate
    28.4       22.3       22.8       29.0       29.0         (0.6 )     (2.1 )
 
                                                         
Revenue — fully taxable equivalent (FTE)
                                                         
Net interest income
  $ 241,637     $ 241,900     $ 235,198     $ 239,068     $ 227,058       $ 14,579       6.4  
FTE adjustment
    3,734       2,961       2,861       2,847       2,864         870       30.4  
           
Net interest income (1)
    245,371       244,861       238,059       241,915       229,922         15,449       6.7  
Non-interest income
    160,740       156,170       168,050       182,940       189,891         (29,151 )     (15.4 )
           
Total revenue (1)
  $ 406,111     $ 401,031     $ 406,109     $ 424,855     $ 419,813       $ (13,702 )     (3.3 )%
           
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).

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Table 2 — Selected Year to Date Income Statement Data
                                 
    Nine Months Ended September 30,   Change
(in thousands of dollars, except per share amounts)   2005   2004   Amount   Percent
     
Interest income
  $ 1,199,289     $ 988,100     $ 211,189       21.4 %
Interest expense
    480,554       315,794       164,760       52.2  
     
Net interest income
    718,735       672,306       46,429       6.9  
Provision for credit losses
    50,468       42,408       8,060       19.0  
     
Net interest income after provision for credit losses
    668,267       629,898       38,369       6.1  
     
Service charges on deposit accounts
    125,751       129,368       (3,617 )     (2.8 )
Trust services
    56,980       50,095       6,885       13.7  
Brokerage and insurance income
    40,518       41,920       (1,402 )     (3.3 )
Bank owned life insurance income
    30,347       31,813       (1,466 )     (4.6 )
Other service charges and fees
    32,860       30,957       1,903       6.1  
Mortgage banking income
    30,801       23,474       7,327       31.2  
Securities gains
    715       13,663       (12,948 )     (94.8 )
Gains on sales of automobile loans
    756       14,206       (13,450 )     (94.7 )
Other income
    52,141       68,177       (16,036 )     (23.5 )
     
Sub-total before operating lease income
    370,869       403,673       (32,804 )     (8.1 )
Operating lease income
    114,091       231,985       (117,894 )     (50.8 )
     
Total non-interest income
    484,960       635,658       (150,698 )     (23.7 )
     
Personnel costs
    365,547       363,068       2,479       0.7  
Net occupancy
    53,152       49,859       3,293       6.6  
Outside data processing and other services
    54,945       53,552       1,393       2.6  
Equipment
    47,031       47,609       (578 )     (1.2 )
Professional services
    27,129       27,354       (225 )     (0.8 )
Marketing
    20,674       20,908       (234 )     (1.1 )
Telecommunications
    14,195       15,191       (996 )     (6.6 )
Printing and supplies
    9,489       9,315       174       1.9  
Amortization of intangibles
    611       612       (1 )     (0.2 )
Restructuring reserve releases
          (1,151 )     1,151       N.M.  
Other expense
    57,042       66,755       (9,713 )     (14.6 )
     
Sub-total before operating lease expense
    649,815       653,072       (3,257 )     (0.5 )
Operating lease expense
    89,650       188,158       (98,508 )     (52.4 )
     
Total non-interest expense
    739,465       841,230       (101,765 )     (12.1 )
     
Income before income taxes
    413,762       424,326       (10,564 )     (2.5 )
Provision for income taxes
    102,244       116,540       (14,296 )     (12.3 )
     
Net income
  $ 311,518     $ 307,786     $ 3,732       1.2 %
     
Average common shares — diluted
    234,727       233,307       1,420       0.6 %
 
                               
Per Common Share
                               
Net income per common share — diluted
  $ 1.33     $ 1.32     $ 0.01       0.8 %
Cash dividends declared
    0.630       0.550       0.080       14.5  
 
                               
Return on average total assets
    1.28 %     1.32 %     (0.04 )%     (3.0 )%
Return on average total shareholders’ equity
    16.1       17.6       (1.50 )     (8.5 )
Net interest margin (1)
    3.33       3.31       0.02       0.6  
Efficiency ratio (2)
    60.9       64.5       (3.60 )     (5.6 )
Effective tax rate
    24.7       27.5       (2.76 )     (10.1 )
 
                               
Revenue — fully taxable equivalent (FTE)
                               
Net interest income
  $ 718,735     $ 672,306     $ 46,429       6.9 %
FTE adjustment
    9,556       8,806       750       8.5  
     
Net interest income (1)
    728,291       681,112       47,179       6.9  
Non-interest income
    484,960       635,658       (150,698 )     (23.7 )
     
Total revenue (1)
  $ 1,213,251     $ 1,316,770     $ (103,519 )     (7.9 )%
     
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.

29


Significant Factors Influencing Financial Performance Comparisons
     Earnings comparisons from the first quarter of 2004 through the third quarter 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. It is anticipated that the level of operating lease assets and related operating lease income and expense will decline to a point of diminished materiality sometime in 2006. However, until that point is reached, their downward trend influences 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, especially in 2002 through 2004. 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.   Mortgage servicing rights (MSRs) and related hedging. Interest rate levels throughout this period have remained low by historical standards. Though generally increasing throughout this period, they have also been volatile, with increases in one period followed by declines in another and vice versa. This has impacted the valuation of MSRs, which can be volatile when rates change.
    Since the second quarter of 2002, the Company generally has retained the servicing on mortgage loans it originates and sells. MSR values are very sensitive to movements in interest rates as 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 and quarterly trends throughout this period.
 
    Beginning in 2004, the Company uses gains or losses on investment securities, and gains or losses and net interest income on trading account assets, to offset MSR temporary valuation changes. Valuation of trading and investment securities generally react to interest rate changes in an opposite direction compared with changes in 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 single non-interest income line item, whereas trading gains or losses are a component of other non-interest income on the income statement. MSR-related trading assets also generate modest net interest income. The earnings impact of the MSR valuation change, and the combination of securities and/or trading gains/losses may not exactly offset due to, among other factors, the difference in the

30


      magnitude and/or timing of when the MSR valuation is determined and recorded, compared with when the securities are sold and any gain or loss is recorded (see Tables 3 and 8).
  3.   The sale of automobile loans. 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. This objective was achieved during the 2005 first quarter. These sales of higher-rate, higher-risk loans impacted results in a number of ways including: lower growth rates in automobile, total consumer, and total loans; and lower net interest income and margin than otherwise would be the case if the loans were not sold. In addition, during 2004 such sales resulted in the generation of significant gains as large pools of automobile loans were sold in order to achieve the objective, with such gains reflected in non-interest income. In the 2005 second quarter, the Company entered into an arrangement to sell 50%-75% of automobile loan production to a third party on an on-going basis and retain the loan servicing as part of a strategy to manage automobile loans and leases total credit exposure. This flow-sale program has resulted in modest gains in 2005, which Management views as recurring given their on-going nature (see Table 3) .
 
  4.   Significant C&I and CRE charge-offs and recoveries. 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 and nine-month provision expense, as well as middle-market commercial and industrial, total commercial, and total net charge-offs for the quarter and nine-month period (see Tables 16 and 17). In addition, in the 2005 first quarter, a single large commercial credit was charged-off. This impacted 2005 first quarter and nine-month period total net charge-offs and provision expense (see Tables 3, 14, and 15) .
 
  5.   Expenses and accruals associated with the SEC formal investigation and banking regulatory formal written agreements. On June 2, 2005, Huntington filed an 8-K announcing that the Commission approved the settlement of its previously announced formal investigation into certain financial accounting matters.
     The SEC formal investigation and regulatory agreements resulted in certain expenses and accruals as detailed below:
                     
2004
         
2005
       
First quarter
  $ 0.7   million      
First quarter
  $ 2.0   million    
Second quarter
    0.9    
Second quarter
    1.7  
Third quarter
    5.5    
Third quarter
    (0.1 )
 
       
 
     
First nine months
  $ 7.1   million  
First nine months
  $ 3.6   million
 
       
Fourth quarter
    6.5    
 
     
Full year
  $ 13.6   million  
  6.   Other significant non-run rate items . From the first quarter of 2004 through the third quarter of 2005, and in addition to other items discussed separately in this section, a number of significant non-run rate items impacted financial results. These included:
    $3.6 million pre-tax of severance and other expenses in the 2005 second quarter and $4.6 million pre-tax nine-month results associated with the consolidation of certain operations functions, including the closing of an item-processing center in Michigan, which influences comparisons with both the year-ago quarter, as well as prior quarter. These expenses included $2.0 million in severance-related personnel costs, $0.8 million in net occupancy, $0.5 million in equipment expense, and $0.3 million in other expense. This item impacted non-interest expense.
 
    $2.1 million pre-tax write-off of an equity investment in the 2005 second quarter and nine-month results. This item impacted non-interest income.
 
    $1.8 million pre-tax of Unizan system conversion expense in the 2004 third quarter and $2.7 million pre-tax in the 2004 nine-month results. This item impacted non-interest expense.
  7.   Effective tax rate. The effective tax rate through-out this period included the after-tax positive impact on net income due to a federal tax loss carry back. In addition, the after-tax rate also included the positive impact of tax exempt income, bank owned life insurance, asset securitization activities, and general business credits from investments in low income housing and historic property partnerships. The lower effective tax rate is expected

31


      to impact the fourth quarter of 2005. In addition, the 2005 third quarter and nine-month effective tax rates were negatively impacted by a $5.0 million after-tax net impact, primarily reflected in increased income tax expense, resulting from a decision to repatriate foreign earnings. As previously disclosed, the earnings repatriation was under consideration in 2005. In 2006, the effective tax rate is anticipated to increase to a more typical rate slightly below 30% (see Table 3) .

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Table 3 — Significant Items Influencing Earnings Performance Comparisons (1)
                 
    Impact (2)
(in millions, except per share amounts)   Amount (3)   EPS
Three Months Ended:
               
 
               
September 30, 2005 — GAAP earnings
  $ 108.6 (4)   $ 0.47  
Net impact of federal tax loss carry back
    6.8 (4)     0.03  
Net impact of repatriating foreign earnings
    (5.0 ) (4)     (0.02 )
Mortgage servicing right (MSR) recovery net of hedge-related trading losses
    (2.1 )     (0.01 )
 
               
June 30, 2005 — GAAP earnings
  $ 106.4 (4)   $ 0.45  
Net impact of federal tax loss carry back
    6.6 (4)     0.03  
MSR temporary impairment net of hedge-related trading gains
    (4.0 )     (0.01 )
Severance and consolidation expenses
    (3.6 )     (0.01 )
Write-off of equity investment
    (2.1 )     (0.01 )
 
               
September 30, 2004 — GAAP earnings
  $ 93.5 (4)   $ 0.40  
Investment securities gains
    7.8       0.02  
MSR temporary impairment net of hedge-related trading losses
    (6.5 )     (0.02 )
SEC reated expenses / accruals
    (5.5 )     (0.02 )
Unizan system conversion expense
    (1.8 )     (0.01 )
 
               
Nine Months Ended:
               
 
               
September 30, 2005 — GAAP earnings
  $ 311.5 (4)   $ 1.33  
Net impact of federal tax loss carry back
    19.8 (4)     0.09  
Net impact of repatriating foreign earnings
    (5.0 ) (4)     (0.02 )
MSR temporary impairment net of hedge-related trading losses
    (5.7 )     (0.02 )
Single C&I charge-off impact, net of allocated reserves
    (6.4 )     (0.02 )
Severance and consolidation expenses
    (3.6 )     (0.01 )
Write-off of equity investment
    (2.1 )     (0.01 )
SEC and regulatory related expenses
    (3.6 )     (0.02 )
 
               
September 30, 2004 — GAAP earnings
  $ 307.8 (4)   $ 1.32  
Gains on sales of automobile loans
    14.2       0.04  
Investment securities gains
    13.7       0.04  
Single commercial credit recovery
    9.7       0.03  
MSR temporary impairment net of hedge-related trading losses
    (6.2 )     (0.03 )
SEC reated expenses / accruals
    (7.1 )     (0.02 )
Unizan system conversion expense
    (2.7 )     (0.01 )
 
(1)   Includes significant items with $0.01 EPS impact or greater
 
(2)   Favorable (unfavorable) impact on GAAP earnings
 
(3)   Pre-tax unless otherwise noted
 
(4)   After-tax

33


RESULTS OF OPERATIONS
Net Interest Income
(This section should be read in conjunction with Significant Factors 1 and 3.)
2005 Third Quarter versus 2004 Third Quarter
     Fully taxable equivalent net interest income increased $15.4 million, or 7%, from the year-ago quarter, primarily reflecting the favorable impact of a $1.7 billion, or 6%, increase in average earning assets, as well as a one basis point increase in the net interest margin. The fully taxable equivalent net interest margin was 3.31% compared with 3.30% in the year-ago quarter. The stable net interest margin reflected a combination of factors. These included the benefit from growth in higher-yielding loans and redirecting part of the proceeds from maturing securities to fund loan growth, as well as an increase in both the proportion and the contribution of net free funds on the balance sheet. These positives were partially offset by the negative impacts from the flattening of the yield curve and share repurchase activity.
     Average total loans and leases increased $2.3 billion, or 10%, from the 2004 third quarter, reflecting growth in both consumer loans and commercial loans. Total average consumer loans increased $1.5 billion, or 12%, from the year-ago quarter, reflecting growth across all consumer loan categories. Average residential mortgages increased $0.7 billion, or 19%, and average home equity loans increased $0.3 billion, or 8%. Though residential mortgage and home equity growth rates were strong, the annualized 2005 third quarter growth rates of 8% and 4%, respectively, were approximately half the year-over-year growth rates. This reflected our commitment to maintaining underwriting and pricing discipline in a competitive market.
     Compared with the year-ago quarter, average total automobile loans and leases increased $0.4 billion, or 10%. Average automobile loans increased $0.2 billion, or 12%, reflecting 30% higher automobile loan production levels, stimulated by manufacturer employee pricing discounts in the current quarter, partially offset by loan sales over the past 12 months. Average direct financing leases increased $0.2 billion, or 8%, from the year-ago quarter reflecting the migration from operating leases, despite 56% lower production levels reflecting lower automobile lease demand and aggressive price competition. Average operating lease assets declined $0.5 billion, or 61%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter end was 19%, down from 21% a year ago.
     Average total commercial loans increased $0.8 billion, or 8%, from the year-ago quarter. This increase reflected a $0.4 billion, or 10%, increase in middle market commercial and industrial (C&I) loans despite the negative impact from the current quarter decline in automobile dealer floor plan loans. Average middle market commercial real estate (CRE) loans increased $0.2 billion, or 6%, with small business C&I and CRE loans increasing $0.2 billion, or 8%.
     Average total investment securities declined $0.7 billion, or 14%, from the year-ago quarter. This decline reflected a combination of factors including lowering the level of excess liquidity and funding loan growth.
     Average total core deposits in the 2005 third quarter were $17.2 billion, up $0.7 billion, or 4%, from the year-ago quarter. The largest contributor to this growth was a $0.7 billion, or 31%, increase in retail certificates of deposit. Interest bearing demand deposits grew $0.2 billion, or 2%, with all of the increase reflecting growth in commercial money market deposits, as consumer money market accounts declined. Non-interest bearing demand deposits increased $0.1 billion, or 4%, reflecting growth in both consumer and commercial non-interest bearing deposits. These increases were partially offset by a $0.3 billion, or 10%, decline in savings and other domestic time deposits.
2005 Third Quarter versus 2005 Second Quarter
     Compared with the 2005 second quarter, fully taxable equivalent net interest income increased $0.5 million reflecting a $0.2 billion, or 1%, increase in average earning assets, offset by a 5 basis point decline in the net interest margin to 3.31% from 3.36%. Of the 5 basis point decline, 2 basis points related to lower yields on mezzanine-related loans and one basis point related to the impact of share repurchases. The remainder reflected continued loan and deposit pricing pressures, as well as the overall impact of a flatter yield curve.
     Average total loans and leases in the third quarter were virtually unchanged from the 2005 second quarter as

34


growth in average consumer loans was offset by a decline in average commercial loans.
     Total average commercial loans decreased $0.1 billion, or 1%, from the second quarter due to a $193 million, or 4%, decrease in average C&I loans, partially offset by a 2% increase in average CRE loans. Of the decline in average C&I loans, approximately $157 million related to a decline in dealer floor plan loans primarily reflecting lower utilization rates, as dealer automobile inventories fell. Growth in average small business C&I and CRE loans was 1%, slightly below the growth rates in the 2005 first and second quarters.
     Compared with the 2005 second quarter, average total consumer loans increased $0.1 billion, or 1%, primarily reflecting a 2% increase in residential mortgages and a 1% increase in average home equity loans. Growth rates in residential mortgages and home equity loans have slowed in each of the last three linked quarters. Average automobile loans and leases decreased 1%, reflecting a 2% decline in average automobile direct financing leases. Average automobile loans were little changed, as growth due to higher automobile loan production was offset by loan sales.
     Average investment securities increased $0.1 billion, or 2%, from the 2005 second quarter.
     Compared with the 2005 second quarter, average total core deposits increased $0.2 billion, or 1%. This primarily reflected a $0.4 billion, or 16%, increase in retail certificates of deposits, primarily consumer driven. Non-interest bearing deposits also increased 2%, with all of this related to growth in commercial non-interest bearing deposits, as consumer non-interest bearing deposits declined. These increases were partially offset by a $0.1 billion, or 4%, decline in savings and other time deposits, and a $0.1 billion, or 2%, decline in interest bearing demand deposits.
     Tables 4 and 5 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

35


 
Table 4 — Condensed Consolidated Quarterly Average Balance Sheets
                                                           
    Average Balances     Change
Fully taxable equivalent basis   2005   2004     3Q05 vs 3Q04
(in millions of dollars)   Third   Second   First   Fourth   Third     Amount   Percent
           
Assets
                                                         
Interest bearing deposits in banks
  $ 54     $ 54     $ 53     $ 60     $ 55       $ (1 )     (1.8 )%
Trading account securities
    274       236       200       228       148         126       85.1  
Federal funds sold and securities purchased under resale agreements
    142       225       475       695       318         (176 )     (55.3 )
Loans held for sale
    427       276       203       229       283         144       50.9  
Investment securities:
                                                         
Taxable
    3,523       3,589       3,932       3,858       4,340         (817 )     (18.8 )
Tax-exempt
    537       411       409       404       398         139       34.9  
           
Total investment securities
    4,060       4,000       4,341       4,262       4,738         (678 )     (14.3 )
Loans and leases: (1)
                                                         
Commercial:
                                                         
Middle market commercial and industrial
    4,708       4,901       4,710       4,503       4,298         410       9.5  
Construction
    1,720       1,678       1,642       1,577       1,514         206       13.6  
Commercial
    1,922       1,905       1,883       1,852       1,913         9       0.5  
           
Middle market commercial real estate
    3,642       3,583       3,525       3,429       3,427         215       6.3  
Small business commercial and industrial and commercial real estate
    2,251       2,230       2,183       2,136       2,081         170       8.2  
           
Total commercial
    10,601       10,714       10,418       10,068       9,806         795       8.1  
           
Consumer:
                                                         
Automobile loans
    2,078       2,069       2,008       1,913       1,857         221       11.9  
Automobile leases
    2,424       2,468       2,461       2,388       2,250         174       7.7  
           
Automobile loans and leases
    4,502       4,537       4,469       4,301       4,107         395       9.6  
Home equity
    4,681       4,636       4,570       4,489       4,337         344       7.9  
Residential mortgage
    4,157       4,080       3,919       3,695       3,484         673       19.3  
Other loans
    507       491       480       479       461         46       10.0  
           
Total consumer
    13,847       13,744       13,438       12,964       12,389         1,458       11.8  
           
Total loans and leases
    24,448       24,458       23,856       23,032       22,195         2,253       10.2  
Allowance for loan and lease losses
    (256 )     (270 )     (282 )     (283 )     (288 )       32       11.1  
           
Net loans and leases
    24,192       24,188       23,574       22,749       21,907         2,285       10.4  
           
Total earning assets
    29,405       29,249       29,128       28,506       27,737         1,668       6.0  
           
Operating lease assets
    309       409       529       648       800         (491 )     (61.4 )
Cash and due from banks
    867       865       909       880       928         (61 )     (6.6 )
Intangible assets
    217       218       218       216       216         1       0.5  
All other assets
    2,197       2,149       2,079       2,094       2,066         131       6.3  
           
Total assets
  $ 32,739     $ 32,620     $ 32,581     $ 32,061     $ 31,459       $ 1,280       4.1 %
           
 
                                                         
Liabilities and shareholders’ equity
                                                         
Deposits:
                                                         
Demand deposits — non-interest bearing
  $ 3,406     $ 3,352     $ 3,314     $ 3,401     $ 3,276       $ 130       4.0 %
Demand deposits — Interest bearing
    7,539       7,677       7,925       7,658       7,384         155       2.1  
Savings and other domestic time deposits
    3,095       3,230       3,309       3,395       3,436         (341 )     (9.9 )
Retail certificates of deposit
    3,157       2,720       2,496       2,454       2,414         743       30.8  
           
Total core deposits
    17,197       16,979       17,044       16,908       16,510         687       4.2  
Domestic time deposits of $100,000 or more
    1,271       1,248       1,249       990       886         385       43.5  
Brokered deposits and negotiable CDs
    3,286       3,249       2,728       1,948       1,755         1,531       87.2  
Foreign time deposits
    462       434       442       465       476         (14 )     (2.9 )
           
Total deposits
    22,216       21,910       21,463       20,311       19,627         2,589       13.2  
Short-term borrowings
    1,559       1,301       1,179       1,302       1,342         217       16.2  
Federal Home Loan Bank advances
    935       1,136       1,196       1,270       1,270         (335 )     (26.4 )
Subordinated notes and other long-term debt
    3,960       4,100       4,517       5,099       5,244         (1,284 )     (24.5 )
           
Total interest bearing liabilities
    25,264       25,095       25,041       24,581       24,207         1,057       4.4  
           
All other liabilities
    1,458       1,554       1,699       1,598       1,564         (106 )     (6.8 )
Shareholders’ equity
    2,611       2,619       2,527       2,481       2,412         199       8.3  
           
Total liabilities and shareholders’ equity
  $ 32,739     $ 32,620     $ 32,581     $ 32,061     $ 31,459       $ 1,280       4.1 %
           
 
(1)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

36


 
Table 5 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)
    2005   2004
Fully taxable equivalent basis (1)   Third   Second   First   Fourth   Third
     
Assets
                                       
Interest bearing deposits in banks
    2.13 %     1.47 %     1.88 %     1.61 %     0.91 %
Trading account securities
    3.95       3.94       4.14       4.15       4.44  
Federal funds sold and securities purchased under resale agreements
    3.41       2.76       2.36       1.99       1.53  
Loans held for sale
    5.43       6.04       5.55       5.69       5.25  
Investment securities:
                                       
Taxable
    4.37       4.13       3.87       3.77       3.83  
Tax-exempt
    6.62       6.76       6.73       6.89       7.06  
     
Total investment securities
    4.67       4.40       4.14       4.07       4.10  
Loans and leases: (3)
                                       
Commercial:
                                       
Middle market commercial and industrial
    5.87       5.65       5.02       4.80       4.46  
Construction
    6.16       5.70       5.13       4.65       4.13  
Commercial
    5.90       5.44       5.15       4.80       4.45  
     
Middle market commercial real estate
    6.02       5.56       5.14       4.73       4.31  
Small business commercial and industrial and commercial real estate
    6.17       5.99       5.81       5.67       5.45  
     
Total commercial
    5.98       5.69       5.23       4.96       4.62  
     
Consumer:
                                       
Automobile loans
    6.44       6.57       6.83       7.31       7.65  
Automobile leases
    4.94       4.91       4.92       5.00       5.02  
     
Automobile loans and leases
    5.63       5.67       5.78       6.02       6.21  
Home equity
    6.60       6.24       5.77       5.30       4.84  
Residential mortgage
    5.45       5.37       5.36       5.53       5.48  
Other loans
    5.92       6.22       6.42       6.87       6.54  
     
Total consumer
    5.91       5.79       5.67       5.66       5.54  
     
Total loans and leases
    5.94       5.75       5.48       5.34       5.12  
     
Total earning assets
    5.72 %     5.52 %     5.21 %     5.05 %     4.89 %
     
 
                                       
Liabilities and shareholders’ equity
                                       
Deposits:
                                       
Demand deposits — non-interest bearing
    %     %     %     %     %
Demand deposits — Interest bearing
    1.87       1.64       1.45       1.21       1.06  
Savings and other domestic time deposits
    1.39       1.34       1.27       1.26       1.24  
Retail certificates of deposit
    3.58       3.49       3.43       3.38       3.32  
     
Total core deposits
    2.15       1.94       1.76       1.62       1.52  
Domestic time deposits of $100,000 or more
    3.60       3.27       2.92       2.51       2.40  
Brokered deposits and negotiable CDs
    3.66       3.25       2.80       2.26       1.84  
Foreign time deposits
    2.28       1.95       1.41       0.98       0.83  
     
Total deposits
    2.52       2.26       1.99       1.73       1.58  
Short-term borrowings
    2.74       2.16       1.66       1.17       0.92  
Federal Home Loan Bank advances
    3.08       3.02       2.90       2.68       2.60  
Subordinated notes and other long-term debt
    4.20       3.91       3.39       2.67       2.62  
     
Total interest bearing liabilities
    2.82 %     2.56 %     2.27 %     1.94 %     1.82 %
     
 
                                       
Net interest rate spread
    2.90 %     2.96 %     2.94 %     3.11 %     3.07 %
Impact of non-interest bearing funds on margin
    0.41       0.40       0.37       0.27       0.23  
     
Net interest margin
    3.31 %     3.36 %     3.31 %     3.38 %     3.30 %
     
 
(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.

37


2005 First Nine Months versus 2004 First Nine Months
     Fully taxable equivalent net interest income increased $47.2 million, or 7%, from the comparable year-ago period, reflecting the favorable impact of a $1.8 billion, or 7%, increase in average earning assets, and a 2 basis point increase in the net interest margin. The fully taxable equivalent net interest margin increased to 3.33% from 3.31% in the year-ago period reflecting a shift from lower-yielding investments to higher-yielding loans as a result of decreasing the level of excess liquidity and redirecting part of the proceeds of securities sales to fund loan growth. The margin also benefited from an increase in non-interest bearing funds. These benefits were partially offset by the impact of a flattening yield curve.
     Average total loans and leases increased $2.4 billion, or 11%, from the 2004 first nine-month period, reflecting growth in consumer loans, and to a lesser degree, growth in commercial loans. Total average consumer loans increased $1.6 billion, or 13%, from the year-ago period primarily due to a $1.0 billion, or 33%, increase in average residential mortgages as mortgage loan rates remained at attractive levels. Average home equity loans increased $0.5 billion, or 13%.
     Average total automobile loans decreased $0.4 billion, or 15%, from the year-ago period primarily reflecting the sale of automobile loans. Partially offsetting the decline in automobile loans was a $0.3 billion, or 15% increase in direct financing leases due to the continued migration from operating lease assets, which have not been originated since April 2002.
     Average total commercial loans increased $0.9 billion, or 9%, from the year-ago nine-month period. This reflected a $0.3 billion, or 10%, increase in CRE loans, a $0.3 billion, or 8%, increase in C&I loans, and a $0.2 billion, or 10%, increase in average small business C&I and CRE loans.
     Average total investment securities declined $0.9 billion, or 18%, from the first nine months of 2004. This decline reflected a combination of factors including lowering the level of excess liquidity, a decision to sell selected lower yielding securities, and partially funding loan growth with the proceeds from the sale of securities.
     Average total core deposits in the 2005 first nine-month period were $17.1 billion, up $1.0 billion, or 6%, from the comparable year-ago period, reflecting a $0.7 billion, or 9%, increase in average interest bearing demand deposit accounts, primarily money market accounts, a $0.4 billion, or 16%, increase in retail certificates of deposit, and a $0.2 billion, or 6%, increase in non-interest bearing deposits. These increases were partially offset by a $0.2 billion, or 7%, decline in savings and other domestic time deposits.

38


 
Table 6 — Condensed Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
                                                 
    YTD Average Balances   YTD Average Rates (2)
Fully taxable equivalent basis (1)   Nine Months Ended Sept 30,   Change   Nine Months Ended September 30,
(in millions of dollars)   2005   2004   Amount   Percent   2005   2004
         
Assets
                                               
Interest bearing deposits in banks
  $ 53     $ 67     $ (14 )     (20.9 )%     1.82 %     0.88 %
Trading account securities
    237       64       173       N.M.       4.00       4.17  
Federal funds sold and securities purchased under resale agreements
    298       193       105       54.4       2.79       1.42  
Loans held for sale
    303       248       55       22.2       5.63       5.24  
Investment securities:
                                               
Taxable
    3,662       4,615       (953 )     (20.7 )     4.09       3.91  
Tax-exempt
    453       415       38       9.2       6.69       7.00  
         
Total investment securities
    4,115       5,030       (915 )     (18.2 )     4.37       4.17  
Loans and leases: (3)
                                               
Commercial:
                                               
Middle market commercial and industrial
    4,773       4,431       342       7.7       5.52       4.28  
Construction
    1,680       1,355       325       24.0       5.67       3.86  
Commercial
    1,903       1,902       1       0.1       5.50       4.32  
         
Middle market commercial real estate
    3,583       3,257       326       10.0       5.58       4.13  
Small business commercial and industrial and commercial real estate
    2,222       2,024       198       9.8       5.99       5.41  
         
Total commercial
    10,578       9,712       866       8.9       5.64       4.46  
         
Consumer:
                                               
Automobile loans
    2,052       2,410       (358 )     (14.9 )     6.61       7.20  
Automobile leases
    2,451       2,126       325       15.3       4.92       5.00  
         
Automobile loans and leases
    4,503       4,536       (33 )     (0.7 )     5.69       6.17  
Home equity
    4,630       4,086       544       13.3       6.21       4.84  
Residential mortgage
    4,053       3,049       1,004       32.9       5.39       5.36  
Other loans
    492       440       52       11.8       6.18       6.21  
         
Total consumer
    13,678       12,111       1,567       12.9       5.79       5.52  
         
Total loans and leases
    24,256       21,823       2,433       11.1       5.73       5.03  
Allowance for loan and lease losses
    (269 )     (303 )     34       (11.2 )                
         
Net loans and leases
    23,987       21,520       2,467       11.5                  
         
Total earning assets
    29,262       27,425       1,837       6.7       5.49 %     4.84 %
         
Operating lease assets
    415       980       (565 )     (57.7 )                
Cash and due from banks
    880       814       66       8.1                  
Intangible assets
    218       216       2       0.9                  
All other assets
    2,141       2,074       67       3.2                  
                     
Total assets
  $ 32,647     $ 31,206     $ 1,441       4.6 %                
                     
 
                                               
Liabilities and shareholders’ equity
                                               
Deposits:
                                               
Demand deposits — non-interest bearing
  $ 3,358     $ 3,172     $ 186       5.9 %     %     %
Demand deposits — interest bearing
    7,712       7,055       657       9.3       1.65       0.96  
Savings and other domestic time deposits
    3,213       3,444       (231 )     (6.7 )     1.33       1.29  
Retail certificates of deposit
    2,793       2,404       389       16.2       3.50       3.35  
         
Total core deposits
    17,076       16,075       1,001       6.2       1.95       1.50  
Domestic time deposits of $100,000 or more
    1,256       823       433       52.6       3.27       2.31  
Brokered deposits and negotiable CDs
    3,088       1,800       1,288       71.6       3.27       1.64  
Deposits in foreign offices
    446       522       (76 )     (14.6 )     1.89       0.77  
         
Total deposits
    21,866       19,220       2,646       13.8       2.26       1.53  
Short-term borrowings
    1,347       1,447       (100 )     (6.9 )     2.23       0.85  
Federal Home Loan Bank advances
    1,088       1,271       (183 )     (14.4 )     2.99       2.54  
Subordinated notes and other long-term debt
    4,190       5,474       (1,284 )     (23.5 )     3.82       2.39  
         
Total interest bearing liabilities
    25,133       24,240       893       3.7       2.55       1.74  
         
All other liabilities
    1,570       1,456       114       7.8                  
Shareholders’ equity
    2,586       2,338       248       10.6                  
                     
Total liabilities and shareholders’ equity
  $ 32,647     $ 31,206     $ 1,441       4.6 %                
                     
Net interest rate spread
                                    2.94       3.10  
Impact of non-interest bearing funds on margin
                                    0.39       0.21  
                                 
Net interest margin
                                    3.33 %     3.31 %
                                 
 
(1)   Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)   Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

39


Provision for Credit Losses
(This section should be read in conjunction with Significant Factors 1, 3 and 4, 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 allowance for loan and lease losses (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 allowance for unfunded loan commitments (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 in the 2005 third quarter was $17.7 million, a $5.9 million increase from the year-ago quarter and a $4.8 million increase from the 2005 second quarter. The increase in provision expense from the year-ago quarter and the prior quarter primarily reflected the relatively stable credit quality in the current quarter compared with improving trends in the prior periods. The provision for credit losses in the first nine months of 2005 was $50.5 million, an $8.1 million, or 19%, increase from the year-age nine-month period, reflecting the benefit of a $9.7 million commercial loan recovery in the prior year nine-month period.
Non-Interest Income
(This section should be read in conjunction with Significant Factor 1, 2, 3, and 6.)
     Table 7 reflects non-interest income detail for each of the past five quarters and for the first nine months of 2005 and 2004.
Table 7 — Non-Interest Income
                                                         
    2005   2004   3Q05 vs 3Q04
(in thousands of dollars)   Third   Second   First   Fourth   Third   Amount   Percent
         
Service charges on deposit accounts
  $ 44,817     $ 41,516     $ 39,418     $ 41,747     $ 43,935     $ 882       2.0 %
Trust services
    19,671       19,113       18,196       17,315       17,064       2,607       15.3  
Brokerage and insurance income
    13,948       13,544       13,026       12,879       13,200       748       5.7  
Bank owned life insurance income
    10,104       10,139       10,104       10,484       10,019       85       0.8  
Other service charges and fees
    11,449       11,252       10,159       10,617       10,799       650       6.0  
Mortgage banking income (loss)
    21,116       (2,376 )     12,061       8,822       4,448       16,668       N.M.  
Securities gains (losses)
    101       (343 )     957       2,100       7,803       (7,702 )     (98.7 )
Gain on sales of automobile loans
    502       254                   312       190       60.9  
Other income
    9,770       24,974       17,397       23,870       17,899       (8,129 )     (45.4 )
         
Sub-total before operating lease income
    131,478       118,073       121,318       127,834       125,479       5,999       4.8  
Operating lease income
    29,262       38,097       46,732       55,106       64,412       (35,150 )     (54.6 )
         
Total non-interest income
  $ 160,740     $ 156,170     $ 168,050     $ 182,940     $ 189,891     $ (29,151 )     (15.4) %
         
                                 
    Nine Months Ended Sep 30,   YTD 2005 vs 2004
(in thousands of dollars)   2005   2004   Amount   Percent
     
Service charges on deposit accounts
  $ 125,751     $ 129,368     $ (3,617 )     (2.8 )%
Trust services
    56,980       50,095       6,885       13.7  
Brokerage and insurance income
    40,518       41,920       (1,402 )     (3.3 )
Bank owned life insurance income
    30,347       31,813       (1,466 )     (4.6 )
Other service charges and fees
    32,860       30,957       1,903       6.1  
Mortgage banking income
    30,801       23,474       7,327       31.2  
Securities gains
    715       13,663       (12,948 )     (94.8 )
Gain on sales of automobile loans
    756       14,206       (13,450 )     (94.7 )
Other income
    52,141       68,177       (16,036 )     (23.5 )
     
Sub-total before operating lease income
    370,869       403,673       (32,804 )     (8.1 )
Operating lease income
    114,091       231,985       (117,894 )     (50.8 )
     
Total non-interest income
  $ 484,960     $ 635,658     $ (150,698 )     (23.7 )%
     
N.M., not a meaningful value.

40


     Table 8 reflects mortgage banking income detail for each of the past five quarters and for the first nine months of 2005 and 2004
Table 8 — Mortgage Banking Income and Net Impact of MSR Hedging
                                                               
    2005   2004   3Q05 vs 3Q04
(in thousands of dollars)   Third   Second   First   Fourth   Third   Amount   Percent
         
Mortgage Banking Income
                                                       
Origination fees
  $ 3,037     $ 3,066     $ 2,699     $ 3,264     $ 3,219     $ (182 )     (5.7 )%
Secondary marketing
    3,409       1,749       2,482       1,623       (14 )     3,423       N.M.  
Servicing fees
    5,532       5,464       5,394       5,730       5,353       179       3.3  
Amortization of capitalized servicing
    (4,626 )     (5,187 )     (4,761 )     (5,153 )     (4,468 )     (158 )     3.5  
Other mortgage banking income
    3,307       2,763       2,487       2,620       4,477       (1,170 )     (26.1 )
         
Sub-total
    10,659       7,855       8,301       8,084       8,567       2,092       24.4  
MSR recovery / (impairment)
    10,457       (10,231 )     3,760       738       (4,119 )     14,576       N.M.  
         
Total mortgage banking income (loss)
  $ 21,116     $ (2,376 )   $ 12,061     $ 8,822     $ 4,448     $ 16,668       N.M. %
         
 
                                                       
Capitalized mortgage servicing rights (1)
  $ 85,940     $ 71,150     $ 80,972     $ 77,107     $ 76,540     $ 9,400       12.3 %
Total mortgages serviced for others (1)
    7,081,000       6,951,000       6,896,000       6,861,000       6,780,000       301,000       4.4  
 
                                                       
Net Impact of MSR Hedging
                                                       
MSR recovery / (impairment)
  $ 10,457     $ (10,231 )   $ 3,760     $ 738     $ (4,119 )   $ 14,576       N.M. %
Net trading gains (losses) related to MSR hedging (2)
    (12,831 )     5,727       (4,182 )     (3,345 )     (2,340 )     (10,491 )     N.M.  
Net interest income related to MSR hedging
    233       512       834       1,451             233        
Other MSR hedge activity (4)
                                         
         
Net impact of MSR hedging (3)
  $ (2,141 )   $ (3,992 )   $ 412     $ (1,156 )   $ (6,459 )   $ 4,318       (66.9 )%
         
                                 
    Nine Months Ended Sep 30,     YTD 2005 vs 2004  
(in thousands of dollars)   2005     2004     Amount     Percent  
     
Mortgage Banking Income
                               
Origination fees
  $ 8,802     $ 9,112     $ (310 )     (3.4 )%
Secondary marketing
    7,640       6,717       923       13.7  
Servicing fees
    16,390       15,967       423       2.6  
Amortization of capitalized servicing
    (14,574 )     (13,866 )     (708 )     5.1  
Other mortgage banking income
    8,557       4,904       3,653       74.5  
                   
Sub-total
    26,815       22,834       3,981       17.4  
MSR recovery / (impairment)
    3,986       640       3,346       N.M.  
                   
Total mortgage banking income
  $ 30,801     $ 23,474     $ 7,327       31.2 %
                 
 
                               
Capitalized mortgage servicing rights (1)
  $ 85,940     $ 76,540     $ 9,400       12.3 %
Total mortgages serviced for others (1)
    7,081,000       6,780,000       301,000       4.4  
 
                               
Net Impact of MSR Hedging
                               
MSR recovery / (impairment)
  $ 3,986     $ 640     $ 3,346       N.M. %
Net trading losses related to MSR hedging (2)
    (11,286 )     (2,340 )     (8,946 )     N.M.  
Net interest income related to MSR hedging
    1,579             1,579        
Other MSR hedge activity (4)
          (4,492 )     4,492       N.M.  
                 
Net impact of MSR hedging (3)
  $ (5,721 )   $ (6,192 )   $ 471       (7.6 )%
                 
 
N.M., not a meaningful value.
 
(1)   At period end.
 
(2)   Included in other non-interest income.
 
(3)   The tables above exclude securities gains or losses related to the investment securities portfolio.
 
(4)   Included in other mortgage banking income.

41


2005 Third Quarter versus 2004 Third Quarter
     Non-interest income decreased $29.2 million, or 15%, from the year-ago quarter with the decline primarily attributed to the $35.2 million decline in operating lease income reflecting the continued run-off of the operating lease portfolio. The remaining fee income categories increased a total of $6.0 million with the primary drivers being:
    $16.7 million increase in mortgage banking income, reflecting a $10.5 million MSR temporary impairment recovery in the current quarter compared with a $4.1 million MSR temporary impairment in the year-ago quarter. Higher secondary marketing income was the primary contributor to the remainder of the increase.
 
    $2.6 million, or 15%, increase in trust services income, due primarily to higher personal trust, mutual fund, and institutional trust assets under management.
 
    $0.9 million, or 2%, increase in service charges on deposit accounts, reflecting higher activity-related personal service charges, partially offset by lower maintenance personal service charges.
 
    $0.7 million, or 6%, increase in brokerage and insurance income, reflecting higher credit insurance revenue and higher life and title insurance sales.
 
    $0.7 million, or 6%, increase in other service charges and fees, due to higher check card fees, partially offset by lower bill pay fees as a result of a decision to eliminate fees for this service beginning in the 2004 fourth quarter.
Partially offset by:
    $7.7 million decline in securities gains.
 
    $8.1 million, or 45%, decline in other non-interest income, primarily reflecting the negative impact of $12.8 million of MSR hedge-related trading losses in the current quarter compared with $2.3 million of MSR hedge-related trading losses in the year-ago quarter.
2005 Third Quarter versus 2005 Second Quarter
     Compared with the 2005 second quarter, non-interest income increased $4.6 million, or 3%. This was despite an $8.8 million decline in operating lease income, reflecting the run-off of the operating lease portfolio, as the remaining fee income categories contributed a net $13.4 million increase with the primary drivers being:
    $23.5 million increase in mortgage banking income, reflecting a $10.5 million MSR temporary impairment recovery in the current quarter compared with a $10.2 million MSR temporary impairment in the prior quarter. Higher secondary marketing income was the primary contributor to the balance of the increase.
 
    $3.3 million, or 8%, increase in service charges on deposit accounts, primarily due to higher personal NSF and overdraft charges and higher maintenance fees on deposit accounts.
 
    $0.6 million, or 3%, increase in trust services income, due to higher personal trust and mutual fund assets under management, as well as higher institutional trust servicing fees.
 
    $0.4 million, or 3%, increase in brokerage and insurance income, primarily reflecting higher annuity sales and higher credit insurance revenue.
Partially offset by:
    $15.2 million decrease in other income, reflecting the negative impact of $12.8 million of MSR hedge-related trading losses in the current quarter compared with $5.7 million of MSR hedge-related trading gains in the prior quarter, partially offset by higher safe deposit fees and securitization fee income.
 
    No equity investment write-offs in the current quarter compared with $2.1 million of such write-offs in the 2005 second quarter.

42


2005 First Nine Months versus 2004 First Nine Months
     Non-interest income decreased $150.7 million, or 24%, from the year-ago nine-month period with $117.9 million of the decline reflecting the decrease in operating lease income. Of the remaining $32.8 million decline from the year-ago period, the primary drivers were:
    $16.0 million, or 24%, decline in other income reflecting a combination of factors including $11.3 million MSR hedge-related trading losses in the current period compared with $2.3 million of hedge-related trading losses in the year-ago period, lower income from automobile lease terminations, the $2.1 million write-off of an equity investment in the 2005 second quarter, lower investment banking income, and lower equity investment gains.
 
    $13.5 million decline in gains on sale of automobile loans as the year-ago period included $14.2 million of such gains.
 
    $12.9 million decline in securities gains, reflecting $13.7 million of gains in the year-ago period taken to mitigate the net impact of the MSR impairment.
 
    $3.6 million, or 3%, decline in service charges on deposit accounts with a decline in commercial service charges contributing more than half of 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 maintenance fees on deposit accounts, as well as lower personal NSF and overdraft service charges, partially offset by higher activity-related personal service charges.
 
    $1.5 million, or 5%, decline in bank owned life insurance income.
 
    $1.4 million, or 3%, decline in brokerage and insurance income, reflecting lower annuity sales.
Partially offset by:
    $7.3 million, or 31%, increase in mortgage banking income, reflecting a $4.0 million MSR temporary impairment recovery in the current nine-month period compared with a $0.6 million recovery in the year-ago period, as well as $4.5 million of MSR hedge-related losses in the prior period.
 
    $6.9 million, or 14%, increase in trust services income due to higher personal trust and mutual fund fees, reflecting a combination of higher market value of assets, as well as increased activity.
 
    $1.9 million, or 6%, increase in other service charges and fees, due to higher check card fees, partially offset by lower bill pay fees as a result of a decision to eliminate fees for this service beginning in the 2004 fourth quarter.

43


Non-Interest Expense
(This section should be read in conjunction with Significant Factor 1, 5, and 6.)
     Table 9 reflects non-interest expense detail for each of the last five quarters and for the first nine months of 2005 and 2004.
Table 9 — Non-Interest Expense
                                                         
    2005   2004   3Q05 vs 3Q04
(in thousands of dollars)   Third   Second   First   Fourth   Third   Amount   Percent
         
Salaries
  $ 93,209     $ 98,283     $ 96,239     $ 94,658     $ 96,456     $ (3,247 )     (3.4 )%
Benefits
    24,267       25,807       27,742       28,080       25,273       (1,006 )     (4.0 )
         
Personnel costs
    117,476       124,090       123,981       122,738       121,729       (4,253 )     (3.5 )
Net occupancy
    16,653       17,257       19,242       26,082       16,838       (185 )     (1.1 )
Outside data processing and other services
    18,062       18,113       18,770       18,563       17,527       535       3.1  
Equipment
    15,531       15,637       15,863       15,733       15,295       236       1.5  
Professional services
    8,323       9,347       9,459       9,522       12,219       (3,896 )     (31.9 )
Marketing
    6,779       7,441       6,454       5,581       5,000       1,779       35.6  
Telecommunications
    4,512       4,801       4,882       4,596       5,359       (847 )     (15.8 )
Printing and supplies
    3,102       3,293       3,094       3,148       3,201       (99 )     (3.1 )
Amortization of intangibles
    203       204       204       205       204       (1 )     (0.5 )
Restructuring reserve releases
                            (1,151 )     1,151       N.M.  
Other expense
    19,588       19,074       18,380       26,526       22,317       (2,729 )     (12.2 )
         
Sub-total before operating lease expense
    210,229       219,257       220,329       232,694       218,538       (8,309 )     (3.8 )
Operating lease expense
    22,823       28,879       37,948       48,320       54,885       (32,062 )     (58.4 )
         
Total non-interest expense
  $ 233,052     $ 248,136     $ 258,277     $ 281,014     $ 273,423     $ (40,371 )     (14.8 )%
         
                                 
    Nine Months Ended Sep 30,   YTD 2005 vs 2004
(in thousands of dollars)   2005   2004   Amount   Percent
     
Salaries
  $ 287,731     $ 281,610     $ 6,121       2.2 %
Benefits
    77,816       81,458       (3,642 )     (4.5 )
     
Personnel costs
    365,547       363,068       2,479       0.7  
Net occupancy
    53,152       49,859       3,293       6.6  
Outside data processing and other services
    54,945       53,552       1,393       2.6  
Equipment
    47,031       47,609       (578 )     (1.2 )
Professional services
    27,129       27,354       (225 )     (0.8 )
Marketing
    20,674       20,908       (234 )     (1.1 )
Telecommunications
    14,195       15,191       (996 )     (6.6 )
Printing and supplies
    9,489       9,315       174       1.9  
Amortization of intangibles
    611       612       (1 )     (0.2 )
Restructuring reserve releases
          (1,151 )     1,151       N.M.  
Other expense
    57,042       66,755       (9,713 )     (14.6 )
     
Sub-total before operating lease expense
    649,815       653,072       (3,257 )     (0.5 )
Operating lease expense
    89,650       188,158       (98,508 )     (52.4 )
     
Total non-interest expense
  $ 739,465     $ 841,230     $ (101,765 )     (12.1 )%
     
N.M., not a meaningful value.

44


2005 Third Quarter versus 2004 Third Quarter
     Non-interest expense decreased $40.4 million, or 15%, from the year-ago quarter with $32.1 million of the decline reflecting the run-off of the operating lease portfolio. Of the remaining $8.3 million decline from the year-ago quarter, the primary drivers were:
    $4.3 million, or 3%, decline in personnel expense, primarily reflecting lower incentive compensation and benefits expense.
 
    $3.9 million, or 32%, decline in professional services, due primarily to lower SEC-related expenses.
 
    $2.7 million, or 12%, decline in other expense, primarily reflecting SEC-related accruals in the year-ago quarter.
Partially offset by:
    $1.8 million, or 36%, increase in marketing expense related to increased advertising expenditures.
 
    $1.2 million increase in the restructuring reserve charges line item, reflecting a restructuring reserve release in the year-ago quarter with no release in the current quarter.
2005 Third Quarter versus 2005 Second Quarter
     Compared with the 2005 second quarter, non-interest expense decreased $15.1 million, or 6%, with $6.1 million reflecting the run-off of the operating lease portfolio. Of the remaining $9.0 million decrease from the prior quarter, the primary drivers were:
    $6.6 million, or 5%, decline in personnel costs, primarily reflecting lower incentive compensation, and benefits expense.
 
    $1.0 million, or 11%, decline in professional services, due to a decline in SEC-related expenses.
 
    $0.7 million, or 9%, decline in marketing expense, primarily reflecting a reduction in advertising.
2005 First Nine Months versus 2004 First Nine Months
     Non-interest expense decreased $101.8 million, or 12%, from the year-ago nine-month period with $98.5 million of the decline reflecting the decrease in operating lease expense. Of the remaining $3.3 million decline from the year-ago period, the primary drivers were:
    $9.7 million, or 15%, decrease in other expense, reflecting $5.8 million of costs related to investments in partnerships generating tax benefits in the year-ago period, and lower SEC penalty expense accruals and insurance costs in the current period.
 
    $1.0 million, or 7%, decrease in telecommunications expense.
Partially offset by:
    $3.3 million, or 7%, increase in net occupancy expense, primarily reflecting an equity loss from a real estate partnership minority interest caused by a refinancing penalty, as well as lower rental income and higher depreciation expense.
 
    $2.5 million, or 1%, increase in personnel costs reflecting an increase in salaries, partially offset by lower sales commissions and benefits expense.
 
    $1.4 million, or 3%, increase in outside data processing and other services.
 
    $1.2 million increase in the restructuring reserve charges line item, reflecting a restructuring reserve release in the year-ago quarter with no release in the current quarter.

45


Operating Lease Assets
(This section should be read in conjunction with Significant Factor 1 and Lease Residual Risk section.)
     Table 10 reflects operating lease assets performance detail for each of the last five quarters and for the first nine months of 2005 and 2004.
Table 10 — Operating Lease Performance
                                                                
    2005   2004   3Q05 vs 3Q04
(in thousands of dollars)   Third   Second   First   Fourth   Third   Amount   Percent
                 
Balance Sheet:
                                                       
 
                                                       
Average operating lease assets outstanding
  $ 308,952     $ 408,798     $ 529,245     $ 647,970     $ 800,145     $ (491,193 )     (61.4 )%
         
 
                                                       
Income Statement:
                                                       
 
                                                       
Net rental income
  $ 26,729     $ 34,562     $ 43,554     $ 51,016     $ 60,267     $ (33,538 )     (55.6 )%
Fees
    1,419       1,773       1,857       2,111       2,965       (1,546 )     (52.1 )
Recoveries — early terminations
    1,114       1,762       1,321       1,979       1,180       (66 )     (5.6 )
                 
Total operating lease income
    29,262       38,097       46,732       55,106       64,412       (35,150 )     (54.6 )
         
 
                                                       
Depreciation and residual losses at termination
    20,856       26,560       34,703       45,293       49,917       (29,061 )     (58.2 )
Losses — early terminations
    1,967       2,319       3,245       3,027       4,968       (3,001 )     (60.4 )
                 
Total operating lease expense
    22,823       28,879       37,948       48,320       54,885       (32,062 )     (58.4 )
                 
Net earnings contribution
  $ 6,439     $ 9,218     $ 8,784     $ 6,786     $ 9,527     $ (3,088 )     (32.4 )%
         
Earnings ratios (1)
                                                       
Net rental income
    34.6 %     33.8 %     32.9 %     31.5 %     30.1 %     4.5 %     15.0 %
Depreciation and residual losses at termination
    27.0       26.0       26.2       28.0       25.0       2.0       8.0  
                                 
    Nine Months Ended Sep 30,   YTD 2005 vs. 2004
(in thousands of dollars)   2005   2004   Amount   Percent
         
Balance Sheet:
                               
 
                               
Average operating lease assets outstanding
  $ 414,858     $ 980,312     $ (565,454 )     (57.7 )%
     
 
                               
Income Statement:
                               
Net rental income
  $ 104,845     $ 216,186     $ (111,341 )     (51.5 )
Fees
    5,049       11,346       (6,297 )     (55.5 )
Recoveries — early terminations
    4,197       4,453       (256 )     (5.7 )
         
Total operating lease income
    114,091       231,985       (117,894 )     (50.8 )
         
Depreciation and residual losses at termination
    82,119       171,152       (89,033 )     (52.0 )
Losses — early terminations
    7,531       17,006       (9,475 )     (55.7 )
         
Total operating lease expense
    89,650       188,158       (98,508 )     (52.4 )
         
Net earnings contribution
  $ 24,441     $ 43,827     $ (19,386 )     (44.2 )%
     
 
                               
Earnings ratios (1)
                               
Net rental income
    33.7 %     29.4 %     4.3 %     14.6 %
Depreciation and residual losses at termination
    26.4       23.3       3.1       13.3 %
(1)   As a percent of average operating lease assets, annualized.

46


2005 Third Quarter versus 2004 Third Quarter and 2005 Second Quarter
     Average operating lease assets in the 2005 third quarter were $0.3 billion, down $0.5 billion, or 61%, from the year-ago quarter and 24% from the 2005 second 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 .)
     Operating lease income, which totaled $29.3 million in the 2005 third quarter, represented 18% of total non-interest income in the quarter. Operating lease income was down $35.2 million, or 55%, from the year-ago quarter and $8.8 million, or 23%, from the 2005 second quarter, reflecting the declines in average operating leases. As no new operating leases have been originated after April 2002, the operating lease asset balances will continue to decline through both depreciation and lease terminations. Net rental income was down 56% and 23%, respectively, from the year-ago and 2005 second quarter. Fees declined 52% from the year-ago quarter, and 20% from the second quarter. Recoveries from early terminations decreased 6% from the year-ago quarter and 37% from the second quarter.
     Operating lease expense totaled $22.8 million, down $32.1 million, or 58%, from the year-ago quarter and down $6.1 million, or 21%, from the 2005 second quarter. These declines also reflected the fact that this portfolio is decreasing over time. Losses on early terminations, which are included in total operating lease expense, declined 60% from the year-ago quarter and 15% from the first quarter.
2005 First Nine Months versus 2004 First Nine Months
     Average operating lease assets in the first nine-month period of 2005 were $0.4 billion, down $0.6 billion, or 58% from the comparable year-ago period.
     Operating lease income, which totaled $114.1 million for the first nine months of 2005, represented 24% of total non-interest income, and was down $117.9 million, or 51%, from the comparable year-ago period. Net rental income was down $111.3 million, or 52%. Fees declined $6.3 million, or 55%, from the comparable year-ago period. Recoveries from early terminations were down 6% from the year-ago period. Operating lease expense totaled $89.7 million, down $98.5 million, or 52%, from the comparable year-ago period. The declines in operating lease income and operating lease expense reflected the fact that this portfolio is decreasing over time.
Provision for Income Taxes
(This section should be read in conjunction with Significant Factor 7.)
     The provision for income taxes in the third quarter of 2005 was $43.1 million and represented an effective tax rate on income before taxes of 28.4%. The provision for income taxes increased $4.8 million from the year-ago quarter, primarily due to an increase in pre-tax earnings and the repatriation of foreign earnings, offset by 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 second quarter of 2005 were 29.0% and 22.3%, respectively. For the first nine months of 2005, provision for income taxes was $102.2 million and represented an effective tax rate on income before taxes of 24.7%. The provision for income taxes decreased $14.3 million from the same period in 2004, in which the effective tax rate was 27.5%, reflecting higher pre-tax income in the first nine months of 2004, and the recognition of the effect of federal tax refunds on income tax expense in the first nine months of 2005, partially offset by the repatriation of foreign earnings.
     As noted in Huntington’s 2004 Form 10-K, the American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction of 85% on the repatriation of certain foreign earnings to a U.S. taxpayer. During the third quarter of 2005, Huntington had approximately $110.0 million of foreign earnings eligible for repatriation. In September 2005, Huntington received approximately $110.0 million of cash dividends of previously undistributed foreign earnings. During the third quarter of 2005, the board of directors of Huntington resolved to adopt a Domestic Reinvestment Plan signed by the Chairman, President and Chief Executive Officer of Huntington. In the third quarter of 2005, income tax expense of $5.7 million, associated with the repatriation, was recorded. Huntington will reinvest the cash dividend received through expenditures on infrastructure and capital investments with respect to the opening of new branches, qualified pension and 401(k) contributions and funding of worker hiring, training and other compensation.

47


     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.
     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, second, and third quarter effective tax rate included the after-tax positive impact on net income due to a federal tax loss carry back. In addition, through-out 2005, the after-tax rate also included the positive impact of tax exempt income, bank owned life insurance, asset securitization activities, and general business credits from investments in low income housing and historic property partnerships. The lower effective tax rate is expected to impact the fourth quarter of 2005. In addition, the 2005 third quarter and nine-month effective tax rates were negatively impacted by a $5.0 million after-tax net impact, primarily reflected in increased income tax expense, resulting from a decision to repatriate foreign earnings. As previously disclosed, the earnings repatriation was under consideration in 2005. In 2006, the effective tax rate is anticipated to increase to a more typical rate slightly below 30%.
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
(This section should be read in conjunction with Significant Factor 3.)
     Compared with the year-ago period, the composition of the loan and lease portfolio at September 30, 2005, had changed such that lower credit risk home equity loans and residential mortgages combined represented 36% of total credit exposure, up from 34% a year earlier. Conversely, relatively higher risk automobile exposure, which consists of automobile loans and leases, as well as operating lease assets, declined from 21% at September 30, 2004 to 19% at September 30, 2005.
     Table 11 reflects period-end loan and lease portfolio mix by type of loan or lease, as well as by business segment:

48


Table 11 — Credit Exposure Composition
                                                                                 
    2005   2004
(in millions of dollars)   September 30,   June 30,   March 31,   December 31,   September 30,
           
By Type
                                                                               
Commercial:
                                                                               
Middle market commercial and industrial
  $ 4,791       19.3 %   $ 4,883       19.6 %   $ 4,824       19.6 %   $ 4,660       19.3 %   $ 4,353       18.7 %
Construction
    1,762       7.1       1,684       6.8       1,648       6.7       1,592       6.6       1,538       6.6  
Commercial
    1,885       7.6       1,900       7.6       1,914       7.8       1,882       7.8       1,898       8.1  
           
Middle market commercial real estate
    3,647       14.7       3,584       14.4       3,562       14.5       3,474       14.4       3,436       14.7  
           
Small business commercial and industrial and commercial real estate
    2,235       9.1       2,258       9.1       2,205       8.9       2,170       8.9       2,124       9.2  
           
Total commercial
    10,673       43.1       10,725       43.1       10,591       43.0       10,304       42.6       9,913       42.6  
           
Consumer:
                                                                               
Automobile loans
    2,063       8.3       2,046       8.2       2,066       8.4       1,949       8.1       1,885       8.1  
Automobile leases
    2,381       9.6       2,458       9.9       2,476       10.0       2,443       10.1       2,317       9.9  
Home equity
    4,685       18.9       4,684       18.8       4,595       18.6       4,555       18.9       4,430       19.0  
Residential mortgage
    4,180       16.9       4,152       16.7       3,996       16.2       3,829       15.9       3,566       15.3  
Other loans
    514       2.1       502       1.9       483       1.9       481       2.0       477       2.0  
           
Total consumer
    13,823       55.8       13,842       55.5       13,616       55.1       13,257       55.0       12,675       54.3  
           
Total loans and direct financing leases
  $ 24,496       98.9     $ 24,567       98.6     $ 24,207       98.1     $ 23,561       97.6     $ 22,588       96.9  
           
 
                                                                               
Operating lease assets
    274       1.1       354       1.4       466       1.9       587       2.4       717       3.1  
           
Total credit exposure
  $ 24,770       100.0 %   $ 24,921       100.0 %   $ 24,673       100.0 %   $ 24,148       100.0 %   $ 23,305       100.0 %
     
 
                                                                               
           
Total automobile exposure (1)
  $ 4,718       19.0 %   $ 4,858       19.5 %   $ 5,008       20.3 %   $ 4,979       20.6 %   $ 4,919       21.1 %
     
 
                                                                               
By Business Segment (2)
                                                                               
Regional Banking:
                                                                               
Central Ohio
  $ 3,224       13.0 %   $ 3,146       12.6 %   $ 3,112       12.6 %   $ 3,097       12.8 %   $ 3,029       13.0 %
Northern Ohio
    2,952       11.9       2,916       11.7       2,910       11.8       2,858       11.8       2,810       12.1  
Southern Ohio / Kentucky
    2,065       8.3       2,105       8.4       2,023       8.2       1,895       7.8       1,826       7.8  
West Michigan
    2,370       9.6       2,386       9.6       2,336       9.5       2,272       9.4       2,236       9.6  
East Michigan
    1,531       6.2       1,496       6.0       1,476       6.0       1,430       5.9       1,388       6.0  
West Virginia
    949       3.8       919       3.7       887       3.6       882       3.7       867       3.7  
Indiana
    967       3.9       1,046       4.2       997       4.0       962       4.0       863       3.7  
Mortgage and equipment leasing groups
    3,505       14.1       3,449       13.8       3,331       13.5       3,197       13.3       2,979       12.8  
           
Regional Banking
    17,563       70.8       17,463       70.0       17,072       69.2       16,593       68.7       15,998       68.7  
Dealer Sales (3)
    5,492       22.2       5,761       23.1       5,956       24.1       5,920       24.5       5,765       24.7  
Private Financial and Capital Markets Group
    1,715       7.0       1,697       6.9       1,645       6.7       1,635       6.8       1,542       6.6  
Treasury / Other
                                                           
           
Total credit exposure
  $ 24,770       100.0 %   $ 24,921       100.0 %   $ 24,673       100.0 %   $ 24,148       100.0 %   $ 23,305       100.0 %
     
(1)   Sum of automobile loans and leases and automotive operating lease assets.
 
(2)   Prior period amounts have been reclassified to conform to the current period business segment structure.
 
(3)   Includes operating lease inventory.

49


Non-Performing Assets (NPAs) and Past Due Loans and Leases
(This section should be read in conjunction with Significant Factor 4.)
     Table 12 reflects period-end NPAs and past due loans and leases detail for each of the last five quarters.
Table 12 — Non-Performing Assets and Past Due Loans and Leases
                                         
    2005   2004
(in thousands of dollars)   September 30,   June 30,   March 31,   December 31,   September 30,
               
Non-accrual loans and leases:
                                       
Middle market commercial and industrial
  $ 25,431     $ 26,856     $ 16,993     $ 24,179     $ 20,098  
Middle market commercial real estate
    13,073       15,331       6,682       4,582       14,717  
Small business commercial and industrial and commercial real estate
    26,098       19,788       16,387       14,601       12,087  
Residential mortgage
    16,402       14,137       12,498       13,545       13,197  
Home equity
    8,705       7,748       7,333       7,055       7,685  
               
Total non-performing loans and leases
    89,709       83,860       59,893       63,962       67,784  
 
                                       
Other real estate, net:
                                       
Residential
    11,182       10,758       10,571       8,762       8,840  
Commercial (1)
    909       2,800       2,839       35,844       3,852  
               
Total other real estate, net
    12,091       13,558       13,410       44,606       12,692  
               
Total non-performing assets
  $ 101,800     $ 97,418     $ 73,303     $ 108,568     $ 80,476  
         
 
                                       
Non-performing loans and leases as a % of total loans and leases
    0.37 %     0.34 %     0.25 %     0.27 %     0.30 %
Non-performing assets as a % of total loans and leases and other real estate
    0.42       0.40       0.30       0.46       0.36  
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Non-performing loans and leases (NPLs)
    283       304       441       424       417  
Non-performing assets (NPAs)
    249       262       361       250       351  
 
                                       
Total allowances for credit losses (ACL) as % of:
                                       
Non-performing loans and leases
    326       349       494       476       461  
Non-performing assets
    287       300       404       280       389  
 
                                       
Accruing loans and leases past due 90 days or more
  $ 50,780     $ 53,371     $ 50,086     $ 54,283     $ 53,456  
Accruing loans and leases past due 90 days or more as a percent of total loans and leases
    0.21 %     0.22 %     0.21 %     0.23 %     0.24 %
(1)   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 first quarter of 2005.
     NPAs were $101.8 million at September 30, 2005, and represented only 0.42% of related assets, up $21.3 million from $80.5 million, or 0.36%, at the end of the year-ago quarter and up $4.4 million from $97.4 million, or 0.40%, at June 30, 2005. Non-performing loans and leases (NPLs), which exclude OREO, were $89.7 million at September 30, 2005, up $21.9 million from the year-earlier period and $5.8 million from the end of the second quarter. Expressed as a percent of total loans and leases, NPLs remained at low levels and were 0.37% of total loans and leases at September 30, 2005, up from 0.30% a year earlier and from 0.34% at June 30, 2005.
     The over 90-day delinquent, but still accruing, ratio was 0.21% at September 30, 2005, down from 0.24% at the end of the year-ago quarter, and little changed from 0.22% at June 30, 2005.

50


Non-Performing Assets Activity
Table 13 — Non-Performing Asset Activity
                                         
    2005   2004
(in thousands of dollars)   Third   Second   First   Fourth   Third
               
Non-performing assets, beginning of period
  $ 97,418     $ 73,303     $ 108,568     $ 80,476     $ 74,696  
New non-performing assets (1)
    37,570       47,420       33,607       61,684       22,740  
Returns to accruing status
    (231 )     (250 )     (3,838 )     (2,248 )      
Loan and lease losses
    (5,897 )     (6,578 )     (17,281 )     (8,578 )     (5,424 )
Payments
    (21,203 )     (11,925 )     (10,404 )     (8,829 )     (10,202 )
Sales (1)
    (5,857 )     (4,552 )     (37,349 )     (13,937 )     (1,334 )
               
Non-performing assets, end of period
  $ 101,800     $ 97,418     $ 73,303     $ 108,568     $ 80,476  
         
(1)   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, 3, and 4, and the Credit Risk section.)
     Since the 2004 first quarter, the Company has maintained 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).
     The September 30, 2005, ALLL was $253.9 million, down from $282.7 million a year earlier and $254.8 million at June 30, 2005. Expressed as a percent of period-end loans and leases, the ALLL ratio at September 30, 2005, was 1.04%, down from 1.25% a year ago reflecting the improvement in economic indicators, the change in the mix of the loan portfolio to lower-risk residential mortgages, and the reduction of specific reserves related to improved or resolved individual problem commercial credits. Although the ALLL ratio was unchanged from the 2005 second quarter, the component mix changed with a 2 basis point decline in both the economic and specific reserves, offset by a 4 basis point increase in the transaction reserve.
     The ALLL as a percent of NPAs was 249% at September 30, 2005, down from 351% a year ago, and 262% at June 30, 2005.
     At September 30, 2005, the AULC was $38.1 million, up from $30.0 million at the end of the year-ago quarter and from $37.5 million at June 30, 2005. At June 30, 2005, $6.3 million of the economic reserve was reclassified to the AULC.
     On a combined basis, the ACL as a percent of total loans and leases was 1.19% at September 30, 2005, down from 1.38% a year earlier and unchanged from the end of last quarter. The ACL as a percent of NPAs was 287% at September 30, 2005, down from 389% a year earlier and 300% at June 30, 2005.
     Tables 14 and 15 reflect activity in the ALLL and AULC for each of the last five quarters and for the nine months ended September 30, 2005 and 2004.

51


Table 14 — Quarterly Credit Reserves Analysis
                                         
    2005   2004
(in thousands of dollars)   Third   Second   First   Fourth   Third
               
Allowance for loan and lease losses, beginning of period
  $ 254,784     $ 264,390     $ 271,211     $ 282,650     $ 286,935  
 
                                       
Loan and lease losses
    (25,830 )     (25,733 )     (37,213 )     (31,737 )     (26,366 )
Recoveries of loans previously charged off
    7,877       9,469       8,941       10,824       9,886  
               
Net loan and lease losses
    (17,953 )     (16,264 )     (28,272 )     (20,913 )     (16,480 )
               
Provision for loan and lease losses
    17,112       13,247       21,451       9,474       12,971  
 
                                       
Economic reserve transfer
          (6,253 )                  
Allowance of assets sold and securitized
          (336 )                 (776 )
               
Allowance for loan and lease losses, end of period
  $ 253,943     $ 254,784     $ 264,390     $ 271,211     $ 282,650  
         
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 37,511     $ 31,610     $ 33,187     $ 30,007     $ 31,193  
 
                                       
Provision for unfunded loan commitments and letters of credit losses
    587       (352 )     (1,577 )     3,180       (1,186 )
Economic reserve transfer
          6,253                    
               
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 38,098     $ 37,511     $ 31,610     $ 33,187     $ 30,007  
         
Total allowances for credit losses
  $ 292,041     $ 292,295     $ 296,000     $ 304,398     $ 312,657  
         
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Transaction reserve
    0.81 %     0.77 %     0.81 %     0.78 %     0.84 %
Economic reserve
    0.20       0.22       0.27       0.32       0.33  
Specific reserve
    0.03       0.05       0.01       0.05       0.08  
               
Total loans and leases
    1.04 %     1.04 %     1.09 %     1.15 %     1.25 %
 
                                       
Total allowances for credit losses (ACL) as % of total loans and leases
    1.19 %     1.19 %     1.22 %     1.29 %     1.38 %

52


Table 15 — Year to Date Credit Reserves Analysis
                 
    Nine Months Ended September 30,
(in thousands of dollars)   2005   2004
     
Allowance for loan and lease losses, beginning of period
  $ 271,211     $ 299,732  
 
               
Loan and lease losses
    (88,776 )     (94,378 )
 
               
Recoveries of loans previously charged off
    26,287       36,756  
     
 
               
Net loan and lease losses
    (62,489 )     (57,622 )
 
Provision for loan and lease losses
    51,810       47,923  
Economic reserve transfer
    (6,253 )      
Allowance of assets sold and securitized
    (336 )     (7,383 )
     
Allowance for loan and lease losses, end of period
  $ 253,943     $ 282,650  
 
 
               
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 33,187     $ 35,522  
 
               
Provision for unfunded loan commitments and letters of credit losses
    (1,342 )     (5,515 )
Economic reserve transfer
    6,253        
 
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 38,098     $ 30,007  
 
Total allowances for credit losses
  $ 292,041     $ 312,657  
 

53


Net Loan and Lease Charge-Offs
(This section should be read in conjunction with Significant Factors 3 and 4.)
     Tables 16 and 17 reflect net loan and lease charge-off detail for each of the last five quarters and for the nine months ended September 30, 2005 and 2004:
Table 16 — Quarterly Net Charge-Off Analysis
                                         
    2005   2004
(in thousands of dollars)   Third   Second   First   Fourth   Third
               
Net charge-offs by loan and lease type:
                                       
Commercial:
                                       
Middle market commercial and industrial
  $ (1,082 )   $ 1,312     $ 14,092     $ 1,239     $ (102 )
Construction
    495       (134 )     (51 )     704       (19 )
Commercial
    1,779       2,269       (152 )     1,834       1,490  
               
Middle market commercial real estate
    2,274       2,135       (203 )     2,538       1,471  
               
Small business commercial and industrial and commercial real estate
    3,062       2,141       2,283       1,386       1,195  
               
Total commercial
    4,254       5,588       16,172       5,163       2,564  
               
Consumer:
                                       
Automobile loans
    3,895       1,664       3,216       4,406       5,142  
Automobile leases
    3,105       2,123       3,014       3,104       2,415  
               
Automobile loans and leases
    7,000       3,787       6,230       7,510       7,557  
Home equity
    4,093       5,065       3,963       5,346       4,259  
Residential mortgage
    522       430       439       608       534  
Other loans
    2,084       1,394       1,468       2,286       1,566  
               
Total consumer
    13,699       10,676       12,100       15,750       13,916  
               
Total net charge-offs
  $ 17,953     $ 16,264     $ 28,272     $ 20,913     $ 16,480  
         
 
                                       
Net charge-offs — annualized percentages:
                                       
Commercial:
                                       
Middle market commercial and industrial
    (0.09 )%     0.11 %     1.20 %     0.11 %     (0.01) %
Construction
    0.12       (0.03 )     (0.01 )     0.18       (0.01 )
Commercial
    0.37       0.48       (0.03 )     0.40       0.31  
               
Middle market commercial real estate
    0.25       0.24       (0.02 )     0.30       0.17  
               
Small business commercial and industrial and commercial real estate
    0.54       0.38       0.42       0.26       0.23  
               
Total commercial
    0.16       0.21       0.62       0.21       0.10  
               
Consumer:
                                       
Automobile loans
    0.75       0.32       0.64       0.92       1.11  
Automobile leases
    0.51       0.34       0.49       0.52       0.43  
               
Automobile loans and leases
    0.62       0.33       0.56       0.70       0.74  
Home equity
    0.35       0.44       0.35       0.48       0.39  
Residential mortgage
    0.05       0.04       0.04       0.07       0.06  
Other loans
    1.64       1.14       1.22       1.91       1.36  
               
Total consumer
    0.40       0.31       0.36       0.49       0.45  
               
Net charge-offs as a % of average loans
    0.29 %     0.27 %     0.47 %     0.36 %     0.30 %
         

54


Table 17 — Year to Date Net Charge-Off Analysis
                 
    Nine Months Ended September 30,
(in thousands of dollars)   2005   2004
     
Net charge-offs by loan and lease type:
               
Commercial:
               
Middle market commercial and industrial
  $ 14,322     $ 681  
Construction
    310       1,761  
Commercial
    3,896       3,672  
     
Middle market commercial real estate
    4,206       5,433  
     
Small business commercial and industrial and commercial real estate
    7,486       4,180  
     
Total commercial
    26,014       10,294  
     
Consumer:
               
Automobile loans
    8,775       24,168  
Automobile leases
    8,242       7,733  
     
Automobile loans and leases
    17,017       31,901  
Home equity
    13,121       9,728  
Residential mortgage
    1,391       1,152  
Other loans
    4,946       4,547  
     
Total consumer
    36,475       47,328  
     
Total net charge-offs
  $ 62,489     $ 57,622  
 
 
Net charge-offs — annualized percentages:
               
Commercial:
               
Middle market commercial and industrial
    0.40 %     0.02 %
Construction
    0.02       0.17  
Commercial
    0.27       0.26  
     
Middle market commercial real estate
    0.16       0.22  
     
Small business commercial and industrial and commercial real estate
    0.45       0.28  
     
Total commercial
    0.33       0.14  
     
Consumer:
               
Automobile loans
    0.57       1.34  
Automobile leases
    0.45       0.48  
     
Automobile loans and leases
    0.50       0.94  
Home equity
    0.38       0.32  
Residential mortgage
    0.05       0.05  
Other loans
    1.34       1.38  
     
Total consumer
    0.36       0.52  
     
Net charge-offs as a % of average loans
    0.34 %     0.35 %
 

55


2005 Third Quarter versus 2004 Third Quarter and 2005 Second Quarter
     Total net charge-offs for the 2005 third quarter were $18.0 million, or an annualized 0.29% of average total loans and leases. This was up from $16.5 million, or 0.30%, in the year-ago quarter and up from $16.3 million, or an annualized 0.27%, of average total loans and leases in the 2005 second quarter.
     Total commercial net charge-offs in the third quarter were $4.3 million, or an annualized 0.16%, up from $2.6 million, or an annualized 0.10%, in the year-ago quarter, driven primarily by higher small business C&I and CRE net charge-offs. Total small business net charge-offs in the 2005 third quarter were $3.1 million, or an annualized 0.54% of related loans, up from $1.2 million, or an annualized 0.23% in the year-ago quarter. Current period total commercial net charge-offs were down from $5.6 million, or an annualized 0.21%, in the prior quarter.
     Total consumer net charge-offs in the current quarter were $13.7 million, or an annualized 0.40% of related loans. This compared with $13.9 million, or 0.45%, in the year-ago quarter. The decline from the year-ago quarter reflected both lower automobile loan and lease net charge-offs and lower home equity net charge-offs. Total automobile loan and lease net charge-offs in the 2005 third quarter were $7.0 million, or an annualized 0.62% of related loans and leases, down from $7.6 million, or an annualized 0.74%, in the year-ago quarter. Home equity net charge-offs in the current quarter were $4.1 million, or an annualized 0.35% of related loans, down slightly from $4.3 million, or 0.39%, in the year-ago quarter. Compared with the 2005 second quarter, total consumer net charge-offs increased $3.0 million, primarily reflecting a $3.2 million increase in automobile loan and lease net charge-offs from the second quarter’s low levels, partially offset by a $1.0 million decrease in home equity loan net charge-offs.
2005 First Nine Months versus 2004 First Nine Months
     Total net charge-offs for the first nine months of 2005 were $62.5 million, or an annualized 0.34% of average total loans and leases. While the dollar amount of net charge-offs increased 8% from the comparable year-ago period, on a relative basis, net charge-offs declined slightly from the annualized 0.35% ratio a year ago.
     Total commercial net charge-offs in the first nine-month period of 2005 were $26.0 million, or an annualized 0.33%, up from $10.3 million, or 0.14%, in the year-ago period, which included a $9.7 million one-time recovery on a previously charged-off loan.
     Total consumer net charge-offs in the current nine-month period were $36.5 million, or an annualized 0.36% of related loans, down from $47.3 million, or 0.52%, in the comparable year-ago period. The decline from the year-ago period primarily reflected lower automobile loan and lease net charge-offs due to the sales of automobile loans in the first half of 2004, partially offset by higher home equity net charge-offs. Total automobile loan and lease net charge-offs in the 2005 nine-month period were $17.0 million, or an annualized 0.50% of related loans and leases, down 47% from $31.9 million, or 0.94%, in the year-ago nine-month period. Home equity net charge-offs in the current nine-month period were $13.1 million, or an annualized 0.38% of related loans, up from $9.7 million, or 0.32%, in the year-ago period.
MARKET RISK
     Market risk represents the risk of loss due to changes in the market values of assets and liabilities, as well as the risk of decreases in the Company’s net income due to changes in interest rates. 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 from changes in relationships between market interest rates and the yields on assets and rates on liabilities, including the impact of embedded options.

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     Management seeks to minimize the impact of changing interest rates on net interest income and the fair values of assets and liabilities. The board of directors establishes broad policies regarding interest rate, market, and liquidity risk. The Market Risk Committee (MRC) establishes specific operating guidelines within the parameters of the board of directors’ policies.
     Interest rate risk management is a dynamic process that encompasses monitoring loan and deposit flows and 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 risk to ensure compliance with risk tolerances approved by the board of directors.
     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 non-interest income, these portfolios are included in the interest rate 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 and asset-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, with which all other scenarios are compared, is based on forward 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 September 30, 2005, June 30, 2005, and December 31, 2004. All of the positions were well within the board of directors’ policy limits .
Table 18 — 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 %
 
September 30, 2005
    -1.7 %     -0.6 %     +0.4 %     +0.7 %
June 30, 2005
    -2.4 %     -0.8 %     +0.4 %     +0.7 %
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.

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Table 19 — 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 %
 
September 30, 2005
    -1.3 %     +0.4 %     -2.0 %     -4.9 %
June 30, 2005
    -3.0 %     -0.5 %     -1.6 %     -4.0 %
December 31, 2004
    -3.0 %     -0.5 %     -1.5 %     -4.0 %
Lease Residual Risk
(This section should be read in conjunction 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 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.
     As of September 30, 2005, three distinct residual value insurance policies were in place to address the residual risk in the portfolio. One residual value insurance policy covered all vehicles leased between October 1, 2000 and April 30, 2002 and had a total payment cap of $50 million. Any losses above the cap result in additional operating lease depreciation expense. It is Management’s assessment that the $50 million cap remains sufficient to cover any expected losses. A second residual insurance policy covers all originations from May 2002 through June 2005, and does not have a cap. A third policy, similar in structure to the referenced second policy, went into effect July 1, 2005, and covers all originations for a period of one year.
Price Risk
     Price risk is risk to earnings or capital arising from changes in the value of financial instruments subject to mark-to-market adjustments. This risk arises from market-making, dealing, and position taking in interest-rate, foreign exchange, and equity markets as well as loans held for sale and loan servicing assets. 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 maximum loss positions within a quarter.
LIQUIDITY RISK
     Liquidity risk is the current and prospective risk to earnings or capital arising from a bank’s inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. 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. (See Liquidity section in the Company’s 2004 Form 10-K for additional discussion.)
     The primary source of funding for the Bank is core deposits from retail and commercial customers (see Table 20). As of September 30, 2005, core deposits totaled $17.3 billion, and represented 77% of total deposits. This compared with $16.7 billion, or 83%, of total deposits a year earlier. Most of the growth in core deposits was attributable to growth in non-interest bearing demand deposits and retail certificates of deposit.

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Table 20 — Deposit Composition
                                                                                 
    2005     2004  
(in millions of dollars)   September 30,     June 30,     March 31,     December 31,     September 30,  
     
By Type
                                                                               
Demand deposits — non-interest bearing
  $ 3,362       15.0 %   $ 3,221       14.4 %   $ 3,186       14.6 %   $ 3,392       16.3 %   $ 3,264       16.2 %
Demand deposits — interest bearing
    7,481       33.5       7,675       34.4       7,849       36.1       7,786       37.5       7,472       37.2  
Savings and other domestic time deposits
    3,186       14.2       3,341       15.0       3,468       15.9       3,503       16.9       3,571       17.8  
Retail certificates of deposit
    3,281       14.7       3,033       13.5       2,555       11.7       2,467       11.9       2,441       12.1  
     
Total core deposits
    17,310       77.4       17,270       77.3       17,058       78.3       17,148       82.6       16,748       83.3  
Domestic time deposits of $100,000 or more
    1,357       6.1       1,177       5.3       1,311       6.0       1,082       5.2       998       5.0  
Brokered deposits and negotiable CDs
    3,228       14.5       3,452       15.5       3,000       13.8       2,097       10.1       1,896       9.4  
Foreign time deposits
    454       2.0       432       1.9       402       1.9       441       2.1       467       2.3  
     
Total deposits
  $ 22,349       100.0 %   $ 22,331       100.0 %   $ 21,771       100.0 %   $ 20,768       100.0 %   $ 20,109       100.0 %
     
 
                                                                               
Total core deposits:
                                                                               
Commercial
  $ 5,425       31.3 %   $ 5,399       31.3 %   $ 5,218       30.6 %   $ 5,294       30.9 %   $ 5,228       31.2 %
Personal
    11,885       68.7       11,871       68.7       11,840       69.4       11,854       69.1       11,520       68.8  
     
Total core deposits
  $ 17,310       100.0 %   $ 17,270       100.0 %   $ 17,058       100.0 %   $ 17,148       100.0 %   $ 16,748       100.0 %
     
 
                                                                               
By Business Segment (1)
                                                                               
Regional Banking:
                                                                               
Central Ohio
  $ 4,434       19.8 %   $ 4,646       20.8 %   $ 4,610       21.2 %   $ 4,501       21.7 %   $ 4,227       21.0 %
Northern Ohio
    4,036       18.1       3,964       17.8       3,930       18.1       4,068       19.6       4,012       20.0  
Southern Ohio / Kentucky
    1,915       8.6       1,824       8.2       1,774       8.1       1,742       8.4       1,600       8.0  
West Michigan
    2,784       12.5       2,600       11.6       2,685       12.3       2,644       12.7       2,699       13.4  
East Michigan
    2,311       10.3       2,241       10.0       2,299       10.6       2,222       10.7       2,166       10.8  
West Virginia
    1,428       6.4       1,412       6.3       1,369       6.3       1,375       6.6       1,381       6.9  
Indiana
    771       3.4       772       3.5       718       3.3       664       3.2       665       3.3  
Mortgage and equipment leasing groups
    177       0.8       184       0.8       170       0.8       195       0.9       200       1.0  
     
Regional Banking
    17,856       79.9       17,643       79.0       17,555       80.7       17,411       83.8       16,950       84.4  
Dealer Sales
    72       0.3       68       0.3       69       0.3       75       0.4       69       0.3  
Private Financial and Capital Markets Group
    1,186       5.3       1,159       5.2       1,139       5.2       1,176       5.7       1,127       5.6  
Treasury / Other (2)
    3,235       14.5       3,461       15.5       3,008       13.8       2,106       10.1       1,963       9.7  
     
Total deposits
  $ 22,349       100.0 %   $ 22,331       100.0 %   $ 21,771       100.0 %   $ 20,768       100.0 %   $ 20,109       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.

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            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.
On October 3, 2005, Fitch Ratings affirmed their current ratings and changed the outlook to stable from negative. Management believes that sufficient liquidity exists to meet the funding needs of the Bank and the parent company. Credit ratings as of October 3, 2005, for the parent company and the Bank were:
Table 21 — Credit Rating Agency Ratings
                                 
    October 3, 2005
    Senior Unsecured Notes     Subordinated 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     Stable
 
                               
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     Stable
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 47% of standby letters of credit are collateralized and most are expected to expire without being drawn upon. There were $959 million, $945 million, and $959 million of outstanding standby letters of credit at September 30, 2005, December 31, 2004, and September 30, 2004, respectively. The carrying amount of deferred revenue related to standby letters of credit at September 30, 2005, was $3.7 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 September 30, 2005, commitments to sell residential real estate loans totaled $566.8 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 12 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

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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.
            Shareholders’ equity totaled $2.6 billion at September 30, 2005. This balance represented an $85 million increase from December 31, 2004. The growth in shareholders’ equity resulted from the retention of net income after dividends declared to shareholders, netting to $165.9 million, and $36.5 million as a result of stock options exercised, partially offset by $108.6 million reflecting the impact of shares repurchased and by a decrease in accumulated other comprehensive income of $10.9 million. The decline in accumulated other comprehensive income resulted from an decrease in the market value of securities available for sale at September 30, 2005, compared with December 31, 2004.
            As of September 30, 2005, the Company had unused authority to repurchase up to 3.1 million common shares under an April 27, 2004, share repurchase authorization of 7.5 million common shares (the 2004 Repurchase Program). During the 2005 third quarter, the Company repurchased 2.6 million common shares having a total value of $64.4 million.
            On October 18, 2005, the Company announced that the board of directors authorized a new program for the repurchase of up to 15 million shares (the 2005 Repurchase Program). The 2005 Repurchase Program expires upon the purchase of the maximum number of shares authorized under the program. The 2004 Repurchase Program, with 3.1 million shares remaining, was cancelled and replaced by the 2005 Repurchase Program. The Company expects to repurchase the shares from time-to-time in the open market or through privately negotiated transactions depending on market conditions.
            On July 19, 2005, the board of directors declared a quarterly cash dividend on its common stock of $0.215 per common share. The dividend was payable October 1, 2005, to shareholders of record on September 16, 2005. On October 18, 2005, the board of directors declared a quarterly cash dividend on its common stock of $0.215 per common share payable January 3, 2006, to shareholders of record on December 16, 2005.
      &nbs