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, 2007
Commission File Number 0-2525
Huntington Bancshares Incorporated
     
Maryland   31-0724920
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [x]   Accelerated filer [ ]   Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [x] No
There were 365,898,439 shares of Registrant’s common stock ($0.01 par value) outstanding on September 30, 2007.

 


 

Huntington Bancshares Incorporated
INDEX
             
Part I. Financial Information        
 
           
  Financial Statements (Unaudited)        
 
           
 
  Condensed Consolidated Balance Sheets at September 30, 2007, December 31, 2006, and September 30, 2006     59  
 
           
 
  Condensed Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2007 and 2006     60  
 
           
 
  Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine-month periods ended September 30, 2007 and 2006     61  
 
           
 
  Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2007 and 2006     62  
 
           
 
  Notes to Unaudited Condensed Consolidated Financial Statements     63  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     3  
 
           
  Quantitative and Qualitative Disclosures about Market Risk     80  
 
           
  Controls and Procedures     80  
 
           
  Controls and Procedures     80  
 
           
Part II. Other Information        
 
           
  Exhibits     81  
 
           
        82  
  EX-10.5
  EX-10.6
  EX-10.7
  EX-12.1
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2

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Part 1. Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
     Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in 1866, we provide full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, brokerage services, reinsurance of private mortgage insurance, reinsurance of credit life and disability insurance, and other insurance and financial products and services. Our banking offices are located in Ohio, Michigan, Indiana, Pennsylvania, West Virginia, and Kentucky. Selected financial service activities are also conducted in other states including: Dealer Sales offices in Arizona, Florida, Georgia, Nevada, New Jersey, New York, North Carolina, South Carolina, and Tennessee; Private Financial and Capital Markets Group offices in Florida; and Mortgage Banking offices in Maryland and New Jersey. Sky Insurance offers retail and commercial insurance agency services, through offices in Ohio, Pennsylvania, and Indiana. International banking services are available through the headquarters office in Columbus and a limited purpose office located in both the Cayman Islands and Hong Kong.
     The following discussion and analysis provides you with information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows and should be read in conjunction with the financial statements, notes, and other information contained in this report. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) appearing in our 2006 Annual Report on Form 10-K (2006 Form 10-K), as updated by the information contained in this report, should be read in conjunction with this discussion and analysis.
     Our discussion is divided into key segments:
    Introduction - Provides overview comments on important matters including risk factors, acquisitions, and other items. These are essential for understanding our performance and prospects.
 
    Discussion of Results of Operations - Reviews financial performance from a consolidated company perspective. It also includes a Significant Items Influencing Financial Performance Comparisons section that summarizes key issues helpful for understanding performance trends. Key consolidated balance sheet and income statement trends are also discussed in this section.
 
    Risk Management and Capital - Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we fund ourselves, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements.
 
    Lines of Business Discussion - Provides an overview of financial performance for each of our major lines of business and provides additional discussion of trends underlying consolidated financial performance.
Forward-Looking Statements
     This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, and projections, and including statements about the benefits of the merger between Huntington and Sky Financial, which are subject to numerous assumptions, risks, and uncertainties.
     Actual results could differ materially from those contained or implied by such statements for a variety of factors including: the expected merger efficiencies and any revenue synergies from the merger may not be fully realized within the expected timeframes; disruption from the merger may make it more difficult to maintain relationships with clients, associates, or suppliers; changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of other business strategies; the nature, extent, and timing of governmental actions and reforms; and extended disruption of vital infrastructure. Additional factors that could cause results to differ materially

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from those described above can be found in our 2006 Annual Report on Form 10-K, and documents subsequently filed with the Securities and Exchange Commission (SEC).
     All forward-looking statements speak only as of the date they are made. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws.
Risk Factors
     We, like other financial companies, are subject to a number of risks, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk , which is the risk 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 our financial condition or results of operation, (3) liquidity risk , which is the risk that we, or the Bank, will have insufficient cash or access to cash to meet operating needs, and (4) operational risk , which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events . Refer to the ‘Risk Management and Capital’ section for additional information regarding risk factors. Additionally, more information on risk is set forth under the heading “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, and subsequent filings with the SEC.
Critical Accounting Policies and Use of Significant Estimates
     Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our financial statements. Note 1 of the Notes to Consolidated Financial Statements included in our 2006 Form 10-K as supplemented by this report lists significant accounting policies we use in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors necessary for an understanding and evaluation of our company, financial position, results of operations, and cash flows.
     An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce actual results that differ from when those estimates were made.
Acquisition of Sky Financial
     The merger with Sky Financial Group Inc. (Sky Financial) was completed on July 1, 2007. At the time of acquisition, Sky Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion. Sky Financial results were fully included in our consolidated results for the full 2007 third quarter, and will impact all quarters thereafter. Additionally, during the 2007 third quarter, Sky Bank and Sky Trust, National Association (“Sky Trust”), merged into the Bank and systems integration was completed. As a result, performance comparisons of 2007 third quarter and 2007 nine-month performance to prior periods are affected as Sky Financial results were not included in the prior periods. Comparisons of the 2007 third quarter and 2007 nine-month performance compared with prior periods are impacted as follows:
    Increased the absolute level of reported average balance sheet, revenue, expense, and the absolute level of certain credit quality results (e.g., amount of net charge-offs).
 
    Increased the absolute level of reported non-interest expense items because of costs incurred as part of merger integration activities, most notably employee retention bonuses, outside programming services related to systems conversions, occupancy expenses, and marketing expenses related to customer retention initiatives. These net merger costs were $32.3 million in the 2007 third quarter.
     Given the significant impact of the merger on reported 2007 results, we believe that an understanding of the impacts of the merger is necessary to understand better underlying performance trends. When comparing post-merger period results to premerger periods, we use the following terms when discussing financial performance:
    “Merger related” refers to amounts and percentage changes representing the impact attributable to the merger.

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    “Merger costs” represent non-interest expenses primarily associated with merger integration activities.
 
    “Non-merger related” refers to performance not attributable to the merger and include:
    “Merger efficiencies”, which represent non-interest expense reductions realized as a result of the merger.
     The following methodology has been implemented to estimate the approximate effect of the Sky Financial merger used to determine “merger-related” impacts.
Balance Sheet Items
For loans and leases, as well as total deposits, Sky Financial’s balances as of June 30, 2007, adjusted for purchase accounting adjustments, and transfers of loans to loans held-for-sale, are used in the comparison. To estimate the impact on 2007 third quarter average balances, it was assumed that the June 30, 2007 balances, as adjusted, remained constant throughout the 2007 third quarter and will remain constant in all subsequent periods.
Income Statement Items
For income statement line items, Sky Financial’s actual results for the first six months of 2007, adjusted for the impact of unusual items and purchase accounting adjustments, were determined. This six-month adjusted amount was divided by two to estimate a quarterly amount. This results in an approximate quarterly impact, as the methodology does not adjust for any unusual items, market related changes, or seasonal factors in Sky Financial’s 2007 six-month results. Nor does it consider any revenue or expense synergies realized since the merger date. This same estimated amount will also be used in all subsequent quarterly reporting periods. The one exception to this methodology of holding the estimated quarterly impact constant relates to the amortization of intangibles expense where the amount is known and is therefore used.
     Certain tables contained within our discussion and analysis provide detail of changes to reported results to quantify the estimated impact of the Sky Financial merger using this methodology.
DISCUSSION OF RESULTS OF OPERATIONS
     This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Items Influencing Financial Performance Comparisons section that summarizes key issues important for a complete understanding of performance trends. Key consolidated balance sheet and income statement trends are discussed in this section. All earnings per share data are reported on a diluted basis. For additional insight on financial performance, please read this section in conjunction with the Lines of Business Discussion.
Summary
     We reported 2007 third quarter net income of $138.2 million and earnings per common share of $0.38. These results compared favorably to net income of $80.5 million and earnings per common share of $0.34 in the 2007 second quarter, but declined from net income of $157.4 million and earnings per common share of $0.65 in the third quarter of 2006. Our year-to-date net income was $314.4 million, or $1.12 per common share, down from net income of $373.5 million, or $1.56 per common share, in the comparable year-ago period. Additionally, comparisons with the prior year are impacted by the benefits for income taxes and balance sheet restructuring charges in the comparable year-ago period. Period-to-period comparisons are significantly impacted by the Sky Financial acquisition, which closed on July 1, 2007. The acquisition solidified our position in Ohio, greatly expanded our presence in the Indianapolis market, and established western Pennsylvania as a new market. Customer reaction has been very positive, and we continue to work to ensure that all of the growth opportunities afforded by the acquisition are realized.
     Expense control was a major highlight for the quarter. Although non-interest expense increased $140.9 million from the prior quarter, $161.3 million of the increase was merger related, either through merger related expenses or increased merger costs. Non-merger related expenses actually declined $20.4 million and represented most of the merger efficiencies that we targeted from the acquisition. We expect to achieve most of the remaining benefit next quarter. Our efficiency

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ratio, which has been a key focal point for us, is approaching our targeted range, and we expect to be within, or very near, that range, once we achieve the remaining targeted merger efficiencies.
     Fee income performance was mixed for the quarter. In addition to the increase in non-interest income that was merger related, non-merger related deposit service charges and other service charges showed very good growth, however, non-merger related trust services, mortgage banking, and brokerage and insurance income were down.
     Net interest income for the third quarter of 2007 increased $156.2 million from the prior quarter. The current quarter included three months of net interest income attributable to the acquisition of Sky Financial, which added $12.8 billion of loans, net of transfers to loans held-for-sale and purchase accounting adjustment, and $12.9 billion of deposits at July 1, 2007. During the current quarter, we saw good growth in non-merger related commercial loans and certain consumer loans, however, average automobile leases continued to shrink, as expected, due to low consumer demand and competitive pricing. Additionally, the lack of growth in non-merger related average home equity loans and average residential real estate loans continued to reflect the softness in the real estate markets. Growth in non-merger related average total deposits was also good during the quarter, driven by strong growth in interest-bearing demand deposits and money market accounts. Our net interest margin was 3.52%, consistent with expectations and up from 3.26% in the second quarter, primarily merger related.
     Consistent with expectations, overall credit quality was stable during the quarter. The allowance for loan and leases losses (ALLL) was 1.14% of total loans, down slightly from 1.15% at June 30, 2007. The ALLL coverage of nonperforming loans (NPLs) improved to 182% at September 30, 2007, from 145% at June 30, 2007, and declined from 189% at December 31, 2006. However, nonperforming assets (NPAs) increased $173.9 million from the prior quarter as we acquired $144.5 million of NPAs from Sky Financial. Additionally, we designated $16.3 million of impaired asset-backed securities as other NPAs. During the quarter, non-merger related NPLs and other-real-estate-owned (OREO) grew $13.0 million. Our outlook remains for NPLs to rise modestly in the 2007 fourth quarter, as there remains pressure on businesses and consumers in our markets.
     Market conditions remain difficult and we do not expect that to change in the near future. We anticipate that the economic environment will continue to be negatively impacted by weakness in residential real estate markets and negative impacts from the on-going challenges in the automotive manufacturing and supplier sector. We expect our greatest impacts to be in our eastern Michigan and northern Ohio markets.
Significant Items
     Certain components of the income statement are naturally subject to more volatility than others. As a result, readers of this report may view such items differently in their assessment of “underlying” or “core” earnings performance compared with their expectations and/or any implications resulting from them on their assessment of future performance trends.
     Therefore, we believe the disclosure of certain “Significant Items” in current and prior period results aids readers of this report in better understanding corporate performance so that they can ascertain for themselves what, if any, items they may wish to include or exclude from their analysis of performance, within the context of determining how that performance differed from their expectations, as well as how, if at all, to adjust their estimates of future performance accordingly.
     To this end, we have adopted a practice of listing as “Significant Items” in our external disclosure documents (including earnings press releases, investor presentations, Forms 10-Q and 10-K) individual and/or particularly volatile items that impact the current period results by $0.01 per share or more. Such “Significant Items” generally fall within one of two categories: timing differences and other items.
Timing Differences
     Part of our regular business activities are by their nature volatile, including capital markets income and sales of loans. While such items may generally be expected to occur within a full year reporting period, they may vary significantly from period to period. Such items are also typically a component of an income statement line item and not, therefore, readily discernable. By specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.

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Other Items
     From time to time an event or transaction might significantly impact revenues, expenses, or taxes in a particular reporting period that are judged to be unusual, short-term in nature, and/or materially outside typically expected performance. Examples would be (1) merger costs, including restructuring charges and asset valuation adjustments, as they typically impact expenses for only a few quarters during the period of transition; (2) changes in an accounting principle; (3) unusual tax assessments or refunds; (4) a large gain/loss on the sale of an asset; (5) outsized commercial loan net charge-offs; and other items deemed significant. By disclosing such items, analysts/investors can better assess how, if at all, to adjust their estimates of future performance.
Provision for Credit Losses
     While the provision for credit losses may vary significantly among periods, and often exceeds $0.01 per share, we typically exclude it from the list of significant items unless, in our view, there is a significant, specific credit (or multiple significant, specific credits) affecting comparability among periods. In determining whether any portion of the provision for credit losses should be included as a significant item, we consider, among other things, that the provision is a major income statement caption rather than a component of another caption and, therefore, the period-to-period variance can be readily determined.
Other Exclusions
     “Significant Items” for any particular period are not intended to be a complete list of items that may significantly impact future periods. A number of factors, including those described in Huntington’s 2006 Annual Report on Form 10-K and other factors described from time to time in Huntington’s other filings with the SEC, could also significantly impact future periods.

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Table 1 — Selected Quarterly Income Statement Data (1), (7)
                                         
    2007     2006  
(in thousands, except per share amounts)   Third     Second     First     Fourth     Third  
     
Interest income
  $ 851,155     $ 542,461     $ 534,949     $ 544,841     $ 538,988  
Interest expense
    441,522       289,070       279,394       286,852       283,675  
     
Net interest income
    409,633       253,391       255,555       257,989       255,313  
Provision for credit losses
    42,007       60,133       29,406       15,744       14,162  
     
Net interest income after provision for credit losses
    367,626       193,258       226,149       242,245       241,151  
     
Service charges on deposit accounts
    78,107       50,017       44,793       48,548       48,718  
Trust services
    33,562       26,764       25,894       23,511       22,490  
Brokerage and insurance income
    28,806       17,199       16,082       14,600       14,697  
Other service charges and fees
    21,045       14,923       13,208       13,784       12,989  
Bank owned life insurance income
    14,847       10,904       10,851       10,804       12,125  
Mortgage banking income
    9,629       7,122       9,351       6,169       8,512  
Securities (losses) gains (2)
    (13,152 )     (5,139 )     104       (15,804 )     (57,332 )
Other income
    31,830       34,403       24,894       38,994       35,711  
     
Total non-interest income
    204,674       156,193       145,177       140,606       97,910  
     
Personnel costs
    202,148       135,191       134,639       137,944       133,823  
Outside data processing and other services
    40,600       25,701       21,814       20,695       18,664  
Net occupancy
    33,334       19,417       19,908       17,279       18,109  
Equipment
    23,290       17,157       18,219       18,151       17,249  
Marketing
    13,186       8,986       7,696       6,207       7,846  
Professional services
    11,273       8,101       6,482       8,958       6,438  
Telecommunications
    7,286       4,577       4,126       4,619       4,818  
Printing and supplies
    4,743       3,672       3,242       3,610       3,416  
Amortization of intangibles
    19,949       2,519       2,520       2,993       2,902  
Other expense
    29,754       19,334       23,426       47,334       29,165  
     
Total non-interest expense
    385,563       244,655       242,072       267,790       242,430  
     
Income before income taxes
    186,737       104,796       129,254       115,061       96,631  
Provision (benefit) for income taxes (3)
    48,535       24,275       33,528       27,346       (60,815 )
     
Net income
  $ 138,202     $ 80,521     $ 95,726     $ 87,715     $ 157,446  
     
Average common shares — diluted
    368,280       239,008       238,754       239,881       240,896  
 
                                       
Per common share
                                       
Net income — diluted
  $ 0.38     $ 0.34     $ 0.40     $ 0.37     $ 0.65  
Cash dividends declared
    0.265       0.265       0.265       0.250       0.250  
 
                                       
Return on average total assets
    1.02 %     0.92 %     1.11 %     0.98 %     1.75 %
Return on average total shareholders’ equity
    8.8       10.6       12.9       11.3       21.0  
Return on average tangible shareholder’s equity (4)
    20.9       13.6       16.5       14.5       27.1  
Net interest margin (5)
    3.52       3.26       3.36       3.28       3.22  
Efficiency ratio (6)
    57.7       57.8       59.2       63.3       57.8  
Effective tax rate (3)
    26.0       23.2       25.9       23.8       (62.9 )
 
                                       
Revenue — fully taxable equivalent (FTE)
                                       
Net interest income
  $ 409,633     $ 253,391     $ 255,555     $ 257,989     $ 255,313  
FTE adjustment
    5,712       4,127       4,047       4,115       4,090  
     
Net interest income (5)
    415,345       257,518       259,602       262,104       259,403  
Non-interest income
    204,674       156,193       145,177       140,606       97,910  
     
Total revenue (5)
  $ 620,019     $ 413,711     $ 404,779     $ 402,710     $ 357,313  
     
 
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to the ‘Significant Items Influencing Financial Performance Comparisons’ for additional discussion regarding these key factors.
 
(2)   Includes $57.5 million of securities impairment losses for the 2006 third quarter.
 
(3)   The third quarter of 2006 includes $84.5 million benefit reflecting the resolution of a federal income tax audit of tax years 2002 and 2003, as well as the recognition of federal tax loss carry backs.
 
(4)   Net income less expense of amortization of intangibles (net of tax) for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill.
 
(5)   On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(6)   Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses).
 
(7)   On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances presented include the impact of the acquisition from that date.

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Table 2 — Selected Year to Date Income Statement Data (1), (7)
                                 
    Nine Months Ended September 30,     Change  
(in thousands, except per share amounts)   2007     2006     Amount     Percent  
     
Interest income
  $ 1,928,565     $ 1,525,678     $ 402,887       26.4 %
Interest expense
    1,009,986       764,490       245,496       32.1  
     
Net interest income
    918,579       761,188       157,391       20.7  
Provision for credit losses
    131,546       49,447       82,099       N.M.  
     
Net interest income after provision for credit losses
    787,033       711,741       75,292       10.6  
     
Service charges on deposit accounts
    172,917       137,165       35,752       26.1  
Trust services
    86,220       66,444       19,776       29.8  
Brokerage and insurance income
    62,087       44,235       17,852       40.4  
Other service charges and fees
    49,176       37,570       11,606       30.9  
Bank owned life insurance income
    36,602       32,971       3,631       11.0  
Mortgage banking income
    26,102       35,322       (9,220 )     (26.1 )
Securities losses (2)
    (18,187 )     (57,387 )     39,200       (68.3 )
Other income
    91,127       124,143       (33,016 )     (26.6 )
     
Total non-interest income
    506,044       420,463       85,581       20.4  
     
Personnel costs
    471,978       403,284       68,694       17.0  
Outside data processing and other services
    88,115       58,084       30,031       51.7  
Net occupancy
    72,659       54,002       18,657       34.5  
Equipment
    58,666       51,761       6,905       13.3  
Marketing
    29,868       25,521       4,347       17.0  
Professional services
    25,856       18,095       7,761       42.9  
Telecommunications
    15,989       14,633       1,356       9.3  
Printing and supplies
    11,657       10,254       1,403       13.7  
Amortization of intangibles
    24,988       6,969       18,019       N.M.  
Other expense
    72,514       90,601       (18,087 )     (20.0 )
     
Total non-interest expense
    872,290       733,204       139,086       19.0  
     
Income before income taxes
    420,787       399,000       21,787       5.5  
Provision for income taxes (3)
    106,338       25,494       80,844       N.M.  
     
Net income
  $ 314,449     $ 373,506     $ (59,057 )     (15.8) %
     
 
                               
Average common shares — diluted
    282,014       239,933       42,081       17.5 %
 
                               
Per common share
                               
Net income per common share — diluted
  $ 1.12     $ 1.56     $ (0.44 )     (28.2) %
Cash dividends declared
    0.795       0.750       0.045       6.0  
 
                               
Return on average total assets
    1.02 %     1.43 %     (0.41 )     (28.7) %
Return on average total shareholders’ equity
    10.3       17.2       (6.9 )     (40.1 )
Return on average tangible shareholders’ equity (4)
    17.3       21.5       (4.2 )     (19.5 )
Net interest margin (5)
    3.40       3.29       0.11       3.3  
Efficiency ratio (6)
    58.2       58.1       0.1       0.2  
Effective tax rate (3)
    25.3       6.4       18.9       N.M.  
 
                               
Revenue — fully taxable equivalent (FTE)
                               
Net interest income
  $ 918,578     $ 761,188     $ 157,390       20.7 %
FTE adjustment (5)
    13,886       11,910       1,976       16.6  
     
Net interest income
    932,464       773,098       159,366       20.6  
Non-interest income
    506,046       420,463       85,583       20.4  
     
Total revenue
  $ 1,438,510     $ 1,193,561     $ 244,949       20.5 %
     
     
N.M., not a meaningful value.
 
(1)   Comparisons for presented periods are impacted by a number of factors. Refer to the ‘Significant Items Influencing Financial Performance Comparisons’ for additional discussion regarding these key factors.
 
(2)     Includes $57.5 million of securities impairment losses for the 2006 third quarter.
 
(3)     The third quarter of 2006 includes $84.5 million benefit reflecting the resolution of a federal income tax audit of tax years 2002 and 2003, as well as the recognition of federal tax loss carry backs.
 
(4)     Net income less expense of amortization of intangibles (net of tax) for the period divided by average tangible common shareholders’ equity. Average tangible common shareholders’ equity equals average total common shareholders’ equity less average intangible assets and goodwill.
 
(5)     On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
 
(6)   Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains/(losses).
 
(7)   On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances presented include the impact of the acquisition from that date.

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Significant Items Influencing Financial Performance Comparisons
     Earnings comparisons from the beginning of 2006 through the third quarter of 2007 were impacted by a number of significant items summarized below.
  1.   Sky Financial Acquisition. The merger with Sky Financial was completed on July 1, 2007. At the time of acquisition, Sky Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of $12.9 billion. Sky Financial results are reflected in our consolidated results beginning July 1, 2007. The impacts of the affected quarterly and year-to-date reported results compared with premerger reporting periods are as follows:
    Increased the absolute level of reported average balance sheet, revenue, expense, and credit quality results (for example, net charge-offs).
 
    Increased reported non-interest expense items as a result of costs incurred as part of merger integration activities, most notably employee retention bonuses, outside programming services related to systems conversions, and marketing expenses related to customer retention initiatives. These net merger costs were $0.8 million in the 2007 first quarter, $7.6 million in the 2007 second quarter, and $32.3 million in the 2007 third quarter.
  2.   Balance Sheet Restructuring . In third and fourth quarters of 2006, we utilized the excess capital resulting from the third quarter’s significant reduction to federal tax expense (see Item 6 below) to restructure certain under-performing components of our balance sheet. Total securities losses as a result of these actions totaled $73.3 million. The refinancing of Federal Home Loan Bank (FHLB) funding and the sale of mortgage loans resulted in total charges of $4.4 million, resulting in total balance sheet restructuring costs of $77.7 million ($0.21 per common share). Our actions impacted 2006 third and fourth quarter results as follows:
    $57.3 million pretax ($0.16 per common share) negative impact in the 2006 third quarter from securities impairment. Subsequent to the end of the quarter, we initiated a review of our investment securities portfolio. The objective of this review was to reposition the portfolio to optimize performance in light of changing economic conditions and other factors. A total of $2.1 billion of securities, primarily consisting of U.S. Treasury, agency securities, and mortgage-backed securities, as well as certain other asset-backed securities, were identified as other-than-temporarily impaired as a result of this review.
 
    $20.2 million pretax ($13.1 million after tax or $0.05 per common share) negative impact in the 2006 fourth quarter related to costs associated with the completion of the balance sheet restructuring. This consisted of $9.0 million pretax of investment securities losses as well as $6.8 million of additional impairment on certain asset-backed securities not included in the restructuring recognized in the third quarter, and $4.4 million pretax of other balance sheet restructuring expenses, most notably FHLB funding refinancing costs.

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3.   Mortgage servicing rights (MSRs) and related hedging. Included in net market related losses are net losses or gains from our mortgage servicing rights and the related hedging. MSR fair 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. A hedging strategy is used to minimize the impact from MSR fair value changes. However, volatile changes in interest rates can diminish the effectiveness of these hedges. We typically report MSR fair value adjustments net of hedge-related trading activity. Net income included the following net impact of MSR hedging activity (reference Table 11) :
                                         
(in thousands)                                  
    Net     Non-                     Per  
    interest     interest     Pretax     Net     Common  
Period   income     income     income     income     Share  
1Q ‘07
  $     $ (2,018 )   $ (2,018 )   $ (1,312 )   $ (0.01 )
2Q ‘07
    248       (4,998 )     (4,750 )     (3,088 )     (0.01 )
3Q ‘07
    2,357       (6,002 )     (3,645 )     (2,369 )     (0.01 )
 
                             
9 mo. ‘07
  $ 2,605     $ (13,018 )   $ (10,413 )   $ (6,769 )   $ (0.02 )
 
                             
 
                                       
1Q ‘06
  $     $ 4,575 (1)   $ 4,575     $ 2,974     $ 0.01  
2Q ‘06
          1,542       1,542       1,002        
3Q ‘06
    38       (38 )                  
 
                             
9 mo. ‘06
    38       6,079       6,117       3,976       0.02  
 
4Q ‘06
    (2 )     (2,493 )     (2,495 )     (1,622 )     (0.01 )
 
                             
12 mo. ‘06
  $ 36     $ 3,586     $ 3,622     $ 2,354     $ 0.01  
 
                             
 
(1)   Includes $5.1 million related to the positive impact of adopting SFAS No. 156
    Beginning in the 2006 first quarter, we adopted Statement of Financial Accounting Standards (Statement) No. 156, Accounting for Servicing of Financial Assets (an amendment of FASB Statement No. 140), which allowed us to carry MSRs at fair value. This resulted in a $5.1 million pretax ($0.01 per common share) positive impact in the 2006 first quarter (this impact is reflected in the above table). Under the fair value approach, servicing assets and liabilities are recorded at fair value at each reporting date. Changes in fair value between reporting dates are recorded as an increase or decrease in mortgage banking income. MSR assets are included in other assets.

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4.   Other net market-related losses. Other net market-related losses include losses and gains related to the following market-driven activities: gains and losses from equity investing (included in other non-interest income), net securities gains and losses, and the impact from the extinguishment of debt (included as other non-interest expense). Total net market-related losses also include the net impact of MSRs and related hedging (see item 3 above). Net income included the following impact from other net market-related losses:
                                                 
(in thousands)                                          
    Securities             Debt                     Per  
    Gains/     Equity     Extinguish-     Pretax     Net     Common  
Period   (Losses)     Investing     ment     income     income     Share  
1Q ‘07
  $ 104     $ (8,530 )   $     $ (8,426 )   $ (5,477 )   $ (0.02 )
2Q ‘07
    (5,139 )     2,301       4,090       1,252       814        
3Q ‘07
    (13,152 )     (4,387 )     3,220       (14,319 )     (9,307 )     (0.03 )
 
                                   
9 mo. ‘07
  $ (18,187 )   $ (10,616 )   $ 7,310     $ (21,493 )   $ (13,970 )   $ (0.05 )
 
                                   
 
                                               
1Q ‘06
  $ (20 )   $ 1,505     $     $ 1,485     $ 965     $  
2Q ‘06
    (35 )     2,322             2,287       1,487       0.01  
3Q ‘06
    (57,332 )     352             (56,980 )     (37,037 )     (0.15 )
 
                                   
9 mo. ‘06
    (57,387 )     4,179             (53,208 )     (34,585 )     (0.14 )
4Q ‘06
    (15,804 )     3,257       (4,389 )     (16,936 )     (11,008 )     (0.05 )
 
                                   
12 mo. ‘06
  $ (73,191 )   $ 7,436     $ (4,389 )   $ (70,144 )   $ (45,593 )   $ (0.19 )
 
                                   
5.   Significant commercial loan provision expense. Performance for the 2007 second quarter included $24.8 million ($16.1 million after tax, or $0.07 per common share) in provision for credit losses associated with three credit relationships: two in the eastern Michigan single-family home builder sector and one northern Ohio commercial credit to an auto industry-related manufacturing company. In the 2007 second quarter, charge-offs of $12.2 million were recorded against two of these credit relationships. In the 2007 third quarter, an additional $10.0 million of charge-offs were recorded, relating to all three of these credit relationships.
 
6.   Effective tax rate. The effective tax rate for the 2006 third quarter included an $84.5 million ($0.35 per common share) reduction of federal income tax expense from the release of tax reserves as a result of the resolution of the federal income tax audit for 2002 and 2003 and the recognition of federal tax loss carry backs.
 
7.   Other significant items influencing earnings performance comparisons. In addition to the items discussed separately in this section, a number of other items impacted financial results. These included:
 
    2007 - First Quarter
    $1.9 million pretax ($1.2 million after tax or $0.01 per common share) negative impact due to litigation losses.
    2006 - Fourth Quarter
    $10.0 million pretax ($6.5 million after tax or $0.03 per common share) contribution to the Huntington Foundation.
 
    $5.2 million pretax ($3.6 million after tax or $0.02 per common share) increase in automobile lease residual value losses. This increase reflected higher relative losses on vehicles sold at auction, most notably high-line imports and larger sport utility vehicles.
 
    $4.5 million pretax ($2.9 million after tax or $0.01 per common share) in severance and consolidation expenses. This reflected severance-related expenses associated with a reduction of 75 Regional Banking staff positions, as well as costs associated with the retirements of a vice chairman and an executive vice president.
 
    $2.6 million pretax ($1.7 million after tax or $0.01 per common share) gain related to the sale of MasterCard ® stock.

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    2006 - First Quarter
    $2.3 million pretax ($1.5 million after tax or $0.01 per common share) negative impact, reflecting a cumulative adjustment to defer annual fees related to home equity loans.
Table 3 reflects the earnings impact of the above-mentioned significant items for periods affected by this Discussion of Results of Operations:

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Table 3 — Significant Items Influencing Earnings Performance Comparison (1)
                                                 
    Three Months Ended
    September 30, 2007   June 30, 2007   September 30, 2006
(in millions)   After-tax   EPS   After-tax   EPS   After-tax   EPS
 
Net income — reported earnings
  $ 138.2             $ 80.5             $ 157.4          
Earnings per share, after tax
          $ 0.38             $ 0.34             $ 0.65  
Change from prior quarter — $
            0.04               (0.06 )             0.19  
Change from prior quarter — %
            11.8 %             (15.0 )%             41.3 %
 
Change from a year-ago — $
          $ (0.27 )           $ (0.12 )           $ 0.18  
Change from a year-ago — %
            (41.5 )%             (26.1 )%             38.3 %
                                                 
Significant items - favorable (unfavorable) impact:   Earnings (2)   EPS   Earnings (2)   EPS   Earnings (2)   EPS
 
Merger costs
  $ (32.3 )   $ (0.06 )   $ (7.6 )   $ (0.02 )   $     $  
Net market-related losses
    (18.0 )     (0.03 )     (3.5 )     (0.01 )            
Significant commercial loan provision expense
                (24.8 )     (0.07 )            
Reduction to federal income tax expense (3)
                            84.5       0.35  
Balance sheet restructuring
                            (57.3 )     (0.16 )
Adjustment for equity method investments
                            (2.1 )     (0.01 )
                                 
    Nine Months Ended
    September 30, 2007   September 30, 2006
(in millions)   After-tax   EPS   After-tax   EPS
 
Net income — reported earnings
  $ 314.4             $ 373.5          
Earnings per share, after tax
          $ 1.12             $ 1.56  
Change from a year-ago — $
            (0.44 )             0.22  
Change from a year-ago — %
            (28.2 )%             16.4 %
                                 
Significant items - favorable (unfavorable) impact:   Earnings (2)   EPS   Earnings (2)    EPS
 
Merger costs
  $ (40.7 )   $ (0.09 )   $ (4.2 )   $ (0.01 )
Net market-related losses
    (32.0 )     (0.07 )     5.1       0.01  
Significant commercial loan provision expense
    (24.8 )     (0.06 )            
Reduction to federal income tax expense (3)
                84.5       0.35  
MSR FAS 156 accounting change
                5.1       0.01  
Balance sheet restructuring
                (57.3 )     (0.16 )
Adjustment for equity method investments
                (3.2 )     (0.01 )
Adjustment to defer home equity annual fees
                (2.3 )     (0.01 )
 
(1)   Refer to the ‘Significant Items Influencing Financial Performance Comparisons’ for additional discussion regarding these items.
 
(2)   Pretax unless otherwise noted.
 
(3)   After tax

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Net Interest Income
(This section should be read in conjunction with Significant Items 1, 2, 3, and 7.)
2007 Third Quarter versus 2006 Third Quarter
     Fully taxable equivalent net interest income for the 2007 third quarter was $415.3 million. This represented an increase of $155.9 million, or 60%, from the year-ago quarter. This reflected the favorable impact of a $14.9 billion increase in average earning assets, of which $13.5 billion represented an increase in average loans and leases, as well as the benefit of an increase in the fully taxable equivalent net interest margin of 30 basis points to 3.52%. The 3.52% fully taxable equivalent net interest margin was consistent with our expectations for a relatively stable net interest margin compared with the pro forma 2007 second quarter level of 3.50%.
     The following table details the estimated merger related impacts on our reported loans and deposits:
Table 4 — Average Loans/Leases and Deposits — Estimated Merger Related Impacts — 3Q’07 vs. 3Q’06
                                                         
    Third Quarter   Change   Merger   Non-merger Related
(in millions)   2007   2006   Amount   %   Related   Amount   % (1)
             
Loans
                                                       
Total commercial
  $ 22,016     $ 12,039     $ 9,977       82.9 %   $ 8,746     $ 1,231       5.9 %
 
                                                       
Automobile loans and leases
    4,354       4,055       299       7.4       432       (133 )     (3.0 )
Home equity
    7,355       5,041       2,314       45.9       2,385       (71 )     (1.0 )
Residential mortgage
    5,456       4,748       708       14.9       1,112       (404 )     (6.9 )
Other consumer
    647       430       217       50.5       143       74       12.9  
               
Total consumer
    17,812       14,274       3,538       24.8       4,072       (534 )     (2.9 )
               
Total loans
  $ 39,828     $ 26,313     $ 13,515       51.4 %   $ 12,818     $ 697       1.8 %
               
 
                                                       
Deposits
                                                       
Demand deposits — non-interest bearing
  $ 5,384     $ 3,509     $ 1,875       53.4 %   $ 1,829     $ 46       0.9 %
Demand deposits — interest bearing
    3,808       2,169       1,639       75.6       1,460       179       4.9  
Money market deposits
    6,869       5,689       1,180       20.7       996       184       2.8  
Savings and other domestic deposits
    5,043       2,923       2,120       72.5       2,594       (474 )     (8.6 )
Core certificates of deposit
    10,425       5,334       5,091       95.4       4,630       461       4.6  
               
Total core deposits
    31,529       19,624       11,905       60.7       11,509       396       1.3  
Other deposits
    6,123       4,969       1,154       23.2       1,342       (188 )     (3.0 )
               
Total deposits
  $ 37,652     $ 24,593     $ 13,059       53.1 %   $ 12,851     $ 208       0.6 %
               
 
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $0.7 billion, or 2%, non-merger related increase in total average loans primarily reflected:
    $1.2 billion, or 6%, increase in average total commercial loans, reflecting continued strong growth in middle-market commercial and industrial (C&I) loans. The increase in commercial loans was spread across substantially all regions.
Partially offset by:
    $0.5 billion, or 3%, decrease in average total consumer loans, reflecting continued declines in automobile leasing due to low consumer demand and competitive pricing, as well as the impact of mortgage loan sales over the last 12 months.
     Also contributing to the growth in average earning assets was a $1.1 billion increase in average trading account securities. The increase in these assets reflected a change in our strategy to use trading account securities to hedge the change in fair value of our MSRs.

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     Concerning total average deposits, the $0.2 billion of non-merger related increase primarily reflected:
    $0.4 billion, or 1%, increase in average total core deposits, reflecting strong growth in interest bearing demand deposits and money market accounts. While there was strong growth in core certificates of deposits, this was offset by a decline in savings and other domestic deposits, as customers transferred funds from lower rate to higher rate accounts.
Partially offset by:
    $0.2 billion, or 3%, decline in other non-core deposits driven by a decline in brokered deposits and negotiable certificates of deposit.
2007 Third Quarter versus 2007 Second Quarter
     Fully taxable equivalent net interest income for the 2007 third quarter was $415.3 million. This represented an increase of $157.8 million, or 61%, from the prior quarter. This reflected the favorable impact of a $15.2 billion increase in average earning assets, of which $13.4 billion represented an increase in average loans and leases, as well as the benefit of an increase in the fully taxable equivalent net interest margin of 26 basis points to 3.52%. These increases were primarily merger related.
     The following table details the estimated merger related impacts on our reported loans and deposits:
Table 5 — Average Loans/Leases and Deposits — Estimated Merger Related Impacts — 3Q’07 vs. 2Q’07
                                                         
    Third   Second            
    Quarter   Quarter   Change   Merger   Non-merger Related
(in millions)   2007   2007   Amount   Percent   Related   Amount   % (1)
             
Loans
                                                       
Total commercial
  $ 22,016     $ 12,818     $ 9,198       71.8 %   $ 8,746     $ 452       2.1 %
 
Automobile loans and leases
    4,354       3,873       481       12.4       432       49       1.1  
Home equity
    7,355       4,973       2,382       47.9       2,385       (3 )     (0.0 )
Residential mortgage
    5,456       4,351       1,105       25.4       1,112       (7 )     (0.1 )
Other consumer
    647       424       223       52.6       143       80       14.1  
               
Total consumer
    17,812       13,621       4,191       30.8       4,072       119       0.7  
               
Total loans
  $ 39,828     $ 26,439     $ 13,389       50.6 %   $ 12,818     $ 571       1.5 %
               
 
                                                       
Deposits
                                                       
Demand deposits — non-interest bearing
  $ 5,384     $ 3,591     $ 1,793       49.9 %   $ 1,829     $ (36 )     (0.7 )%
Demand deposits — interest bearing
    3,808       2,404       1,404       58.4       1,460       (56 )     (1.4 )
Money market deposits
    6,869       5,466       1,403       25.7       996       407       6.3  
Savings and other domestic deposits
    5,043       2,863       2,180       76.1       2,594       (414 )     (7.6 )
Core certificates of deposit
    10,425       5,591       4,834       86.5       4,630       204       2.0  
               
Total core deposits
    31,529       19,915       11,614       58.3       11,509       105       0.3  
Other deposits
    6,123       4,358       1,765       40.5       1,342       423       7.4  
               
Total deposits
  $ 37,652     $ 24,273     $ 13,379       55.1 %   $ 12,851     $ 528       1.4 %
               
 
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $0.6 billion, or 1%, non-merger related increase in average total loans and leases primarily reflected 2% growth in average total commercial loans due to continued strong growth across substantially all regions. Non-merger related average total consumer loans increased 1% with most categories essentially unchanged.
     Also contributing to the growth in average earning assets were $0.9 billion increase in average trading account securities and $0.7 billion in average investment securities. These increases were primarily merger related. The increase in these assets reflected a change in our strategy to use trading account securities to hedge the change in fair value of our MSRs.

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     Concerning the $13.4 billion increase in average total deposits, $12.9 billion was merger related. The $0.5 billion, or 1%, non-merger related increase reflected:
    $0.4 billion, or 7%, increase in other non-core deposits, reflecting an increase in wholesale deposits.
 
    $0.1 billion increase in average total core deposits. This reflected strong growth in money market deposits and core certificates of deposit, partially offset by a decline in savings and other domestic deposits as those depositors moved funds into higher rate accounts. The decline in interest bearing and non-interest bearing demand deposits reflected seasonality.
Tables 6 and 7 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

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Table 6 — Consolidated Quarterly Average Balance Sheets
                                                           
    Average Balances     Change
Fully taxable equivalent basis   2007   2006     3Q07 vs 3Q06
(in millions)   Third   Second   First   Fourth   Third     Amount   Percent
           
Assets
                                                         
Interest bearing deposits in banks
  $ 292     $ 259     $ 93     $ 77     $ 75       $ 217       N.M. %
Trading account securities
    1,149       230       48       116       96         1,053       N.M.  
Federal funds sold and securities purchased under resale agreements
    557       574       503       531       266         291       N.M.  
Loans held for sale
    419       291       242       265       275         144       52.4  
Investment securities:
                                                         
Taxable
    3,951       3,253       3,595       3,792       4,364         (413 )     (9.5 )
Tax-exempt
    675       629       591       594       581         94       16.2  
           
Total investment securities
    4,626       3,882       4,186       4,386       4,945         (319 )     (6.5 )
Loans and leases: (1)
                                                         
 
                                                         
Commercial:
                                                         
Middle market commercial and industrial
    10,301       6,209       6,070       5,882       5,651         4,650       82.3  
Middle market commercial real estate:
                                                         
Construction
    1,782       1,245       1,151       1,170       1,129         653       57.8  
Commercial
    5,623       2,865       2,772       2,839       2,846         2,777       97.6  
           
Middle market commercial real estate
    7,405       4,110       3,923       4,009       3,975         3,430       86.3  
Small business
    4,310       2,499       2,466       2,421       2,413         1,897       78.6  
           
Total commercial
    22,016       12,818       12,459       12,312       12,039         9,977       82.9  
           
Consumer:
                                                         
Automobile loans
    2,931       2,322       2,215       2,111       2,079         852       41.0  
Automobile leases
    1,423       1,551       1,698       1,838       1,976         (553 )     (28.0 )
           
Automobile loans and leases
    4,354       3,873       3,913       3,949       4,055         299       7.4  
Home equity
    7,355       4,973       4,913       4,973       5,041         2,314       45.9  
Residential mortgage
    5,456       4,351       4,496       4,635       4,748         708       14.9  
Other loans
    647       424       422       430       430         217       50.5  
           
Total consumer
    17,812       13,621       13,744       13,987       14,274         3,538       24.8  
           
Total loans and leases
    39,828       26,439       26,203       26,299       26,313         13,515       51.4  
Allowance for loan and lease losses
    (475 )     (297 )     (278 )     (282 )     (291 )       (184 )     (63.2 )
           
Net loans and leases
    39,353       26,142       25,925       26,017       26,022         13,331       51.2  
           
Total earning assets
    46,871       31,675       31,275       31,674       31,970         14,901       46.6  
           
Cash and due from banks
    1,111       748       826       830       823         288       35.0  
Intangible assets
    3,337       626       627       631       634         2,703       N.M.  
All other assets
    3,124       2,398       2,480       2,617       2,633         491       18.6  
           
Total Assets
  $ 53,968     $ 35,150     $ 34,930     $ 35,470     $ 35,769       $ 18,199       50.9 %
           
 
                                                         
Liabilities and Shareholders’ Equity
                                                         
Deposits:
                                                         
Demand deposits — non-interest bearing
  $ 5,384     $ 3,591     $ 3,530     $ 3,580     $ 3,509       $ 1,875       53.4 %
Demand deposits — interest bearing
    3,808       2,404       2,349       2,219       2,169         1,639       75.6  
Money market deposits
    6,869       5,466       5,489       5,548       5,689         1,180       20.7  
Savings and other domestic deposits
    5,043       2,863       2,827       2,849       2,923         2,120       72.5  
Core certificates of deposit
    10,425       5,591       5,455       5,380       5,334         5,091       95.4  
           
Total core deposits
    31,529       19,915       19,650       19,576       19,624         11,905       60.7  
Other domestic deposits of $100,000 or more
    1,694       1,124       1,219       1,282       1,141         553       48.5  
Brokered deposits and negotiable CDs
    3,728       2,682       3,020       3,252       3,307         421       12.7  
Deposits in foreign offices
    701       552       562       598       521         180       34.5  
           
Total deposits
    37,652       24,273       24,451       24,708       24,593         13,059       53.1  
Short-term borrowings
    2,542       2,075       1,863       1,832       1,660         882       53.1  
Federal Home Loan Bank advances
    2,553       1,329       1,128       1,121       1,349         1,204       89.3  
Subordinated notes and other long-term debt
    3,912       3,470       3,487       3,583       3,921         (9 )     (0.2 )
           
Total interest bearing liabilities
    41,275       27,556       27,399       27,664       28,014         13,261       47.3  
           
All other liabilities
    1,103       960       987       1,142       1,276         (173 )     (13.6 )
Shareholders’ equity
    6,206       3,043       3,014       3,084       2,970         3,236       N.M.  
           
Total Liabilities and Shareholders’ Equity
  $ 53,968     $ 35,150     $ 34,930     $ 35,470     $ 35,769       $ 18,199       50.9 %
           
N.M., not a meaningful value.
 
(1)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

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Table 7 — Consolidated Quarterly Net Interest Margin Analysis
                                         
    Average Rates (2)
    2007   2006
Fully taxable equivalent basis (1)   Third   Second   First   Fourth   Third
             
Assets
                                       
Interest bearing deposits in banks
    4.69 %     6.47 %     5.13 %     5.50 %     5.23 %
Trading account securities
    6.01       5.74       5.27       4.10       4.32  
Federal funds sold and securities purchased under resale agreements
    5.26       5.28       5.24       5.35       5.13  
Loans held for sale
    5.13       5.79       6.27       6.01       6.24  
Investment securities:
                                       
Taxable
    6.09       6.11       6.13       6.05       5.49  
Tax-exempt
    6.78       6.69       6.66       6.68       6.80  
             
Total investment securities
    6.19       6.20       6.21       6.13       5.64  
Loans and leases: (3)
                                       
Commercial:
                                       
Middle market commercial and industrial
    7.77       7.39       7.48       7.55       7.40  
Middle market commercial real estate:
                                       
Construction
    7.67       7.62       8.41       8.37       8.49  
Commercial
    7.60       7.34       7.64       7.57       7.86  
             
Middle market commercial real estate
    7.62       7.42       7.87       7.80       8.05  
Small business
    7.55       7.30       7.24       7.18       7.13  
             
Total commercial
    7.68       7.38       7.56       7.56       7.56  
             
Consumer:
                                       
Automobile loans
    7.25       7.10       6.92       6.75       6.62  
Automobile leases
    5.56       5.34       5.25       5.21       5.10  
             
Automobile loans and leases
    6.70       6.39       6.25       6.03       5.88  
Home equity
    7.95       7.63       7.67       7.75       7.62  
Residential mortgage
    6.06       5.61       5.54       5.55       5.46  
Other loans
    10.71       9.57       9.52       9.28       9.41  
             
Total consumer
    7.17       6.69       6.58       6.58       6.46  
             
Total loans and leases
    7.45       7.03       7.05       7.04       6.96  
             
Total earning assets
    7.25 %     6.92 %     6.98 %     6.86 %     6.73 %
             
 
                                       
Liabilities and Shareholders’ Equity
                                       
Deposits:
                                       
Demand deposits — non-interest bearing
    %     %     %     %     %
Demand deposits — interest bearing
    1.53       1.22       1.21       1.04       0.97  
Money market deposits
    3.78       3.85       3.78       3.75       3.66  
Savings and other domestic deposits
    2.50       2.16       2.02       1.90       1.75  
Core certificates of deposit
    4.99       4.79       4.72       4.58       4.40  
             
Total core deposits
    3.69       3.49       3.41       3.32       3.20  
Other domestic deposits of $100,000 or more
    4.81       5.30       5.32       5.29       5.18  
Brokered deposits and negotiable CDs
    5.42       5.53       5.50       5.53       5.50  
Deposits in foreign offices
    3.29       3.16       2.99       3.18       3.12  
             
Total deposits
    3.94       3.84       3.81       3.78       3.66  
Short-term borrowings
    4.10       4.50       4.32       4.21       4.10  
Federal Home Loan Bank advances
    5.31       4.76       4.44       4.50       4.51  
Subordinated notes and other long-term debt
    6.15       5.96       5.77       5.96       5.75  
             
Total interest bearing liabilities
    4.24 %     4.20 %     4.14 %     4.12 %     4.02 %
             
Net interest rate spread
    3.01 %     2.72 %     2.84 %     2.74 %     2.71 %
Impact of non-interest bearing funds on margin
    0.51       0.54       0.52       0.54       0.51  
             
Net interest margin
    3.52 %     3.26 %     3.36 %     3.28 %     3.22 %
             
(1)   Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 1 for the FTE adjustment.
 
(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.

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2007 First Nine Months versus 2006 First Nine Months
     Fully taxable equivalent net interest income for the first nine-month period of 2007 was $932.5 million. This represented an increase of $159.4 million, or 21%, from the comparable year-ago period. This reflected the favorable impact of a $5.3 billion increase in average earning assets, of which $5.0 billion represented an increase in average loans and leases, as well as the benefit of an increase in the fully taxable equivalent net interest margin of 11 basis points to 3.40%. These increases were primarily merger related.
     The following table details the estimated merger related impacts on our reported loans and deposits:
Table 8 — Average Loans/Leases and Deposits — Estimated Merger Related Impacts — Nine Months 2007 vs. Nine Months 2006
                                                         
    Nine Months Ended            
    September 30,   Change   Merger     Non-merger Related
(in millions)   2007   2006   Amount   Percent   Related     Amount   % (1)
                       
Loans
                                                       
Total commercial
  $ 15,799     $ 11,715     $ 4,084       34.9 %   $ 2,915     $ 1,169       8.0 %
 
Automobile loans and leases
    4,048       4,135       (87 )     (2.1 )     144       (231 )     (5.4 )
Home equity
    5,756       4,969       787       15.8       795       (8 )     (0.1 )
Residential mortgage
    4,771       4,563       208       4.6       371       (163 )     (3.3 )
Other consumer
    499       442       57       12.9       48       9       1.9  
                       
Total consumer
    15,074       14,109       965       6.8       1,357       (392 )     (2.5 )
                       
Total loans
  $ 30,873     $ 25,824     $ 5,049       19.6 %   $ 4,273     $ 776       2.6 %
                       
 
                                                       
Deposits
                                                       
Demand deposits — non-interest bearing
  $ 4,175     $ 3,513     $ 662       18.8 %   $ 610     $ 52       1.3 %
Demand deposits — interest bearing
    2,859       2,110       749       35.5       487       262       10.1  
Money market deposits
    5,946       5,624       322       5.7       332       (10 )     (0.2 )
Savings and other domestic time deposits
    3,586       3,041       545       17.9       865       (320 )     (8.2 )
Core certificates of deposit
    7,176       4,939       2,237       45.3       1,543       694       10.7  
                       
Total core deposits
    23,742       19,227       4,515       23.5       3,836       679       2.9  
Other deposits
    5,098       4,780       318       6.7       447       (129 )     (2.5 )
                       
Total deposits
  $ 28,840     $ 24,007     $ 4,833       20.1 %   $ 4,284     $ 549       1.9 %
                       
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $0.8 billion, or 3%, of non-merger related increase in total average loans primarily reflected:
    $1.2 billion, or 8%, increase in average total commercial loans, reflecting continued strong growth in middle-market C&I loans. The increase in commercial loans was spread across substantially all regions.
     Partially offset by:
    $0.4 billion, or 3%, decrease in average total consumer loans, reflecting continued declines in automobile leasing due to low consumer demand and competitive pricing, as well as a decline in residential mortgages due to the impact of mortgage loan sales over the last 12 months.
     Concerning total average deposits, the $0.5 billion, or 2%, non-merger related increase primarily reflected:
    $0.7 billion, or 3%, in average total core deposits, reflecting strong growth in interest bearing demand deposits. While there was strong growth in core certificates of deposits, this was partially offset by the decline in savings and other domestic deposits, as customers transferred funds from lower rate to higher rate accounts.

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Table 9 – 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)   2007   2006   Amount   Percent   2007   2006
                 
Assets
                                               
Interest bearing deposits in banks
  $ 187     $ 44     $ 143       N.M. %     4.93 %     6.16 %
Trading account securities
    480       84       396       N.M.       5.94       4.24  
Federal funds sold and securities
purchased under resale agreements
    545       251       294       N.M.       5.26       4.76  
Loans held for sale
    318       279       39       14.0       5.61       6.13  
Investment securities:
                                               
Taxable
    3,601       4,333       (732 )     (16.9 )     6.11       5.29  
Tax-exempt
    632       562       70       12.5       6.71       6.78  
                 
Total investment securities
    4,233       4,895       (662 )     (13.5 )     6.20       5.46  
Loans and leases: (3)
                                               
Commercial:
                                               
Middle market commercial and industrial
    7,542       5,450       2,092       38.4       7.59       7.33  
Middle market commercial real estate:
                                               
Construction
    1,395       1,277       118       9.2       7.86       7.98  
Commercial
    3,764       2,720       1,044       38.4       7.55       7.06  
                 
Middle market commercial real estate
    5,159       3,997       1,162       29.1       7.63       7.35  
Small business
    3,098       2,268       830       36.6       7.40       6.90  
                 
Total commercial
    15,799       11,715       4,084       34.9       7.57       7.25  
                 
Consumer:
                                               
Automobile loans
    2,492       2,039       453       22.2       7.11       6.51  
Automobile leases
    1,556       2,096       (540 )     (25.8 )     5.38       5.02  
                 
Automobile loans and leases
    4,048       4,135       (87 )     (2.1 )     6.44       5.75  
Home equity
    5,756       4,969       787       15.8       7.77       7.32  
Residential mortgage
    4,771       4,563       208       4.6       5.76       5.40  
Other loans
    499       442       57       12.9       10.05       9.25  
                 
Total consumer
    15,074       14,109       965       6.8       6.85       6.30  
                 
Total loans and leases
    30,873       25,824       5,049       19.6       7.22       6.73  
                                       
Allowance for loan and lease losses
    (351 )     (289 )     (62 )     21.5                  
                           
Net loans and leases
    30,522       25,535       4,987       19.5                  
                 
Total earning assets
    36,636       31,377       5,259       16.8       7.08 %     6.51 %
                 
Cash and due from banks
    925       823       102       12.4                  
Intangible assets
    1,540       545       995       N.M.                  
All other assets
    2,670       2,535       135       5.3                  
                           
Total Assets
  $ 41,420     $ 34,991     $ 6,429       18.4 %                
                           
 
                                               
Liabilities and Shareholders’ Equity
                                               
Deposits:
                                               
Demand deposits — non-interest bearing
  $ 4,175     $ 3,513     $ 662       18.8 %     %     %
Demand deposits — interest bearing
    2,859       2,110       749       35.5       1.36       0.86  
Money market deposits
    5,946       5,624       322       5.7       3.80       3.35  
Savings and other domestic time deposits
    3,586       3,041       545       17.9       2.28       1.61  
Core certificates of deposit
    7,176       4,939       2,237       45.3       4.87       4.13  
                 
Total core deposits
    23,742       19,227       4,515       23.5       3.56       2.92  
Other domestic time deposits of $100,000 or more
    1,347       1,055       292       27.7       5.10       4.87  
Brokered deposits and negotiable CDs
    3,146       3,238       (92 )     (2.8 )     5.48       5.11  
Deposits in foreign offices
    605       487       118       24.2       3.16       2.82  
                 
Total deposits
    28,840       24,007       4,833       20.1       3.88       3.37  
Short-term borrowings
    2,163       1,790       373       20.8       4.29       3.94  
Federal Home Loan Bank advances
    1,675       1,453       222       15.3       4.97       4.28  
Subordinated notes and other long-term debt
    3,624       3,570       54       1.5       5.96       5.55  
                 
Total interest bearing liabilities
    32,127       27,307       4,820       17.7       4.20       3.74  
                 
All other liabilities
    1,018       1,272       (254 )     (20.0 )                
Shareholders’ equity
    4,100       2,899       1,201       41.4                  
                           
Total Liabilities and Shareholders’ Equity
  $ 41,420     $ 34,991     $ 6,429       18.4 %                
                           
Net interest rate spread
                                    2.88       2.77  
Impact of non-interest bearing funds on margin
                                    0.52       0.52  
                                       
Net interest margin
                                    3.40 %     3.29 %
                                       
N.M., not a meaningful value.
 
(1)   Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
 
(2)   Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.
 
(3)   For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

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Provision for Credit Losses
(This section should be read in conjunction with Significant Items 1,5, and the Credit Risk section.)
     The provision for credit losses is the expense necessary to maintain the ALLL and the allowance for unfunded loan commitments (AULC) at levels adequate to absorb our estimate of probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan commitments.
     The provision for credit losses in the 2007 third quarter was $42.0 million, up $27.8 million from the year-ago quarter. Compared with the 2007 second quarter, the provision for credit losses declined $18.1 million. The 2007 second quarter included $24.8 million of provision for credit losses for two eastern Michigan credit relationships and one northern Ohio commercial credit. In the current quarter, charge-offs of $10.0 million, related to these credit relationships, were taken against these reserves. On a reported basis, 2007 third quarter net charge-offs of $47.1 million exceeded current period provision for credit losses by $5.1 million. Adjusting for the $10.0 million of charge-offs associated with these three commercial credits, the current quarter provision for credit losses exceeded net charge-offs by $4.9 million. Refer to the ‘Credit Quality’ section of this document for additional discussion regarding the allowance for credit losses and charge-offs.
Non-Interest Income
(This section should be read in conjunction with Significant Items1, 2, 3, 4, and 7.)
     Table 10 reflects non-interest income detail for each of the past five quarters and the first nine-month periods of 2007 and 2006.
Table 10 — Non-Interest Income
                                                           
    2007   2006     3Q07 vs 3Q06
(in thousands)   Third   Second   First   Fourth   Third     Amount   Percent
                     
Service charges on deposit accounts
  $ 78,107     $ 50,017     $ 44,793     $ 48,548     $ 48,718       $ 29,389       60.3 %
Trust services
    33,562       26,764       25,894       23,511       22,490         11,072       49.2  
Brokerage and insurance income
    28,806       17,199       16,082       14,600       14,697         14,109       96.0  
Other service charges and fees
    21,045       14,923       13,208       13,784       12,989         8,056       62.0  
Bank owned life insurance income
    14,847       10,904       10,851       10,804       12,125         2,722       22.4  
Mortgage banking income
    9,629       7,122       9,351       6,169       8,512         1,117       13.1  
Securities (losses) gains
    (13,152 )     (5,139 )     104       (15,804 )     (57,332 )       44,180       (77.1 )
Other income
    31,830       34,403       24,894       38,994       35,711         (3,881 )     (10.9 )
                     
Total non-interest income
  $ 204,674     $ 156,193     $ 145,177     $ 140,606     $ 97,910       $ 106,764       N.M. %
                     
                                 
    Nine Months Ended Sept 30,   YTD 2007 vs 2006
(in thousands)   2007   2006   Amount   Percent
           
Service charges on deposit accounts
  $ 172,917     $ 137,165     $ 35,752       26.1 %
Trust services
    86,220       66,444       19,776       29.8  
Brokerage and insurance income
    62,087       44,235       17,852       40.4  
Other service charges and fees
    49,176       37,570       11,606       30.9  
Bank owned life insurance income
    36,602       32,971       3,631       11.0  
Mortgage banking income
    26,102       35,322       (9,220 )     (26.1 )
Securities losses
    (18,187 )     (57,387 )     39,200       (68.3 )
Other income
    91,127       124,143       (33,016 )     (26.6 )
           
Total non-interest income
  $ 506,044     $ 420,463     $ 85,581       20.4 %
           
N.M., not a meaningful value.
     Table 11 details mortgage banking income and the net impact of MSR hedging activity for each of the past five quarters and for the first nine-month periods of 2007 and 2006.

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Table 11 — Mortgage Banking Income and Net Impact of MSR Hedging
                                                           
    2007   2006     3Q07 vs 3Q06
(in thousands)   Third   Second   First   Fourth   Third     Amount   Percent
                     
Mortgage Banking Income
                                                         
Origination and secondary marketing
  $ 8,375     $ 6,771     $ 4,940     $ 4,057     $ 3,070         5,305       N.M. %
Servicing fees
    10,811       6,976       6,820       6,662       6,077         4,734       77.9  
Amortization of capitalized servicing (1)
    (6,571 )     (4,449 )     (3,638 )     (3,835 )     (4,484 )       (2,087 )     (46.5 )
Other mortgage banking income
    3,016       2,822       3,247       1,778       3,887         (871 )     (22.4 )
                     
Sub-total
    15,631       12,120       11,369       8,662       8,550         7,081       82.8  
MSR valuation adjustment (1)
    (9,863 )     16,034       (1,057 )     (1,907 )     (10,716 )       853       (8.0 )
Net trading gains (losses) related to MSR hedging
    3,861       (21,032 )     (961 )     (586 )     10,678         (6,817 )     (63.8 )
                     
Total mortgage banking income
  $ 9,629     $ 7,122     $ 9,351     $ 6,169     $ 8,512       $ 1,117       13.1 %
                     
 
                                                         
Capitalized mortgage servicing rights (2)
  $ 228,933     $ 155,420     $ 134,845     $ 131,104     $ 129,317       $ 99,616       77.0 %
Total mortgages serviced for others (2)
    15,073,000       8,693,000       8,494,000       8,252,000       7,994,000         7,079,000       88.6  
MSR % of investor servicing portfolio
    1.52 %     1.79 %     1.59 %     1.59 %     1.62 %       (0.10 )%     (6.2 )
                     
 
                                                         
Net Impact of MSR Hedging
                                                         
MSR valuation adjustment (1)
  $ (9,863 )   $ 16,034     $ (1,057 )   $ (1,907 )   $ (10,716 )     $ 853       (8.0) %
Net trading gains (losses) related to MSR hedging
    3,861       (21,032 )     (961 )     (586 )     10,678         (6,817 )     (63.8 )
Net interest income (losses) related to MSR hedging
    2,357       248             (2 )     38         2,319       N.M.  
                     
Net impact of MSR hedging
  $ (3,645 )   $ (4,750 )   $ (2,018 )   $ (2,495 )   $       $ (3,645 )     %
                     
                                   
    Nine Months Ended September 30,     YTD 2007 vs 2006
(in thousands)   2007   2006     Amount   Percent
             
Mortgage Banking Income
                                 
Origination and secondary marketing
  $ 20,086     $ 14,160       $ 5,926       41.9 %
Servicing fees
    24,607       17,997         6,610       36.7  
Amortization of capitalized servicing (1)
    (14,658 )     (11,309 )       (3,349 )     29.6  
Other mortgage banking income
    9,085       8,395         690       8.2  
             
Sub-total
    39,120       29,243         9,877       33.8  
MSR valuation adjustment (1)
    5,114       6,778         (1,664 )     (24.6 )
Net trading losses related to MSR hedging
    (18,132 )     (699 )       (17,433 )     N.M.  
             
Total mortgage banking income
  $ 26,102     $ 35,322       $ (9,220 )     (26.1 )%
             
 
                                 
Capitalized mortgage servicing rights (2)
  $ 228,933     $ 129,317       $ 99,616       77.0 %
Total mortgages serviced for others (2)
    15,073,000       7,994,000         7,079,000       88.6  
MSR % of investor servicing portfolio
    1.52 %     1.62 %       (0.10 )%     (6.2 )
 
                                 
Net Impact of MSR Hedging
                                 
MSR valuation adjustment (1)
  $ 5,114     $ 6,778       $ (1,664 )     (24.6 )%
Net trading losses related to MSR hedging
    (18,132 )     (699 )       (17,433 )     N.M.  
Net interest income related to MSR hedging
    2,605       38         2,567       N.M.  
             
Net impact of MSR hedging
  $ (10,413 )   $ 6,117       $ (16,530 )     N.M. %
             
N.M., not a meaningful value.
 
(1)   The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing.
 
(2)   At period end.

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2007 Third Quarter versus 2006 Third Quarter
     Non-interest income increased $106.8 million, or 109%, from the year-ago quarter, of which $68.7 million was merger related. The following table details the estimated merger related impact on our reported non-interest income:
Table 12 — Non-Interest Income — Estimated Merger Related Impacts — 3Q’07 vs. 3Q’06
                                                         
    2007   2006   Change   Merger     Non-merger Related
(in thousands)   Third   Third   Amount   %   Related     Amount   % (1)
                       
Service charges on deposit accounts
  $ 78,107     $ 48,718     $ 29,389       60.3 %   $ 24,110     $ 5,279       7.2 %
Trust services
    33,562       22,490       11,072       49.2       7,009       4,063       13.8  
Brokerage and insurance income
    28,806       14,697       14,109       96.0       17,061       (2,952 )     (9.3 )
Other service charges and fees
    21,045       12,989       8,056       62.0       5,800       2,256       12.0  
Bank owned life insurance income
    14,847       12,125       2,722       22.4       1,807       915       6.6  
Mortgage banking income
    9,629       8,512       1,117       13.1       6,256       (5,139 )     (34.8 )
Securities losses
    (13,152 )     (57,332 )     44,180       (77.1 )     283       43,897       (76.9 )
Other income
    31,830       35,711       (3,881 )     (10.9 )     6,390       (10,271 )     (24.4 )
                       
Total non-interest income
  $ 204,674     $ 97,910     $ 106,764       109.0 %   $ 68,716     $ 38,048       22.8 %
                       
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $38.0 million, or 23%, non-merger related increase primarily reflected:
    $43.9 million less in investment securities losses. In the 2007 third quarter, net investment securities losses totaled $13.2 million and consisted of $23.3 million of realized securities impairment losses on certain investment securities, partially offset by $10.2 million of realized gains on other investment securities. This compared favorably with $57.3 million of such losses in the comparable year-ago period, virtually all of which related to balance sheet restructuring (see Significant Item #2 under “Discussion of Results of Operations Significant Items Influencing Financial Performance Comparisons”).
 
    $5.3 million, or 7%, increase in service charges on deposit accounts, reflecting strong growth in personal service charge income.
 
    $4.1 million, or 14%, increase in trust services income, of which $2.5 million reflected fees associated with the acquisition of Unified Fund Services in the 2006 fourth quarter.
Partially offset by:
    $10.3 million, or 24%, decline in other income, reflecting a $7.9 million decline in automobile operating lease income as that portfolio continued to decline, and $4.7 million of higher equity investment losses.
 
    $5.1 million, or 35%, decline in mortgage banking income, reflecting the current quarter’s $6.0 million of MSR hedging losses, compared with no material MSR valuation hedging impact in the comparable year-ago quarter.
2007 Third Quarter versus 2007 Second Quarter
     Non-interest income increased $48.5 million, or 31%, from the 2007 second quarter, of which $68.7 million was merger related. The following table details the estimated merger related impact on our reported non-interest income.

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Table 13 — Non-Interest Income — Estimated Merger Related Impacts — 3Q’07 vs. 2Q’07
                                                         
    2007   Change   Merger     Non-merger Related
(in thousands)   Third   Second   Amount   %   Related     Amount   % (1)
                       
Service charges on deposit accounts
  $ 78,107     $ 50,017     $ 28,090       56.2 %   $ 24,110     $ 3,980       5.4 %
Trust services
    33,562       26,764       6,798       25.4       7,009       (211 )     (0.6 )
Brokerage and insurance income
    28,806       17,199       11,607       67.5       17,061       (5,454 )     (15.9 )
Other service charges and fees
    21,045       14,923       6,122       41.0       5,800       322       1.6  
Bank owned life insurance income
    14,847       10,904       3,943       36.2       1,807       2,136       16.8  
Mortgage banking income
    9,629       7,122       2,507       35.2       6,256       (3,749 )     (28.0 )
Securities losses
    (13,152 )     (5,139 )     (8,013 )     155.9       283       (8,296 )     170.8  
Other income
    31,830       34,403       (2,573 )     (7.5 )     6,390       (8,963 )     (22.0 )
                       
Total non-interest income
  $ 204,674     $ 156,193     $ 48,481       31.0 %   $ 68,716     $ (20,235 )     (9.0 )%
                       
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $20.2 million, or 9%, non-merger related decline primarily reflected:
    $9.0 million, or 22%, decline in other income, reflecting $4.4 million of equity investment losses in the current quarter compared with $2.3 million of such gains in the prior quarter, as well as declines in automobile operating lease income, loan sale gains, and lease prepayment income.
 
    $8.3 million increase in securities losses as the current quarter results reflected $13.2 million of net investment securities losses, compared with $5.1 million of such losses in the 2007 second quarter.
 
    $5.5 million, or 16%, decline in brokerage and insurance income, primarily reflecting seasonal trends in property and casualty insurance income.
 
    $3.7 million, or 28%, decline in mortgage banking income, reflecting $1.0 million higher MSR hedging losses this quarter and lower production, and gains on loan sales.
Partially offset by:
    $4.0 million, or 5%, increase in service charges on deposit accounts, primarily reflecting higher personal service charge income and seasonal trends.
2007 First Nine Months versus 2006 First Nine Months
     Non-interest income for the first nine-month period of 2007 increased $85.6 million, or 20%, from the comparable year-ago period, of which $68.7 million was merger related. The following table details the estimated merger related impact on our non-interest income.

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Table 14 — Non-Interest Income — Estimated Merger Related Impact — Nine Months 2007 vs. Nine Months 2006
                                                         
    Nine Months Ended            
    September 30,   Change   Merger     Non-merger Related
(in thousands)   2007   2006   Amount   %   Related     Amount   % (1)
                       
Service charges on deposit accounts
  $ 172,917     $ 137,165     $ 35,752       26.1 %   $ 24,110     $ 11,642       7.2 %
Trust services
    86,220       66,444       19,776       29.8       7,009       12,767       17.4  
Brokerage and insurance income
    62,087       44,235       17,852       40.4       17,061       791       1.3  
Other service charges and fees
    49,176       37,570       11,606       30.9       5,800       5,806       13.4  
Bank owned life insurance income
    36,602       32,971       3,631       11.0       1,807       1,824       5.2  
Mortgage banking income
    26,102       35,322       (9,220 )     (26.1 )     6,256       (15,476 )     (37.2 )
Securities losses
    (18,187 )     (57,387 )     39,200       (68.3 )     283       38,917       (68.2 )
Other income
    91,127       124,143       (33,016 )     (26.6 )     6,390       (39,406 )     (30.2 )
                       
Total non-interest income
  $ 506,044     $ 420,463     $ 85,581       20.4 %   $ 68,716     $ 16,865       3.4 %
                       
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $16.9 million non-merger related increase primarily reflected:
    $38.9 million less in investment securities losses. In the first nine months of 2007, net investment securities losses totaled $18.2 million and consisted of $28.5 million of realized securities impairment losses on certain investment securities, partially offset by $10.2 million of realized gains on other investment securities. This compared favorably with $57.4 million of such losses in the comparable year-ago period, virtually all of which related to balance sheet restructuring (see Significant Item #2 earlier in this document).
 
    $12.8 million, or 17%, increase in trust services income, primarily reflecting $7.3 million of revenues associated with the acquisition of Unified Fund Services and a $3.4 million increase in Huntington Fund fees due to growth in the Huntington Funds’ managed assets.
 
    $11.6 million, or 7%, increase in service charges on deposit accounts, primarily reflecting higher personal and commercial service charge income.
Partially offset by:
    $39.4 million decline in other income, reflecting a $32.6 million decline in automobile operating lease income as that portfolio continues to decline, and $10.6 million of equity investment losses in the first nine months of 2007 compared with $4.2 million of such gains in the comparable year-ago period.
 
    $15.5 million decline in mortgage banking income, driven by $13.0 million net impact of MSR hedging losses.
Non-Interest Expense
(This section should be read in conjunction with Significant Items 1, 2, 4 and 7.)
     Table 15 reflects non-interest expense detail for each of the last five quarters and for the first nine-month periods of 2007 and 2006.

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Table 15 — Non-Interest Expense
                                                           
    2007   2006     3Q07 vs 3Q06
(in thousands)   Third   Second   First   Fourth   Third     Amount   Percent
                     
Salaries
  $ 166,719     $ 106,768     $ 104,912     $ 111,806     $ 105,144       $ 61,575       58.6 %
Benefits
    35,429       28,423       29,727       26,138       28,679         6,750       23.5  
                     
Personnel costs
    202,148       135,191       134,639       137,944       133,823         68,325       51.1 %
Outside data processing and other services
    40,600       25,701       21,814       20,695       18,664         21,936       N.M.  
Net occupancy
    33,334       19,417       19,908       17,279       18,109         15,225       84.1  
Equipment
    23,290       17,157       18,219       18,151       17,249         6,041       35.0  
Marketing
    13,186       8,986       7,696       6,207       7,846         5,340       68.1  
Professional services
    11,273       8,101       6,482       8,958       6,438         4,835       75.1  
Telecommunications
    7,286       4,577       4,126       4,619       4,818         2,468       51.2  
Printing and supplies
    4,743       3,672       3,242       3,610       3,416         1,327       38.8  
Amortization of intangibles
    19,949       2,519       2,520       2,993       2,902         17,047       N.M.  
Other expense
    29,754       19,334       23,426       47,334       29,165         589       2.0  
                     
Total non-interest expense
  $ 385,563     $ 244,655     $ 242,072     $ 267,790     $ 242,430       $ 143,133       59.0 %
                     
                                   
    Nine Months Ended      
    September 30,     YTD 2006 vs 2005
(in thousands)   2007   2006     Amount   Percent
             
Salaries
  $ 378,399     $ 313,851       $ 64,548       20.6 %
Benefits
    93,579       89,433         4,146       4.6  
             
Personnel costs
    471,978       403,284         68,694       17.0  
Outside data processing and other services
    88,115       58,084         30,031       51.7  
Net occupancy
    72,659       54,002         18,657       34.5  
Equipment
    58,666       51,761         6,905       13.3  
Professional services
    29,868       25,521         4,347       17.0  
Marketing
    25,856       18,095         7,761       42.9  
Telecommunications
    15,989       14,633         1,356       9.3  
Printing and supplies
    11,657       10,254         1,403       13.7  
Amortization of intangibles
    24,988       6,969         18,019       N.M.  
Other expense
    72,514       90,601         (18,087 )     (20.0 )
             
Total non-interest expense
  $ 872,290     $ 733,204       $ 139,086       19.0 %
             
N.M., not a meaningful value.
2007 Third Quarter versus 2006 Third Quarter
     Non-interest expense increased $143.1 million, or 59%, from the year-ago quarter. This included $136.6 million of merger-related expenses, as well as $32.3 million of merger costs related to merger-integration activities. The following table details the estimated merger related impact on our reported non-interest expense:

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Table 16 — Non-Interest Expense — Estimated Merger Related Impact — 3Q’07 vs. 3Q’06
                                                                 
    2007   2006   Change   Merger   Merger   Non-merger Related
(in thousands)   Third   Third   Amount   Percent   Related   Costs   Amount   % (1)
                       
Personnel costs
  $ 202,148     $ 133,823     $ 68,325       51 %   $ 68,250     $ 7,750     $ (7,675 )     (3.8) %
Outside data processing and other services
    40,600       18,664       21,936       117.5       12,262       6,854       2,820       9.1  
Net occupancy
    33,334       18,109       15,225       84.1       10,184       7,440       (2,399 )     (8.5 )
Equipment
    23,290       17,249       6,041       35.0       4,799       1,792       (550 )     (2.5 )
Marketing
    13,186       7,846       5,340       68.1       4,361       4,966       (3,987 )     (32.7 )
Professional services
    11,273       6,438       4,835       75.1       2,707       1,555       573       6.3  
Telecommunications
    7,286       4,818       2,468       51.2       2,224       196       48       0.7  
Printing and supplies
    4,743       3,416       1,327       38.8       1,374       457       (504 )     (10.5 )
Amortization of intangibles
    19,949       2,902       17,047       587.4       17,431             (384 )     (1.9 )
Other expense
    29,754       29,165       589       2.0       13,048       1,250       (13,709 )     (32.5 )
                       
Total non-interest expense
  $ 385,563     $ 242,430     $ 143,133       59.0 %   $ 136,640     $ 32,260     $ (25,767 )     (6.8) %
             
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $25.8 million, or 7%, non-merger related decline reflected:
    $13.7 million, or 32%, decline in other expense, reflecting merger efficiencies, as well as a $5.7 million decline in automobile operating lease expense, the current quarter’s $3.2 million gain on debt extinguishment, and declines in deferred compensation expense and franchise taxes.
 
    $7.7 million, or 4%, decline in personnel expense, reflecting merger efficiencies including the impact of the reduction of 828, or 6%, full-time equivalent staff during the 2007 third quarter.
 
    $4.0 million, or 33%, decline in marketing expense, reflecting merger efficiencies and timing of advertising campaigns.
2007 Third Quarter versus 2007 Second Quarter
     Non-interest expense increased $140.9 million, or 58%, from the prior quarter. This included $136.6 million of merger-related expenses, as well as $24.7 million of merger costs related to merger-integration activities. The following table details the estimated merger related impact on our reported non-interest expense:
Table 17 — Non-Interest Expense — Estimated Merger Related Impact — 3Q’07 vs. 2Q’07
                                                                 
    2007   Change   Merger   Merger   Non-merger Related
(in thousands)   Third   Second   Amount   Percent   Related   Costs   Amount   % (1)
                       
Personnel costs
  $ 202,148     $ 135,191     $ 66,957       50 %   $ 68,250     $ 7,106     $ (8,399 )     (4.1) %
Outside data processing and other services
    40,600       25,701       14,899       58.0       12,262       2,783       (146 )     (0.4 )
Net occupancy
    33,334       19,417       13,917       71.7       10,184       7,329       (3,596 )     (12.1 )
Equipment
    23,290       17,157       6,133       35.7       4,799       1,777       (443 )     (2.0 )
Marketing
    13,186       8,986       4,200       46.7       4,361       3,392       (3,553 )     (26.6 )
Professional services
    11,273       8,101       3,172       39.2       2,707       469       (4 )     (0.0 )
Telecommunications
    7,286       4,577       2,709       59.2       2,224       196       289       4.2  
Printing and supplies
    4,743       3,672       1,071       29.2       1,374       456       (759 )     (15.0 )
Amortization of intangibles
    19,949       2,519       17,430       691.9       17,431             (1 )     (0.0 )
Other expense
    29,754       19,334       10,420       53.9       13,048       1,175       (3,803 )     (11.7 )
                       
Total non-interest expense
  $ 385,563     $ 244,655     $ 140,908       57.6 %   $ 136,640     $ 24,683     $ (20,415 )     (5.4) %
             
(1)   Calculated as non-merger related / (prior period + merger-related)

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     The $20.4 million, or 5%, non-merger related decline primarily represented the total estimated merger efficiencies achieved in the quarter and reflected:
    $8.4 million, or 4%, decline in personnel expense, primarily reflecting merger efficiencies including the impact of the reduction of 828, or 6%, full-time equivalent staff during the 2007 third quarter.
 
    $3.8 million, or 12%, decline in other expense, primarily reflecting merger efficiencies.
 
    $3.6 million, or 27%, decline in marketing expense, reflecting merger efficiencies and timing of advertising campaigns.
 
    $3.6 million, or 12%, decline in net occupancy expense, reflecting merger efficiencies.
2007 First Nine Months versus 2006 First Nine Months
     Non-interest expense for the first nine-month period of 2007 increased $139.1 million from the comparable year-ago period. This included $136.6 million of merger-related expenses, as well as $40.7 million of merger costs related to merger integration activities. The following table details the estimated merger related impact on our reported non-interest expense:
Table 18 — Non-Interest Expense — Estimated Merger Related Impact — Nine Months 2007 vs. Nine Months 2006
                                                                   
    Nine Months Ended                          
    September 30,   Change                     Non-merger Related
(in thousands)   2007   2006   Amount   Percent   Merger Related     Merger Costs   Amount   % (1)
                       
Personnel costs
  $ 471,978     $ 403,284     $ 68,694       17.0 %   $ 68,250       $ 8,402     $ (7,958 )     (1.7) %
Outside data processing and other services
    88,115       58,084       30,031       51.7       12,262         11,520       6,249       8.9  
Net occupancy
    72,659       54,002       18,657       34.5       10,184         7,551       922       1.4  
Equipment
    58,666       51,761       6,905       13.3       4,799         1,806       300       0.5  
Marketing
    29,868       25,521       4,347       17.0       4,361         6,608       (6,622 )     (22.2 )
Professional services
    25,856       18,095       7,761       42.9       2,707         2,736       2,318       11.1  
Telecommunications
    15,989       14,633       1,356       9.3       2,224         197       (1,065 )     (6.3 )
Printing and supplies
    11,657       10,254       1,403       13.7       1,374         458       (429 )     (3.7 )
Amortization of intangibles
    24,988       6,969       18,019       258.6       17,431               588       2.4  
Other expense
    72,514       90,601       (18,087 )     (20.0 )     13,048         1,390       (32,525 )     (31.4 )
                       
Total non-interest expense
  $ 872,290     $ 733,204     $ 139,086       19.0 %   $ 136,640       $ 40,668     $ (38,222 )     (4.4) %
                   
(1)   Calculated as non-merger related / (prior period + merger-related)
     The $38.2 million non-merger related decline included the total estimated merger efficiencies achieved and reflected in the first nine months of 2007:
    $32.5 million decline in other expense, primarily reflecting a $24.1 million decline in automobile operating lease expense as that portfolio continued to decline and merger efficiencies.
 
    $8.0 million, or 2%, decline in personnel expense, primarily reflecting merger efficiencies including the impact of the reduction of 828, or 6%, full-time equivalent staff during the 2007 third quarter.
 
    $6.6 million, or 22%, decline in marketing expense, reflecting merger efficiencies and timing of advertising campaigns.
Partially offset by:
    $6.2 million, or 9%, increase in outside data processing and other services, primarily reflecting costs incurred for technology-related initiatives.
 
    $2.3 million, or 11%, increase in professional services, primarily reflecting increased commercial collections activity.

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Provision for Income Taxes
(This section should be read in conjunction with Significant Items 1 and 6.)
     The provision for income taxes in the 2007 third quarter was $48.5 million, resulting in an effective tax rate of 26.0%. In the year-ago quarter, the provision for income taxes was a negative $60.8 million, resulting in an effective tax rate of negative 62.9%. The year ago quarter reflected an $84.5 million reduction of federal tax expense related to the resolution of a federal tax audit covering tax years 2002 and 2003 that resulted in the release of previously established federal income tax reserves, as well as the recognition of federal tax loss carry backs. The provision for income taxes was $24.3 million in the 2007 second quarter representing an effective tax rate of 23.2%. The increase in the effective tax rate from the 2007 second quarter was the result of the Sky Financial acquisition. The effective tax rate for the 2007 full year is estimated to be consistent with the 25.3% effective tax rate of the first nine-month period of 2007.
     In the ordinary course of business, we operate in various taxing jurisdictions and are subject to income and non-income taxes. The effective tax rate is based in part on our interpretation of the relevant current tax laws. We review the appropriate tax treatment of all transactions taking into consideration statutory, judicial, and regulatory guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent tax audits, and historical experience.
     The Internal Revenue Service is currently examining our federal tax returns for the years ending 2004 and 2005. In addition, we are subject to ongoing tax examinations in various jurisdictions. We believe that the resolution of these examinations will not have a significant adverse impact on our consolidated financial position or results of operations.
RISK MANAGEMENT AND CAPITAL
     Risk identification and monitoring are key elements in overall risk management. We believe our primary risk exposures are credit, market, liquidity, and operational risk. Credit risk is the risk of loss due to adverse changes in the borrower’s ability to meet its financial obligations under agreed upon terms. Market risk represents the risk of loss due to changes in the market value of assets and liabilities due to changes in interest rates, exchange rates, and equity prices. Liquidity risk arises from the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, investor perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues. Operational risk arises from the inherent day-to-day operations of the company that could result in losses due to human error, inadequate or failed internal systems and controls, and external events.
     More information on risk is set forth under the heading “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006. Additionally, the MD&A appearing in our 2006 Form 10-K should be read in conjunction with this discussion and analysis as this report provides only material updates to the 2006 Form 10-K. Our definition, philosophy, and approach to risk management is unchanged from the discussion presented in that document.
Credit Risk
     Credit risk is the risk of loss due to adverse changes in the borrower’s ability to meet its financial obligations under agreed upon terms. The majority of our credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is mitigated through a combination of credit policies and processes and portfolio diversification.
Credit Exposure Mix
(This section should be read in conjunction with Significant Items 1 and 5.)
     Table 19 reflects loan and lease composition detail for each of the past five quarters.
     As shown in Table 19, at September 30, 2007, our largest credit concentration was in total commercial loans, which totaled $22.1 billion and represented 55% of total loans and leases. This portfolio was diversified among middle market C&I loans, middle market commercial real estate loans (CRE), and small business loans (see Commercial Credit discussion below).

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     Total consumer loans were $17.9 billion at September 30, 2007, and represented 45% of total credit exposure. The consumer portfolio was diversified among home equity loans, residential mortgages, and automobile loans and leases (see Consumer Credit discussion below).
     By business segment, Regional Banking accounted for 80% of total loans and leases at September 30, 2007.

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Table 19 — Loans and Leases Composition (1)
                                                                                 
    2007   2006
(in thousands)   September 30,   June 30,   March 31,   December 31,   September 30,
    (Unaudited)                                                                
By Type
                                                                               
Commercial:
                                                                               
Middle market commercial and industrial
  $ 10,200,357       25.5 %   $ 6,210,709       23.2 %   $ 6,164,569       23.5 %   $ 5,961,445       22.8 %   $ 5,811,130       22.0 %
Middle market commercial real estate:
                                                                               
Construction
    1,856,792       4.6       1,382,722       5.2       1,187,664       4.5       1,228,641       4.7       1,169,276       4.4  
Commercial
    5,686,297       14.2       2,950,864       11.0       2,807,063       10.7       2,722,599       10.4       2,808,684       10.7  
                       
Middle market commercial real estate
    7,543,089       18.8       4,333,586       16.2       3,994,727       15.2       3,951,240       15.1       3,977,960       15.1  
Small business
    4,355,252       10.8       2,507,728       9.4       2,474,955       9.4       2,441,837       9.3       2,418,709       9.2  
                       
Total commercial
    22,098,698       55.1       13,052,023       48.8       12,634,251       48.1       12,354,522       47.2       12,207,799       46.3  
                       
Consumer:
                                                                               
Automobile loans
    2,959,913       7.4       2,424,105       9.0       2,251,215       8.6       2,125,821       8.1       2,105,623       8.0  
Automobile leases
    1,365,805       3.4       1,488,903       5.6       1,623,758       6.2       1,769,424       6.8       1,910,257       7.2  
Home equity
    7,317,804       18.4       5,015,506       18.7       4,914,462       18.7       4,926,900       18.8       5,019,101       19.0  
Residential mortgage
    5,505,340       13.8       4,398,720       16.4       4,404,220       16.8       4,548,849       17.4       4,678,577       17.7  
Other loans
    739,680       1.9       432,256       1.5       437,117       1.6       427,909       1.7       440,145       1.8  
                       
Total consumer
    17,888,542       44.9       13,759,490       51.2       13,630,772       51.9       13,798,903       52.8       14,153,703       53.7  
                       
Total loans and leases
  $ 39,987,240       100.0 %   $ 26,811,513       100.0 %   $ 26,265,023       100.0 %   $ 26,153,425       100.0 %   $ 26,361,502       100.0 %
                       
 
                                                                               
By Business Segment
                                                                               
Regional Banking:
                                                                               
Central Ohio
  $ 4,993,373       12.5 %   $ 3,721,031       13.9 %   $ 3,610,316       13.7 %   $ 3,597,172       13.8 %   $ 3,685,704       14.0 %
Northwest Ohio
    2,580,787       6.5       449,232       1.7       455,075       1.7       461,622       1.8       465,413       1.8  
Greater Cleveland
    3,057,757       7.6       2,099,941       7.8       2,019,820       7.7       1,920,421       7.3       1,953,851       7.4  
Greater Akron/Canton
    2,078,588       5.2       1,330,102       5.0       1,318,932       5.0       1,326,374       5.1       1,357,028       5.1  
Southern Ohio/Kentucky
    2,547,800       6.4       2,275,224       8.5       2,159,407       8.2       2,190,115       8.4       2,181,340       8.3  
Mahoning Valley
    939,739       2.4                                                  
Ohio Valley
    869,139       2.2                                                  
West Michigan
    2,520,325       6.3       2,439,517       9.1       2,453,300       9.3       2,421,085       9.3       2,443,461       9.3  
East Michigan
    1,674,896       4.2       1,654,934       6.2       1,646,028       6.3       1,630,050       6.2       1,602,647       6.1  
Western Pennsylvania
    1,106,068       2.8                                                  
Pittsburgh
    888,848       2.2                                                  
Central Indiana
    1,419,693       3.6       1,004,934       3.7       971,186       3.7       962,575       3.7       957,612       3.6  
West Virginia
    1,125,628       2.8       1,148,573       4.3       1,109,197       4.2       1,123,817       4.3       1,102,407       4.2  
Other Regional
    6,256,033       15.7       3,813,381       14.2       3,749,087       14.3       3,767,093       14.3       3,837,728       14.5  
                       
Regional Banking
    32,058,674       80.2       19,936,869       74.4       19,492,348       74.2       19,400,324       74.2       19,587,191       74.3  
Dealer Sales
    5,449,580       13.6       4,944,386       18.4       4,903,370       18.7       4,908,764       18.8       4,956,635       18.8  
Private Financial and Capital Markets Group
    2,478,986       6.2       1,930,258       7.2       1,869,305       7.1       1,844,337       7.0       1,817,676       6.9  
Treasury / Other
                                                           
                       
Total loans and leases
  $ 39,987,240       100.0 %   $ 26,811,513       100.0 %   $ 26,265,023       100.0 %   $ 26,153,425       100.0 %   $ 26,361,502       100.0 %
     
(1)   Reflects post-Sky Financial merger organizational structure effective on July 1, 2007. Accordingly, balances presented for prior periods do not include the impact of the acquisition.

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Commercial Credit
(This section should be read in conjunction with Significant Items 1 and 5.)
     Commercial credit approvals are based on, among other factors, the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic outlook.
     In commercial lending, ongoing credit management is dependent on the type and nature of the loan. In general, quarterly monitoring is normal for all significant exposures. The internal risk ratings are revised and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis. We continually review and adjust our risk rating criteria based on actual experience, which may result in further changes to such criteria, in future periods. Accordingly, in the 2007 third quarter, we changed our reserve methodology for small business loans to utilize a small business credit score, consistent with that used for the consumer loan portfolio, as the primary driver of the reserve for commercial loans less than $500 thousand, rather than reserving based on Obligor Risk Grades (ORG) and Facility Risk Grades (FRG).
     Our commercial loan portfolio is diversified by customer, as well as throughout our geographic footprint. However, the following two segments are noteworthy:
Single Family Homebuilders
     At September 30, 2007, we had $1.6 billion of loans to single family homebuilders, including loans made to both middle market and small business homebuilders. Such loans represented 4% of total loans and leases. Of this portfolio, 63% were to finance projects where houses were currently under construction, 13% to finance the acquisition of land for future development, and 24% to finance the development of land.
     There has been a general slowdown in the housing market across our geographic footprint, reflecting declining prices and excess inventories of houses to be sold, particularly in our eastern Michigan and northern Ohio markets. As a result, homebuilders have shown signs of financial deterioration. We have taken the following steps to mitigate the risk arising from this exposure: (1) all loans have been reviewed three times during the last 12 months and are continuously monitored, (2) credit valuation adjustments have been made across the entire portfolio based on the current condition of each relationship, and (3) reserves have been increased based on proactive risk identification and thorough borrower analysis.
Franklin Credit Management Corporation (Franklin) Portfolio
     As a result of our acquisition of Sky Financial, we have a commercial lending relationship with Franklin Credit Management Corporation (Franklin), a customer of Sky Financial for 17 years. Franklin’s primary business is to acquire, service, and resolve seasoned performing, re-performing, and nonperforming first- and second-priority lien residential mortgage loans and real estate assets. Through their wholly-owned subsidiary, Tribeca Lending Corp (Tribeca), Franklin also originates maximum 75% loan-to-value non-prime mortgage loans for their own portfolio. Tribeca currently accounts for approximately 25% of Franklin’s business activities.
     Our primary relationship with Franklin consists of both commercial term financing and revolving credit warehouse facilities, where the Bank is the lead bank. As of September 30, 2007, this relationship accounted for less than 5% of total loans and leases, with approximately 16% of our direct exposure to Franklin participated on a non-recourse basis to other financial institutions. The term debt exposure is in the form of over 400 individually underwritten commercial loans used to fund over 30,000 individual first- and second-priority lien residential mortgages.
     The collateral securing our commercial term loans cross-collateralizes other loans made under these facilities. Specifically, the collateral for term loans used to fund mortgage loans originated by Tribeca also secures our other term loans used to fund other mortgage loans originated by Tribeca. Likewise, the collateral for term loans used to fund mortgage loans acquired by Franklin also secures our other term loans used to fund other mortgage loans acquired by Franklin. In addition, pursuant to an exclusive lockbox arrangement, Huntington receives all payments made to Franklin and Tribeca on their individual mortgages. As of September 30, 2007, no commercial loans to Franklin were classified as 30-day delinquent or nonperforming, and there have been no net charge-offs related to these facilities for the first nine months of 2007. The determination of an appropriate allowance follows our standard ALLL methodology. As such, an allowance associated with the Franklin portfolio of commercial loans is included in our total ALLL.

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     Although we funded loans originated by Franklin and Tribeca during the 2007 third quarter, we are not required to fund additional loan originations under the terms of the respective credit facilities. We have announced our intention over time to lower in both absolute and relative terms our total Franklin credit exposure.
Consumer Credit
     Consumer credit approvals, which include residential mortgage and home equity loans, are based on, among other factors, the financial strength of the borrower, type of exposure, and the transaction structure.
     Our consumer loan portfolio is diversified throughout our geographic footprint. However, the following two segments are worthy of note:
Home Equity Loans
     Home equity loans and lines consist of both first and second position collateral with underwriting criteria based on minimum FICO credit scores, debt-to-income ratios, and loan-to-value ratios. We offer closed-end home equity loans with a fixed interest rate and level monthly payments and a variable-rate, interest-only home equity line of credit. At September 30, 2007, we had $3.4 billion of home equity loans and $3.9 billion of home equity lines of credit. Combined, this represented 18% of total loans and leases. The weighted average loan-to-value ratio of our home equity portfolio (both loans and lines) was 74% at September 30, 2007.
     We do not originate home equity loans or lines that allow negative amortization, or have a loan-to-value ratio at origination greater than 100%. Home equity loans are generally fixed rate with periodic principal and interest payments. We originated $242 million of home equity loans in the 2007 third quarter with a weighted average loan-to-value ratio of 69% and a weighted average FICO score of 742. Home equity lines of credit generally have variable rates of interest and do not require payment of principal during the 10-year revolving period of the line. During the 2007 third quarter, we originated commitments of $363 million of home equity lines. The lines of credit originated during the quarter had a weighted average loan-to-value ratio of 77% and a weighted average FICO score of 749.
Residential Mortgages
     At September 30, 2007, we had $5.5 billion of residential real estate loans, which represented 14% of total loans and leases. Adjustable-rate mortgages (ARMs), primarily mortgages that have a fixed rate for the first 3 to 5 years and then adjust annually, comprised 59% of total residential mortgages.
     We do not originate residential mortgage loans that (a) allow negative amortization, (b) have a loan-to-value ratio at origination greater than 100%, or (c) are “option ARMs.” Interest-only loans comprised $0.9 billion, or 16%, of residential real estate loans, or 2% of total loans and leases, at September 30, 2007. Interest-only loans are underwritten to specific standards including minimum FICO credit scores, stressed debt-to-income ratios, and extensive collateral evaluation.
Credit Quality Overview
     The Sky Financial merger increased virtually all credit quality measures on an absolute basis: including the level of net charge-offs, NPLs, NPAs, and allowance for credit losses (ACL). We believe the more meaningful way to assess overall credit quality performance for the 2007 third quarter is through an analysis of credit quality performance ratios. This approach forms the basis of most of the following discussion.
     Aside from merger related impacts and consistent with expectations, overall credit quality was stable in the 2007 third quarter. Overall delinquencies increased only slightly and the outlook remains for only modest increases in problem assets in the 2007 fourth quarter. However, the continued weakness in our Midwest markets, most notably eastern Michigan and northern Ohio, resulted in higher levels of non-merger related NPLs and consumer net charge-offs.

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Nonperforming Loans (NPL/NPLs) and Nonperforming Assets (NPA/NPAs)
(This section should be read in conjunction with Significant Items 1 and 5.)
     Table 20 reflects period-end NPLs, NPAs, and past due loans and leases detail for each of the last five quarters.
Table 20 — Non-Performing Loans (NPLs), Non-Performing Assets (NPAs) and Past Due Loans and Leases
                                         
    2007   2006
(in thousands)   September 30,   June 30,   March 31,   December 31,   September 30,
             
Non-accrual loans and leases:
                                       
Middle market commercial and industrial
  $ 56,691     $ 41,644     $ 32,970     $ 35,657     $ 37,082  
Middle market commercial real estate
    85,144       81,108       42,458       34,831       27,538  
Small business
    36,712       32,059       30,015       25,852       21,356  
Residential mortgage
    47,738       39,868       35,491       32,527       30,289  
Home equity
    23,111       16,837       16,396       15,266       13,047  
             
Total NPLs
    249,396       211,516       157,330       144,133       129,312  
 
                                       
Other real estate, net:
                                       
Residential
    66,155       47,712       47,762       47,898       40,615  
Commercial
    2,710       1,957       1,586       1,589       1,285  
             
Total other real estate, net
    68,865       49,669       49,348       49,487       41,900  
Impaired loans held for sale (1)
    100,485                          
Other NPAs (2)
    16,296                          
             
Total NPAs
  $ 435,042     $ 261,185     $ 206,678     $ 193,620     $ 171,212  
     
 
                                       
NPLs as a % of total loans and leases
    0.62 %     0.79 %     0.60 %     0.55 %     0.49 %
 
                                       
NPA ratio (3)
    1.08       0.97       0.79       0.74       0.65  
 
                                       
Accruing loans and leases past due 90 days or more
  $ 115,607     $ 67,277     $ 70,179     $ 59,114     $ 62,054  
 
                                       
Accruing loans and leases past due 90 days or more as a percent of total loans and leases
    0.29 %     0.25 %     0.27 %     0.23 %     0.24 %
 
(1)   Held for sale represent impaired loans obtained from the Sky Financial acquisition that are intended to be sold. Held for sale loans are carried at the lower of cost or market value.
 
(2)   Other NPAs represent certain investment securities backed by mortgage loans.
 
(3)   Nonperforming assets divided by the sum of loans, impaired loans held for sale, net other real estate, and other NPAs.
     NPAs were $435.0 million at September 30, 2007, and represented 1.08% of related assets with most of the NPA increase being merger related. This compared with $171.2 million, or 0.65%, at September 30, 2006, and $261.2 million, or 0.97%, at June 30, 2007. The $173.9 million increase from the end of the prior quarter reflected:
    $144.5 million merger related consisting of:
    $100.5 million of acquired commercial loans previously classified as NPLs, which were reclassified as impaired loans held for sale and written down to their net realizable fair value upon acquisition,
 
    $32.7 million of other acquired commercial and consumer loans and classified as NPLs, and
 
    $11.3 million increase of acquired OREO.
    $13.0 million, or 3%, increase in non-merger related NPLs and OREO.

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    $16.3 million of impaired investment securities, where a decision was made to stop accruing interest and apply future interest payments to principal reduction.
     NPLs increased $37.9 million from the prior quarter, driven primarily by the $32.7 million acquired as a result of the merger. Excluding the merger impact, NPLs increased $5.2 million from the prior quarter.
     NPAs increased $241.4 million from the 2006 fourth quarter reflecting the factors discussed above as well as increases in middle market CRE NPLs, with $18.5 million, net of charge-offs, related to the two commercial real estate relationships classified as NPLs in the 2007 second quarter and an increase in middle market C&I NPLs reflecting $15.0 million related to the one Ohio commercial credit classified as an NPL during the 2007 second quarter. Residential mortgage NPLs also increased significantly during this period reflecting the softness in the overall residential market.
     NPLs increased $105.3 million from the 2006 fourth quarter, with $32.7 million merger-related. Middle market CRE NPLs increased, driven by the $28.5 million attributable to two eastern Michigan commercial real estate relationships, and middle market C&I loans increased, driven by $15.0 million related to one northern Ohio commercial credit, partially offset by declines in other loans. The majority of the remainder of the increase resulted from increased in residential mortgage, reflecting the softness in the overall residential market, and small business.
     NPA activity for each of the last five quarters ended September 30, 2007, and for the first nine-month periods of 2007 and 2006 was as follows:

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Table 21 — Non-Performing Assets (NPAs) Activity
                                         
    2007   2006
(in thousands)   Third   Second   First   Fourth   Third
             
NPAs, beginning of period
  $ 261,185     $ 206,678     $ 193,620     $ 171,212     $ 171,068  
New NPAs (1)
    92,986       112,348       51,588       60,287       55,490  
Acquired NPAs
    144,492                          
Returns to accruing status
    (8,829 )     (4,674 )     (6,176 )     (5,666 )     (11,880 )
NPA losses
    (28,031 )     (27,149 )     (9,072 )     (11,908 )     (14,143 )
Payments
    (17,589 )     (19,662 )     (18,086 )     (16,673 )     (16,709 )
Sales
    (9,172 )     (6,356 )     (5,196 )     (3,632 )     (12,614 )
             
NPAs, end of period
  $ 435,042     $ 261,185     $ 206,678     $ 193,620     $ 171,212  
     
                 
    Nine Months Ended
September 30,
(in thousands)   2007   2006
 
NPAs, beginning of period
  $ 193,620     $ 117,155  
New NPAs (1), (2)
    256,922       161,756  
Acquired NPAs
    144,492       33,843  
Returns to accruing status
    (19,679 )     (38,333 )
Loan and lease losses
    (64,252 )     (34,283 )
Payments
    (55,337 )     (42,796 )
Sales
    (20,724 )     (26,130 )
 
NPAs, end of period
  $ 435,042     $ 171,212  
 
(1)   Includes $16.3 million of other NPAs representing certain investment securities backed by mortgage loans.
 
(2)   Beginning in the second quarter of 2006, new non-performing assets includes OREO balances of loans in foreclosure which are fully guaranteed by the U.S. Government that were reported in 90 day past due loans and leases in prior periods.
Allowances for Credit Losses (ACL)
(This section should be read in conjunction with Significant Items 1 and 5.)
     We maintain two reserves, both of which are available to absorb credit losses: the ALLL and the AULC. When summed together, these reserves constitute the total ACL. Our credit administration group is responsible for developing the methodology and determining the adequacy of the ACL.

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     Table 22 reflects activity in the ALLL and AULC for each of the last five quarters.
Table 22 — Quarterly Credit Reserves Analysis
                                         
    2007   2006
(in thousands)   Third   Second   First   Fourth   Third
     
Allowance for loan and lease losses, beginning of period
  $ 307,519     $ 282,976     $ 272,068     $ 280,152     $ 287,517  
Acquired allowance for loan and lease losses
    188,128                         100  
Loan and lease losses
    (57,466 )     (44,158 )     (27,813 )     (32,835 )     (29,127 )
Recoveries of loans previously charged off
    10,360       9,658       9,695       9,866       7,888  
     
Net loan and lease losses
    (47,106 )     (34,500 )     (18,118 )     (22,969 )     (21,239 )
     
Provision for loan and lease losses
    36,952       59,043       29,026       14,885       13,774  
Allowance for loans transferred to held-for-sale
    (30,709 )                        
     
Allowance for loan and lease losses, end of period
  $ 454,784     $ 307,519     $ 282,976     $ 272,068     $ 280,152  
     
 
                                       
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 41,631     $ 40,541     $ 40,161     $ 39,302     $ 38,914  
 
                                       
Acquired AULC
    11,541                          
Provision for unfunded loan commitments and letters of credit losses
    5,055       1,090       380       859       388  
     
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 58,227     $ 41,631     $ 40,541     $ 40,161     $ 39,302  
     
Total allowances for credit losses
  $ 513,011     $ 349,150     $ 323,517     $ 312,229     $ 319,454  
     
 
                                       
Allowance for loan and lease losses (ALLL) as % of:
                                       
Transaction reserve
    0.97 %     0.94 %     0.89 %     0.86 %     0.86 %
Economic reserve
    0.17       0.21       0.19       0.18       0.20  
     
Total loans and leases
    1.14 %     1.15 %     1.08 %     1.04 %     1.06 %
     
NPLs
    182       145       180       189       217  
NPAs
    105       118       137       141       164  
 
                                       
Total allowances for credit losses (ACL) as % of:
                                       
Total loans and leases
    1.28 %     1.30 %     1.23 %     1.19 %     1.21 %
NPLs
    206       165       206       217       247  
NPAs
    118       134       157       161       187  
 

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     Table 23 reflects activity in the ALLL and AULC for the first nine-month periods of 2007 and 2006.
Table 23 — Year to Date Credit Reserves Analysis
                 
    Nine Months Ended September 30,
(in thousands)   2007   2006
 
Allowance for loan and lease losses, beginning of period
  $ 272,068     $ 268,347  
Acquired allowance for loan and lease losses
    188,128       23,784  
Loan and lease losses
    (129,437 )     (86,857 )
Recoveries of loans previously charged off
    29,713       27,451  
 
Net loan and lease losses
    (99,724 )     (59,406 )
 
Provision for loan and lease losses
    125,021       47,427  
Allowance for loans transferred to held-for-sale
    (30,709 )      
 
Allowance for loan and lease losses, end of period
  $ 454,784     $ 280,152  
 
 
               
Allowance for unfunded loan commitments and letters of credit, beginning of period
  $ 40,161     $ 36,957  
Acquired AULC
    11,541       325  
Provision for unfunded loan commitments and letters of credit losses
    6,525       2,020  
 
Allowance for unfunded loan commitments and letters of credit, end of period
  $ 58,227     $ 39,302  
 
Total allowances for credit losses
  $ 513,011     $ 319,454  
 
 
               
Allowance for loan and lease losses (ALLL) as % of:
               
Transaction reserve
    0.97 %     0.86 %
Economic reserve
    0.17       0.20  
 
Total loans and leases
    1.14 %     1.06 %
 
Non-performing loans and leases (NPLs)
    182       217  
Non-performing assets (NPAs)
    105       164  
 
               
Total allowances for credit losses (ACL) as % of:
               
Total loans and leases
    1.28 %     1.21 %
Non-performing loans and leases
    206       247  
Non-performing assets
    118       187  
 
     The increase in the ACL as compared to both the prior quarter and the 2006 fourth quarter is primarily merger related.
     The increase in the transaction reserve component, as compared to the 2006 fourth quarter, reflected the impact of increasing monitored credits during the 2007 second quarter, primarily resulting from softness in the residential and commercial real estate markets in the Midwest. The three relationships noted above represented a significant portion of the additional required reserve with the remaining increase associated with other relationships meeting the monitored credit definition.

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     Given the expectation of continued stress in commercial real estate markets, as well as weak performance of the eastern Michigan and northern Ohio economies, we expect modest increases in the ALLL ratio in the 2007 fourth quarter.
Net Charge-offs
(This section should be read in conjunction with Significant Items1 and 5.)
     Table 24 reflects net loan and lease charge-off detail for each of the last five quarters.
Table 24 — Quarterly Net Charge-Off Analysis
                                         
    2007   2006
(in thousands)   Third   Second   First   Fourth   Third
     
Net charge-offs by loan and lease type:
                                       
Commercial:
                                       
Middle market commercial and industrial
  $ 7,760     $ 3,628     $ (11 )   $ (1,827 )   $ 1,742  
Middle market commercial real estate:
                                       
Construction
    2,160       2,876       9       3,957       (2 )
Commercial
    2,282       10,428       377       144       644  
     
Middle market commercial real estate
    4,442       13,304       386       4,101       642  
Small business
    5,102       3,603       2,089       4,535       4,451  
     
Total commercial
    17,304       20,535       2,464       6,809       6,835  
     
Consumer:
                                       
Automobile loans
    5,354       1,631       2,853       2,422       1,759  
Automobile leases
    2,561       2,699       2,201       2,866       2,306  
     
Automobile loans and leases
    7,915       4,330       5,054       5,288       4,065  
Home equity
    10,841       5,405       5,968       5,820       6,734  
Residential mortgage
    4,405       1,695       1,931       2,226       876  
Other loans
    6,641       2,535       2,701       2,826       2,729  
     
Total consumer
    29,802       13,965       15,654       16,160       14,404  
     
Total net charge-offs
  $ 47,106     $ 34,500     $ 18,118     $ 22,969     $ 21,239  
     
 
                                       
Net charge-offs — annualized percentages:
                                       
Commercial:
                                       
Middle market commercial and industrial
    0.30 %     0.23 %     %     (0.12 )%     0.12 %
Middle market commercial real estate:
                                       
Construction
    0.48       0.92             1.35        
Commercial
    0.16       1.46       0.05       0.02       0.09  
     
Middle market commercial real estate
    0.24       1.29       0.04       0.41       0.06  
Small business
    0.47       0.58       0.34       0.75       0.74  
     
Total commercial
    0.31       0.64       0.08       0.22       0.23  
     
Consumer:
                                       
Automobile loans
    0.73       0.28       0.52       0.46       0.34  
Automobile leases
    0.72       0.70       0.52       0.62       0.47  
     
Automobile loans and leases
    0.73       0.45       0.52       0.54       0.40  
Home equity
    0.59       0.43       0.49       0.47       0.53  
Residential mortgage
    0.32       0.16       0.17       0.19       0.07  
Other loans
    4.11       2.39       2.56       2.63       2.54  
     
Total consumer
    0.67       0.41       0.46       0.46       0.40  
     
Net charge-offs as a % of average loans
    0.47 %     0.52 %     0.28 %     0.35 %     0.32 %
     

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     Table 25 reflects net loan and lease charge-off detail for the first nine-month periods of 2007 and 2006.
Table 25 — Year To Date Net Charge-Off Analysis
                 
    Nine Months Ended September 30,
(in thousands)   2007   2006
 
Net charge-offs by loan and lease type:
               
Commercial:
               
Middle market commercial and industrial
  $ 11,377     $ 8,145  
Middle market commercial real estate:
               
Construction
    5,045       (404 )
Commercial
    13,087       2,411  
 
Middle market commercial real estate
    18,132       2,007  
Small business
    10,794       10,690  
 
Total commercial
    40,303       20,842  
 
Consumer:
               
Automobile loans
    9,838       5,908  
Automobile leases
    7,461       7,579  
 
Automobile loans and leases
    17,299       13,487  
Home equity
    22,214       16,034  
Residential mortgage
    8,031       2,279  
Other loans
    11,877       6,764  
 
Total consumer
    59,421       38,564  
 
Total net charge-offs
  $ 99,724     $ 59,406  
 
 
               
Net charge-offs — annualized percentages:
               
Commercial:
               
Middle market commercial and industrial
    0.20 %     0.20 %
Middle market commercial real estate:
               
Construction
    0.48       (0.04 )
Commercial
    0.46       0.12  
 
Middle market commercial real estate
    0.47       0.07  
Small business
    0.46       0.63  
 
Total commercial
    0.34       0.24  
 
Consumer:
               
Automobile loans
    0.53       0.39  
Automobile leases
    0.64       0.48  
 
Automobile loans and leases
    0.57       0.43  
Home equity
    0.54       0.43  
Residential mortgage
    0.22       0.07  
Other loans
    3.17       2.04  
 
Total consumer
    0.53       0.36  
 
Net charge-offs as a % of average loans
    0.43 %     0.31 %
 
     Total commercial net charge-offs in the 2007 third quarter were $17.3 million, or an annualized 0.31%. This was higher than an annualized 0.22% in the 2006 fourth quarter, but less than the annualized 0.64% in the prior quarter. In the 2007 second quarter, we provided an additional $24.8 million for loan losses related to two eastern Michigan homebuilder credits and one northern Ohio automotive supplier credit. In that quarter, we charged off $12.2 million, or an annualized 0.38%, against these reserves. In the third quarter 2007, we charged off an additional $10.0 million, or an annualized 0.18%, against these previously established reserves.
     Total consumer net charge-offs in the 2007 third quarter were $29.8 million, or an annualized 0.67%. This was higher than the 0.46% in the 2006 fourth quarter and 0.41% in the prior quarter. The increases in automobile loan and lease net charge-offs from both the prior quarter and 2006 fourth quarter reflected both the impact of the Sky Financial portfolio, as

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well as seasonal factors. The increases in residential mortgage and home equity net charge-offs reflected continued market weakness, particularly in the southeast Michigan and northeast Ohio markets.
     Total net charge-offs for the first nine-months of 2007 were an annualized 0.43% of related total average loans and leases, up from an annualized 0.31% in the comparable year-ago period. The increase primarily reflected higher commercial loan net charge-offs associated with the general weakness in our Midwest markets and was influenced by higher CRE net charge-offs. This included the $22.2 million associated with the three commercial credit relationships noted earlier. The 0.43% annualized total net charge-offs was within our long-term net charge-off targeted range of 0.35%-0.45%.
Market Risk
     Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, foreign exchange rates, equity prices, credit spreads, and expected lease residual values. We have identified two primary sources of market risk: interest rate risk and price risk. Interest rate risk is our primary market risk.
Interest Rate Risk
     Interest rate risk results from timing differences in the repricings and maturities of assets and liabilities, and changes in relationships between market interest rates and the yields on assets and rates on liabilities, as well as from the impact of embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to terminate certificates of deposit before maturity.
     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, 2007 and December 31, 2006. All of the positions were well within the board of directors’ policy limits.
Table 26 — Net Interest Income at Risk
                                 
    Net Interest Income at Risk (%)
Basis point change scenario   -200   -100   +100   +200
     
September 30, 2007
    -0.8 %     -0.3 %     +0.5 %     +0.8 %
December 31, 2006
    0.0 %     0.0 %     -0.2 %     -0.4 %
     The net interest income at risk reported as of September 30, 2007 shows additional asset sensitivity to the balance sheet reflecting an increase in trading portfolio securities used to hedge the value of our mortgage servicing rights.
     The primary simulations for economic value of equity (EVE) at 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 September 30, 2007 results compared to December 31, 2006.

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Table 27 — Economic Value of Equity at Risk
                                 
    Economic Value of Equity at Risk (%)
Basis point change scenario   -200   -100   +100   +200
     
September 30, 2007
    0.0 %     +1.4 %     -4.9 %     -9.5 %
December 31, 2006
    +0.5 %     +1.4 %     -4.7 %     -11.3 %
     The EVE at risk reported as of September 30, 2007 incorporates a methodology change resulting from the acquisition of Sky Financial. Previously, EVE at risk was measured on the basis of total shareholders’ equity. Going forward, given the impact of the Sky Financial acquisition, EVE at risk will be measured on the basis of net equity. Net equity equals total shareholders’ equity adjusted for goodwill and other intangible assets, and the ACL. This change in the measurement of EVE risk did not affect our compliance with limits that have been set by our board of directors. The table below reconciles the difference between total shareholders’ equity and net equity.
                 
    2007   2006
(in thousands)   September 30,   December 31,
 
Total Shareholders’ Equity
  $ 6,249,674     $ 3,014,326  
Less:
               
Goodwill
    2,995,961       570,876  
Other intangible Assets
    443,446       59,487  
Add:
               
Allowance for Credit Losses
    513,011       312,229  
 
Net Equity
  $ 3,323,278     $ 2,696,192  
 
Price Risk
     Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and are subject to fair value accounting.
Liquidity Risk
     Liquidity risk arises from the possibility that funds may not be available to satisfy current or future commitments based on external macro market issues, asset and liability activities, investor perception of financial strength, and events unrelated to the company such as war, terrorism, or financial institution market specific issues. We manage liquidity risk at both the Bank and at the parent company, Huntington Bancshares Incorporated.
     Liquidity policies and limits are established by our board of directors, with operating limits set by the market risk committee (MRC), based upon analyses of the ratio of loans to deposits, the percentage of assets funded with non-core or wholesale funding, and the amount of liquid assets available to cover non-core funds maturities. In addition, guidelines are established to ensure diversification of wholesale funding by type, source, and maturity and provide sufficient balance sheet liquidity to cover 100% of wholesale funds maturing within a six-month time period. A contingency funding plan is in place, which includes forecasted sources and uses of funds under various scenarios in order to prepare for unexpected liquidity shortages, including the implications of any rating changes. The MRC meets monthly to identify and monitor liquidity issues, provide policy guidance, and oversee adherence to, and the maintenance of, an evolving contingency funding plan.
Bank Liquidity
     Conditions in the capital markets have been volatile during 2007, particularly during the third quarter. As a result, there have been significant disruptions in a variety of funding arrangements typically used by many banks, including the availability of liquid markets for the sale of mortgage loan production not conforming to secondary market standards required by Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). In

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addition, many banks relying on short term funding structures such as commercial paper and alternative collateral repurchase agreements have had limited access to these markets. Huntington has maintained a diversified wholesale funding structure with an emphasis on reducing the roll over risk of maturing borrowings resulting in minimal reliance on the short term funding markets. Huntington does not have an active commercial paper funding program and, while active in the securitization markets (primarily indirect auto loans and leases) does not rely heavily on these sources of funding, and therefore, our liquidity has not been subject to the recent disruption in its funding positions. In addition, Huntington does not provide liquidity facilities for conduits, structured investment vehicles, or other off balance sheet financing structures. Indicative credit spreads have widened for Huntington debt along with other peer banks reflecting the current market conditions and we expect these spreads to remain wider than in prior quarters.
     Our primary source of funding for the Bank is core deposits from retail and commercial customers. Core deposits are comprised of interest bearing and non-interest bearing demand deposits, savings and other domestic time deposits, consumer certificates of deposit, and non-consumer certificates of deposit less than $100,000. Non-core deposits include: brokered time deposits, large denomination certificates of deposit, foreign deposits, and other domestic time deposits, comprised primarily of IRA deposits and public fund certificates of deposit greater than $100,000.
     Table 28, presented on the next page, reflects deposit composition detail for each of the past five quarters.

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Table 28 — Deposit Composition (1)
                                                                                 
    2007   2006
(in thousands)   September 30,   June 30,   March 31,   December 31,   September 30,
    (Unaudited)   (Unaudited)                                                
     
By Type
                                                                               
Demand deposits — non-interest bearing
  $ 4,984,663       13.0 %   $ 3,625,540       14.7 %   $ 3,696,231       15.0 %   $ 3,615,745       14.4 %   $ 3,480,888       14.1 %
Demand deposits — interest bearing
    3,982,102       10.4       2,496,250       10.1       2,486,304       10.1       2,389,085       9.5       2,243,153       9.1  
Money market deposits
    6,721,963       17.5       5,323,707       21.6       5,568,104       22.6       5,362,459       21.4       5,678,252       23.0  
Savings and other domestic deposits
    4,877,476       12.7       2,845,945       11.6       2,879,098       11.7       2,986,287       11.9       3,011,268       12.2  
Core certificates of deposit
    10,611,821       27.6       5,738,598       23.3       5,408,289       22.0       5,364,610       21.4       5,313,473       21.5  
     
Total core deposits
    31,178,025       81.2       20,030,040       81.3       20,038,026       81.4       19,718,186       78.6       19,727,034       79.9  
Other domestic deposits of $100,000 or more
    1,914,417       5.0       1,052,545       4.3       1,287,186       5.2       1,191,984       4.8       1,259,720       5.1  
Brokered deposits and negotiable CDs
    3,701,726       9.6       2,920,726       11.9       2,721,927       11.1       3,345,943       13.4       3,183,489       12.9  
Deposits in foreign offices
    1,610,197       4.2       596,601       2.5       538,754       2.3       791,657       3.2       568,152       2.1  
     
Total deposits
  $ 38,404,365       100.0 %   $ 24,599,912       100.0 %   $ 24,585,893       100.0 %   $ 25,047,770       100.0 %   $ 24,738,395       100.0 %
     
 
                                                                               
Total core deposits:
                                                                               
Commercial
  $ 9,017,474       28.3 %   $ 6,267,644       31.3 %   $ 6,314,309       31.5 %   $ 6,063,372       30.8 %   $ 6,214,462       31.5 %
Personal
    22,160,551       71.7       13,762,396       68.7       13,723,717       68.5       13,654,814       69.2       13,512,572       68.5  
     
Total core deposits
  $ 31,178,025       100.0 %   $ 20,030,040       100.0 %   $ 20,038,026       100.0 %   $ 19,718,186       100.0 %   $ 19,727,034       100.0 %
     
 
                                                                               
By Business Segment
                                                                               
Regional Banking:
                                                                               
Central Ohio
  $ 5,931,926       15.4 %   $ 5,052,242       20.5 %   $ 5,130,716       20.9 %   $ 5,122,091       20.4 %   $ 5,040,855       20.4 %
Northwest Ohio
    2,841,442       7.4       1,097,765       4.5       1,062,255       4.3       1,043,918       4.2       1,008,951       4.1  
Greater Cleveland
    3,071,014       8.0       2,025,824       8.2       2,020,165       8.2       1,995,203       8.0       2,126,795       8.6  
Greater Akron/Canton
    2,629,397       6.8       1,883,329       7.7       1,909,677       7.8       1,894,707       7.6       1,896,046       7.7  
Southern Ohio / Kentucky
    2,626,166       6.8       2,353,087       9.6       2,353,129       9.6       2,275,880       9.1       2,212,443       8.9  
Mahoning Valley
    1,540,095       4.0                                                  
Ohio Valley
    1,374,947       3.6                                                  
West Michigan
    2,966,558       7.7       2,820,076       11.5       2,826,489       11.5       2,757,434       11.0       2,938,112       11.9  
East Michigan
    2,420,169       6.3       2,357,108       9.6       2,460,100       10.0       2,418,450       9.7       2,357,607       9.5  
Western Pennsylvania
    1,663,174       4.3                                                  
Pittsburgh
    933,468       2.4                                                  
Central Indiana
    1,910,530       5.0       851,839       3.5       903,119       3.7       819,106       3.3       847,726       3.4  
West Virginia
    1,559,864       4.1       1,586,407       6.4       1,547,095       6.3       1,515,999       6.1       1,517,834       6.1  
Other Regional
    1,319,027       3.4       490,194       2.0       163,456       1.7       387,819       1.5       354,888       1.4  
     
Regional Banking
    32,787,777       85.4       20,517,871       83.4       20,637,340       83.9       20,230,607       80.8       20,301,257       82.1  
Dealer Sales
    63,399       0.2       57,554       0.2       54,644       0.2       58,885       0.2       58,918       0.2  
Private Financial and Capital Markets Group
    1,630,869       4.2       1,103,760       4.5       1,171,982       4.8       1,162,335       4.6       1,144,731       4.6  
Treasury / Other (2)
    3,922,320       10.2       2,920,727       11.9       2,721,927       11.1       3,595,943       14.4       3,233,489       13.1  
     
Total deposits
  $ 38,404,365       100.0 %   $ 24,599,912       100.0 %   $ 24,585,893       100.0 %   $ 25,047,770       100.0 %   $ 24,738,395       100.0 %
     
 
(1)   Reflects post-Sky Financial merger organizational structure effective on July 1, 2007. Accordingly, balances presented for prior periods do not include the impact of the acquisition.
 
(2)   Comprised largely of national market deposits.

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     Core deposits can also increase our need for liquidity as certificates of deposit mature or are withdrawn early and as non-maturity deposits, such as checking and savings account balances, are withdrawn.
     To the extent that we are unable to obtain sufficient liquidity through core deposits, we can meet our liquidity needs through short-term borrowings by purchasing fed funds or by selling securities under repurchase agreements. Our bank also has a $6.0 billion bank note facility, of which $2.8 billion remains available and a $4.5 billion borrowing capacity at the Federal Home Loan Bank of Cincinnati, of which $1.8 billion remained unused at September 30, 2007. Other sources of liquidity exist within our securities available for sale, the relatively shorter-term structure of our commercial loans and automobile loans, and the Federal Reserve Bank’s discount window.
     At September 30, 2007, we believe that the Bank had sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Parent Company Liquidity
     At September 30, 2007, the parent company had $240.2 million in cash or cash equivalents. This declined significantly during the quarter and returned to a more typical level when, on July 2, 2007, as part of consideration for the merger, the parent company made a cash payment of $357.0 million to the former shareholders of Sky Financial as part of the purchase price. On July 17, 2007, Huntington declared a quarterly cash dividend on its common stock of $0.265 per common share, payable October 1, 2007, to shareholders of record on September 14, 2007. In October 2007, the Bank declared and paid a dividend of $120.0 million to the parent company. Based on the regulatory dividend limitation, the Bank could have declared and paid $111.7 million of additional dividends to the parent company at September 30, 2007 without regulatory approval.
     To help meet any additional liquidity needs, we have an open-ended, automatic shelf registration statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt or equity securities.
     Considering potential future obligations, and expected dividend payments, we believe the parent company has sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Credit Ratings
     Credit ratings by the three major credit rating agencies are an important component of our 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 our 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. (See the Liquidity Risks section in Part 1 of the 2006 Annual Report on Form 10-K for additional discussion.)
     Credit ratings as of September 30, 2007, for the parent company and the Bank were:

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Table 29 — Credit Ratings
                                 
    September 30, 2007  
    Senior Unsecured     Subordinated              
    Notes     Notes     Short-Term     Outlook  
     
Huntington Bancshares Incorporated
                               
Moody’s Investor Service
    A3     Baal   P-2     Stable
Standard and Poor’s
  BBB+   BBB     A-2     Stable
Fitch Ratings
    A       A-       F1     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
     These credit ratings were unchanged from December 31, 2006 and were re-affirmed by each of the credit rating agencies after the Sky Financial acquisition was announced.
Off-Balance Sheet Arrangements
     In the normal course of business, we enter 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.
     Through our credit process, we monitor 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 the provision for credit losses. At September 30, 2007, we had $1.5 billion of standby letters of credit outstanding, of which 34% were collateralized.
     We enter into forward contracts relating to the mortgage banking business. At September 30, 2007, December 31, 2006, and September 30, 2006, we had commitments to sell residential real estate loans of $466.1 million, $319.9 million, and $314.2 million, respectively. These contracts mature in less than one year.
     We do not believe that off-balance sheet arrangements will have a material impact on our liquidity or capital resources.
Capital
     Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, liquidity, and operational risks inherent in our business, and to provide the flexibility needed for future growth and new business opportunities.
     During the second quarter of 2007, Huntington Capital III, a trust formed by us, issued $250 million of enhanced trust preferred securities. The securities were secured by junior subordinated notes from the parent company. The enhanced trust preferred securities have a coupon of 6.65% for the first ten years and a floating rate thereafter. They also have a scheduled maturity date of 2037 and may be called, at our discretion, at the 10 th and 20 th anniversaries of the issuance of the notes. In accordance with FIN 46R, the trust is not consolidated in our balance sheet; the junior subordinated notes issued by the parent company represent the obligation reflected in our balance sheet. The junior subordinate notes issued to this trust qualify as Tier 1 regulatory capital for Huntington.
     Our total risk-weighted assets, Tier 1 leverage, Tier 1 risk-based capital, and total risk-based capital ratios for five quarters are shown in Table 30 and are well in excess of minimum levels established for “well capitalized” institutions of 5.00%, 6.00%, and 10.00%, respectively. The decrease in the tangible equity to assets ratio from December 31, 2006,

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primarily reflected the impact of the $2.8 billion of intangibles recorded with the Sky Financial acquisition and a temporary $1.5 billion increase in other assets, which cleared in October of 2007. The expectation is that this ratio will return to our targeted range of 6.00%-6.25% by mid-2008. The decrease in the tangible equity to risk-weighted asset ratio from December 31, 2006 was also primarily merger related.
Table 30 — Capital Adequacy
                                                 
    “Well-                                
    Capitalized”   2007     2006
(in millions)   Minimums   September 30,   June 30,   March 31,   December 31,   September 30,
         
Total risk-weighted assets (1)
          $ 45,978     $ 32,121     $ 31,473     $ 31,155     $ 31,330  
 
                                               
Tier 1 leverage ratio (1)
    5.00 %     7.58 %     9.07 %     8.24 %     8.00 %     7.99 %
Tier 1 risk-based capital ratio (1)
    6.00       8.35       9.74       8.98       8.93       8.95  
Total risk-based capital ratio (1)
    10.00       11.54       13.49       12.82       12.79       12.81  
 
                                               
Tangible equity / asset ratio
            5.42       6.82       7.06       6.87       7.13  
Tangible equity / risk-weighted assets ratio (1)
            6.11       7.60       7.70       7.65       7.97  
Average equity / average assets
            11.50       8.66       8.63       8.70       8.30  
 
(1)   September 30, 2007 figures are estimated. Based on an interim decision by the banking agencies on December 14, 2006, Huntington has excluded the impact of adopting Statement 158 from the regulatory capital calculations.
     The Bank is primarily supervised and regulated by the OCC, which establishes regulatory capital guidelines for banks similar to those established for bank holding companies by the Federal Reserve Board. We intend to maintain the Bank’s risk-based capital ratios at levels at which the Bank would be considered “well capitalized” by regulators. At September 30, 2007, the Bank had tier one and total risk-based capital in excess of the minimum level required to be considered “well capitalized” of $447.6 million and $194.1 million, respectively.

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Table 31 — Quarterly Common Stock Summary
                                         
    2007   2006
(in thousands, except per share amounts)   Third   Second   First   Fourth   Third
     
 
                                       
Common stock price, per share
                                       
High (1)
  $ 22.930     $ 22.960     $ 24.140     $ 24.970     $ 24.820  
Low (1)
    16.050       21.300       21.610       22.870       23.000  
Close
    16.980       22.740       21.850       23.750       23.930  
Average closing price
    18.671       22.231       23.117       24.315       23.942  
 
                                       
Dividends, per share
                                       
Cash dividends declared on common stock
  $ 0.265     $ 0.265     $ 0.265     $ 0.250     $ 0.250  
 
                                       
Common shares outstanding
                                       
Average — basic
    365,895       236,032       235,586       236,426       237,672  
Average — diluted
    368,280       239,008       238,754       239,881       240,896  
Ending
    365,898       236,244       235,714       235,474       237,921  
Book value per share
  $ 17.08     $ 12.97     $ 12.95     $ 12.80     $ 13.15  
Tangible book value per share
    7.68       10.33       10.29       10.12       10.50  
 
                                       
Common share repurchases
                                       
Number of shares repurchased
                      3,050        
 
(1)   High and low stock prices are intra-day quotes obtained from NASDAQ.

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LINES OF BUSINESS DISCUSSION
     This section reviews financial performance from a line of business perspective and should be read in conjunction with the Discussion of Results of Operations, Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements, and other sections for a full understanding of consolidated financial performance.
     We have three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial and Capital Markets Group (PFCMG). A fourth segment includes our Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon our management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around our organizational and management structure and, accordingly, the results derived 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.
(FLOW CHART)
      Acquisition of Sky Financial
     The businesses acquired in the Sky Financial merger were fully integrated into each of the corresponding Huntington lines of business as of July 1, 2007. The Sky Financial merger had the largest impact on the Regional Banking line of business, and also significantly impacted PFCMG and Treasury/Other. For Regional Banking, the merger added four new banking regions and strengthened our presence in five regions where Huntington previously operated. The merger did not significantly impact our Dealer Sales line of business.
      Funds Transfer Pricing
     We use a centralized funds transfer pricing (FTP) methodology to attribute appropriate net interest income to the business segments. The Treasury/Other business segment charges (credits) an internal cost of funds for assets held in (or pays for funding provided by) each line of business. The FTP rate is based on prevailing market interest rates for comparable duration assets (or liabilities). Deposits of an indeterminate maturity receive an FTP credit based on vintage-based pool rates. Other assets, liabilities, and capital are charged (credited) with a four-year moving average FTP rate. The intent of the FTP methodology is to eliminate all interest rate risk from the lines of business by providing matched duration funding of assets and liabilities. The result is to centralize the financial impact, management, and reporting of interest rate and liquidity risk in Treasury/Other where it can be monitored and managed.
      Treasury/Other
     The Treasury function includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the other three business segments. Assets in this segment include investment securities and bank owned life insurance.

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     Net interest income includes the impact of administering our investment securities portfolios and the net impact of derivatives used to hedge interest rate sensitivity. Non-interest income includes miscellaneous fee income not allocated to other business segments such as bank owned life insurance income and any investment securities and trading assets gains or losses. Non-interest expense includes certain corporate administrative, merger, and other miscellaneous expenses not allocated to other business segments. The provision for income taxes for the other business segments is calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a result, Treasury reflects a credit for income taxes representing the difference between the actual effective tax rate and the statutory tax rate used to allocate income taxes to the other segments.

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Regional Banking
(This section should be read in conjunction with Significant Items 1, 5, and 7.)
Objectives, Strategies, and Priorities
     Our Regional Banking line of business provides traditional banking products and services to consumer, small business, and commercial customers located in its 13 operating regions within the six states of Ohio, Michigan, West Virginia, Indiana, Pennsylvania, and Kentucky. It provides these services through a banking network of over 600 branches, and over 1,400 ATMs, along with Internet and telephone banking channels. It also provides certain services outside of these six states, including mortgage banking and equipment leasing. 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. At September 30, 2007, Retail Banking accounted for 50% 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.
     We have a business model that emphasizes the delivery of a complete set of banking products and services offered by larger banks, but distinguished by local decision-making about the pricing and the offering of these products. Our strategy is to focus on building a deeper relationship with our customers by providing a “Simply the Best” service experience. This focus on service requires continued investments in state-of-the-art platform technology in our branches, award-winning retail and business websites for our customers, extensive development of associates, and internal processes that empower our local bankers to serve our customers better. We expect the combination of local decision-making and “Simply the Best” service will result in a competitive advantage and drive revenue and earnings growth.
Table 32 — Key Performance Indicators for Regional Banking
                                 
    Nine Months Ended September 30,   Change
(in thousands unless otherwise noted)   2007   2006   Amount   Percent
 
Net income — operating
  $ 276,336     $ 260,645     $ 15,691       6.0 %
Total average assets (in millions of dollars)
    25,514       20,298       5,216       25.7  
Total average deposits (in millions of dollars)
    24,549       19,555       4,994       25.5  
Return on average equity
    26.8 %     30.9 %     (4.1 )%     (13.3 )
Retail banking # DDA households (eop)
    910,947       560,526       350,421       62.5  
Retail banking # new relationships 90-day cross-sell (average)
    2.68       2.80       (0.12 )     (4.3 )
Small business # business DDA relationships (eop)
    104,137       60,341       43,796       72.6  
Small business # new relationships 90-day cross-sell (average)
    2.40       2.25       0.15       6.7  
Mortgage banking closed loan volume (in millions)
  $ 2,508     $ 2,131     $ 377       17.7  
 
eop — End of Period.
      2007 First Nine Months versus 2006 First Nine Months
     Regional Banking contributed $276.3 million, or 88%, of the company’s net operating earnings for the first nine months of 2007. This compares with $260.6 million in the same year-ago period an increase of $15.7 million, or 6%. The $15.7 million increase includes the impact of the Sky Financial acquisition. Substantially all of the increase in each income statement component was attributable to the impact of the acquisition.

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     Net interest income increased $120.4 million, substantially all of which was merger related. Since 77% of Huntington’s average loans and leases and 85% of Huntington’s total deposits are provided by Regional Banking, the performance and performance trends for net interest income are substantially the same as those of Huntington, and thus, Regional Banking’s net interest income performance trends do not materially differ from those discussed under “Results of Operations – Net interest income.” The following table details the impact of the merger on Regional Banking’s third quarter average total loans including a full quarter of merger related impact, compared with the second quarter, which does not include any merger related impact:
Average Total Loans and Leases
Regional Banking
                         
    Third   Second    
    Quarter   Quarter   Change
(in millions)   2007   2007   Amount
 
Central Ohio
  $ 4,910     $ 3,681     $ 1,229  
Northwest Ohio
    2,341       452       1,889  
Greater Cleveland
    2,993       2,064       929  
Greater Akron/Canton
    2,024       1,328       696  
Southern Ohio/Kentucky
    2,527       2,205       322  
Mahoning Valley
    871             871  
Ohio Valley
    759             759  
West Michigan
    2,484       2,447       37  
East Michigan
    1,662       1,639       23  
Western Pennsylvania
    1,069             1,069  
Pittsburgh
    912             912  
Central Indiana
    1,406       982       424  
West Virginia
    1,163       1,128       35  
Other Regional
    6,834       3,737       3,097  
 
Regional Banking
  $ 31,955     $ 19,663     $ 12,292  
 
N.M. Not meaningful.
     Additionally, the Sky Financial merger impacted deposits. The following table details the impact of the merger on Regional Banking’s third quarter average total loans including a full quarter of merger related impact, compared with the second quarter, which does not include any merger related impact:
Average Total Deposits
Regional Banking
                         
    Third     Second      
    Quarter     Quarter     Change
(in millions)   2007     2007     Amount
 
Central Ohio
  $ 6,026     $ 5,014     $ 1,012  
Northwest Ohio
    2,856       1,070       1,786  
Greater Cleveland
    2,969       2,024       945  
Greater Akron/Canton
    2,613       1,898       715  
Southern Ohio/Kentucky
    2,564       2,333       231  
Mahoning Valley
    1,562             1,562  
Ohio Valley
    1,380             1,380  
West Michigan
    2,868       2,784       84  
East Michigan
    2,423       2,397       26  
Western Pennsylvania
    1,695             1,695  
Pittsburgh
    943             943  
Central Indiana
    1,831       854       977  
West Virginia
    1,562       1,535       27  
Other Regional
    1,597       487       1,110  
 
Regional Banking
  $ 32,889     $ 20,396     $ 12,493  
 

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     Non-interest income increased $63.3 million, substantially all of which was merger related. For the first nine months of 2007, non-merger deposit service charges and electronic banking fees showed significant growth compared with the same year-ago period.
     Non-interest expense increased $86.3 million, substantially all of which was merger related. During the quarter, Sky Bank was merged into the Bank, concurrent with the conversion of major systems. At this time, we closed several duplicate branches. Non-merger related decreases in non-interest expense were noted in personnel costs, net occupancy, and marketing.
     Regional Banking’s provision for credit losses increased $73.2 million for the first nine months from the comparable year-ago period. As 77% of Huntington’s average loans and lease balances are provided by Regional Banking, and as Regional Banking accounts for 98% of Huntington’s NPAs, the credit quality performance and trends in credit quality are substantially the same as those of Huntington and, thus, Regional Banking’s credit quality trends do not materially differ from those discussed under “Risk Management and Capital – Credit Quality.”
     After the merger with Sky Financial, regional banking now has 13 banking regions, organized under four group presidents. The merger helps to diversify Regional Banking’s performance from the economic issues in any one region and strengthens our market share, ranking first in four of our 12 Metropolitan Statistical Areas (MSAs). Additionally, the acquisition strengthens our mortgage banking business, expanding the mortgage loans serviced for others to $15.1 billion from $8.0 billion. The merger also expanded our equipment leasing and small-business administration (SBA) lending businesses.

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Dealer Sales
(This section should be read in conjunction with Significant Item 1 and 7.)
Objectives, Strategies, and Priorities
     Our Dealer Sales line of business provides a variety of banking products and services to more than 3,600 automotive dealerships within our primary banking markets, as well as in Arizona, Florida, Georgia, Nevada, New Jersey, New York, North Carolina, South Carolina, and Tennessee. Dealer Sales finances the purchase of automobiles by customers at the automotive dealerships; purchases automobiles from dealers and simultaneously leases the automobiles to consumers under long-term leases; finances dealerships’ new and used vehicle inventories, land, buildings, and other real estate owned by the dealership, or dealer working capital needs; and provides other banking services to the automotive dealerships and their owners. Competition from the financing divisions of automobile manufacturers and from other financial institutions is intense. Dealer Sales’ production opportunities are directly impacted by the general automotive sales business, including programs initiated by manufacturers to enhance and increase sales directly. We have been in this line of business for over 50 years.
     The Dealer Sales strategy has been to focus on developing relationships with the dealership through its finance department, general manager, and owner. An underwriter who understands each local market makes loan decisions, though we prioritize maintaining pricing discipline over market share.
Table 33 — Key Performance Indicators for Dealer Sales
                                 
    Nine Months Ended September 30,   Change
(in thousands unless otherwise noted)   2007   2006   Amount   Percent
     
Net income — operating
  $ 36,502     $ 49,913     $ (13,411 )     (26.9 ) %
Total average assets (in millions of dollars)
    5,031       5,403       (372 )     (6.9 )
Return on average equity
    26.8 %     23.7 %     3.1 %     13.1  
Automobile loans production (in millions)
  $ 1,423.6     $ 1,337.4     $ 86.2       6.4  
Automobile leases production (in millions)
    239.4       273.7       (34.3 )     (12.5 )
2007 First Nine Months versus 2006 First Nine Months
     Dealer Sales contributed $36.5 million, or 12%, of the company’s net operating earnings for the first nine months of 2007. This compared with $49.9 million in the same year-ago period, a decline of $13.4 million, or 27%.
     Factors contributing to the $13.4 million decline in net operating earnings include:
     Net interest income declined $3.7 million, or 4%, in fully taxable equivalent net interest income, primarily reflecting a 10 basis point decline in the net interest margin to 2.54% for the first nine months of 2007 from 2.64% for the comparable year-ago period. This decline reflected a continuation of competitive pricing pressures and the resulting lower margins on new production as compared with margins on loans and leases that are being repaid. The addition of automobile loans acquired from Sky Financial and an increase in indirect loan production partially offset this decline.
     The provision for credit losses increased $7.2 million, or 76%, primarily reflecting a $4.1 million increase in net charge-offs and an increase in the provision attributed to loan growth. Net charge-offs totaled $18.3 million, or an annualized 0.48%, of average loans and leases, for the first nine months of 2007 as compared with $14.3 million, or an annualized 0.38% of average loans and leases, for the comparable year-ago period. Growth in total loans and direct finance leases, excluding loans added by the Sky Financial acquisition, was primarily attributed to higher production as well as lower sales levels, noted below.

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     Non-interest income declined $36.6 million, or 53%, primarily reflecting the decrease in net automobile operating lease income as that portfolio continued to decline. Additionally, there were declines in insurance related revenues, lease termination income and servicing income totaling $4.0 million.
     Non-interest expense declined $26.8 million, or 32%, primarily reflecting a $24.1 million decrease in automobile operating lease expense. Other non-interest expense declined $2.7 million, reflecting declines in lease residual value insurance and other residual value related losses due to an overall decline in the lease portfolio along with lower relative losses on vehicles sold at auction.

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Private Financial and Capital Markets Group (PFCMG)
(This section should be read in conjunction with Significant Items 1, 3, and 4.)
Objectives, Strategies, and Priorities
     The PFCMG provides products and services designed to meet the needs of higher net worth customers. Revenue is derived through the sale of trust, asset management, investment advisory, brokerage, insurance, and private banking products and services. Sky Insurance, included within PFCMG, provides retail and commercial insurance agency services. PFCMG also focuses on financial solutions for corporate and institutional customers that include investment banking, sales and trading of securities, mezzanine capital financing, and risk management products. To serve higher net worth customers, a unique distribution model is used that employs a single, unified sales force to deliver products and services mainly through Regional Banking distribution channels. PFCMG provides investment management and custodial services to our 31 proprietary mutual funds, including 11 variable annuity funds, which represented approximately $4.6 billion in assets under management at September 30, 2007. The Huntington Investment Company offers brokerage and investment advisory services to both Regional Banking and PFCMG customers through a combination of licensed investment sales representatives and licensed personal bankers. PFCMG’s insurance entities provide a complete array of insurance products including individual life insurance products ranging from basic term life insurance to estate planning, group life and health insurance, property and casualty insurance, mortgage title insurance, and reinsurance for payment protection products. Income and related expenses from the sale of brokerage and insurance products is shared with the line of business that generated the sale or provided the customer referral, most notably Regional Banking.
     PFCMG’s primary goals are to consistently increase assets under management by offering innovative products and services that are responsive to our clients’ changing financial needs and to grow the balance sheet mainly through increased loan volume achieved through improved cross-selling efforts. To grow managed assets, the Huntington Investment Company sales team has been utilized as the distribution source for trust and investment management.
Table 34 — Key Performance Indicators for Private Financial and Capital Markets Group
                                 
    Nine Months Ended September 30,   Change
(in thousands unless otherwise noted)   2007   2006   Amount   Percent
     
Net income — operating
  $ 34,441     $ 40,854     $ (6,413 )     (15.7) %
Total average assets (in millions of dollars)
    2,438       2,102       336       16.0  
Return on average equity
    27.1 %     36.3 %     (9.2) %     (25.3 )
Total brokerage and insurance income
  $ 61,200     $ 40,627     $ 20,573       50.6  
Total assets under management (in billions)
    16.7       11.9       4.8       40.3  
Total trust assets (in billions)
    60.0       49.6       10.4       21.0  
2007 First Nine Months versus 2006 First Nine Months
     PFCMG contributed $34.4 million, or 11%, of the company’s net operating earnings for the first nine months of 2007. This compared with $40.9 million in the same year-ago period, a decline of $6.4 million, or 16%. The $6.4 million decrease included a merger related positive impact of $3.8 million. Non-merger related net income declined $10.2 million.
     Fully taxable net interest income for the first nine months of 2007 increased $5.9 million compared with the same year-ago period, substantially all of which was attributable to merger related increases in loans and deposits.
     Non-interest income increased $23.0 million for the first nine months of 2007 compared with the same year-ago period, substantially all of which was merger related. On a non-merger basis, increases in trust services income and brokerage and insurance income were offset by a large decrease in other non-interest income. The improved level of trust services income reflected trust managed asset growth, most notably for the Huntington Funds. Six out of nine of the equity funds outperformed the S&P for the nine months ended September 30, 2007. A new fund, Real Strategies, was introduced in May

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2007 and grew to $29 million in assets as of September 30, 2007. Trust services income also increased from the acquisition of Unified Fund Services on December 31, 2006, which had attributable revenues of $7.3 million for the first nine months of 2007. These increases were offset by a decrease in other non-interest income, primarily related to the $14.8 million impact of market valuation adjustments on its portfolio of equity funds. These portfolio losses of $10.6 million for the first nine months of 2007 compared with market value gains of $4.2 million for the same year-ago period. The carrying value of this portfolio was $23.8 million at September 30, 2007 and was carried at fair value.
     Non-interest expense increased $37.1 million for the first nine months of 2007 compared with the same year-ago period, substantially all of which was merger related. Non-merger related personnel and other expenses increased compared with the same year-ago period. The increase in personnel costs reflected the acquisition of Unified Fund Services and the opening of new trust offices in Dayton, Ohio, and Indianapolis, Indiana in the 2006 second quarter, and sales commissions due to increased revenue. The increase in other expenses reflected many of the same factors as the increase in personnel expense and increases in minority interest expense related to mezzanine lending.

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Item 1. Financial Statements
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
                         
    2007   2006
(in thousands, except number of shares)   September 30,   December 31,   September 30,
 
Assets
                       
Cash and due from banks
  $ 1,201,981     $ 1,080,163     $ 848,088  
Federal funds sold and securities purchased under resale agreements
    431,244       440,584       370,418  
Interest bearing deposits in banks
    288,841       74,168       59,333  
Trading account securities
    1,034,240       36,056       122,621  
Loans held for sale
    479,853       270,422       276,304  
Investment securities
    4,288,974       4,362,924       4,643,901  
Loans and leases
    39,987,240       26,153,425       26,361,502  
Allowance for loan and lease losses
    (454,784 )     (272,068 )     (280,152 )
 
Net loans and leases
    39,532,456       25,881,357       26,081,350  
 
Bank owned life insurance
    1,302,363       1,089,028       1,083,033  
Premises and equipment
    547,380       372,772       367,709  
Goodwill
    2,995,961       570,876       571,521  
Other intangible assets
    443,446       59,487       61,239  
Accrued income and other assets
    2,757,188       1,091,182       1,176,431  
 
Total Assets
  $ 55,303,927     $ 35,329,019     $ 35,661,948  
 
 
                       
Liabilities and Shareholders’ Equity Liabilities
                       
Deposits
  $ 38,404,365     $ 25,047,770     $ 24,738,395  
Short-term borrowings
    2,227,116       1,676,189       1,532,504  
Federal Home Loan Bank advances
    2,716,265       996,821       1,221,669  
Other long-term debt
    1,974,387       2,229,140       2,592,188  
Subordinated notes
    1,919,625       1,286,657       1,275,883  
Accrued expenses and other liabilities
    1,812,495       1,078,116       1,171,563  
 
Total Liabilities
  $ 49,054,253     $ 32,314,693     $ 32,532,202  
 
 
Shareholders’ equity
                       
Preferred stock — authorized 6,617,808 shares; none outstanding
                ---  
Common stock — No par value and authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 235,474,366 and 237,361,333 shares, respectively
          2,560,569       2,556,168  
Par value of $0.01 and authorized 1,000,000,000 shares at September 30, 2007; issued 387,504,687 shares; outstanding 365,898,439 shares
    3,875              
Capital surplus
    5,700,961              
Less 21,606,248; 22,391,889 and 19,945,179 treasury shares at cost, respectively
    (489,062 )     (506,946 )     (445,359 )
Accumulated other comprehensive loss:
                       
Unrealized (losses) gains on investment securities
    (3,221 )     14,254       12,316  
Unrealized gains on cash flow hedging derivatives
    9,392       17,008       23,043  
Pension and other postretirement benefit adjustments
    (80,272 )     (86,328 )     (3,283 )
Retained earnings
    1,108,001       1,015,769       986,861  
 
Total Shareholders’ Equity
  $ 6,249,674     $ 3,014,326     $ 3,129,746  
 
Total Liabilities and Shareholders’ Equity
  $ 55,303,927     $ 35,329,019     $ 35,661,948  
 
      See notes to unaudited condensed consolidated financial statements

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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)   2007   2006   2007   2006
 
Interest and fee income
                               
Loans and leases
                               
Taxable
  $ 747,938     $ 462,709     $ 1,675,983     $ 1,307,979  
Tax-exempt
    2,409       555       2,994       1,584  
Investment securities
                               
Taxable
    60,152       60,437       164,951       173,397  
Tax-exempt
    7,100       6,137       19,721       17,743  
Other
    33,556       9,150       64,916       24,975  
 
Total interest income
    851,155       538,988       1,928,565       1,525,678  
 
Interest expenses
                               
Deposits
    320,490       194,623       715,321       515,969  
Short-term borrowings
    26,264       17,161       69,372       52,795  
Federal Home Loan Bank advances
    34,661       15,565       63,180       47,130  
Subordinated notes and other long-term debt
    60,107       56,326       162,113       148,596  
 
Total interest expense
    441,522       283,675       1,009,986       764,490  
 
Net interest income
    409,633       255,313       918,579       761,188  
Provision for credit losses
    42,007       14,162       131,546       49,447  
 
Net interest income after provision for credit losses
    367,626       241,151       787,033       711,741  
 
Service charges on deposit accounts
    78,107       48,718       172,917       137,165  
Trust services
    33,562       22,490       86,220       66,444  
Brokerage and insurance income
    28,806       14,697       62,087       44,235  
Other service charges and fees
    21,045       12,989       49,176       37,570  
Bank owned life insurance income
    14,847       12,125       36,602       32,971  
Mortgage banking income
    9,629       8,512       26,102       35,322  
Securities losses
    (13,152 )     (57,332 )     (18,187 )     (57,387 )
Other income
    31,830       35,711       91,127       124,143  
 
Total non-interest income
    204,674       97,910       506,044       420,463  
 
Personnel costs
    202,148       133,823       471,978       403,284  
Outside data processing and other services
    40,600       18,664       88,115       58,084  
Net occupancy
    33,334       18,109       72,659       54,002  
Equipment
    23,290       17,249       58,666       51,761  
Marketing
    13,186       7,846       29,868       25,521  
Professional services
    11,273       6,438       25,856       18,095  
Telecommunications
    7,286       4,818       15,989       14,633  
Printing and supplies
    4,743       3,416       11,657       10,254  
Amortization of intangibles
    19,949       2,902       24,988       6,969  
Other expense
    29,754       29,165       72,514       90,601  
 
Total non-interest expense
    385,563       242,430       872,290       733,204  
 
Income before income taxes
    186,737       96,631       420,787       399,000  
Provision for income taxes
    48,535       (60,815 )     106,338       25,494  
 
Net income
  $ 138,202     $ 157,446     $ 314,449     $ 373,506  
 
 
                               
Average common shares — basic
    365,895       237,672       279,171       236,790  
Average common shares — diluted
    368,280       240,896       282,014       239,933  
 
                               
Per common share
                               
Net income — basic
  $ 0.38     $ 0.66     $ 1.13     $ 1.58  
Net income — diluted
    0.38       0.65       1.12       1.56  
Cash dividends declared
    0.265       0.250       0.795       0.750  
      See notes to unaudited condensed consolidated financial statements

60


Table of Contents

Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
                                                                                 
                                                            Accumulated        
                                                            Other        
    Preferred Stock   Common Stock   Capital   Treasury Stock   Comprehensive   Retained    
(in thousands)   Shares   Amount   Shares   Amount   Surplus   Shares   Amount   Income (Loss)   Earnings   Total
 
Nine Months Ended September 30, 2006:
                                                                               
Balance, beginning of period
        $  —       257,866     $ 2,491,326     $       (33,760 )   $ (693,576 )   $ (22,093 )   $ 781,844     $ 2,557,501  
Comprehensive Income:
                                                                               
Net income
                                                                    373,506       373,506  
Unrealized net gains on investment securities arising during the period, net of reclassification (1) for net realized losses, net of tax of ($25,313)
                                                            46,332               46,332  
Unrealized gains on cash flow hedging derivatives, net of tax of $4,220
                                                            7,837               7,837  
 
                                                                               
Total comprehensive income
                                                                            427,675  
 
                                                                               
Cumulative effect of change in accounting principle for servicing financial assets, net of tax of $6,521
                                                                    12,110       12,110  
Cash dividends declared ($0.75 per share)
                                                                    (180,599 )     (180,599 )
Shares issued pursuant to acquisition
                            53,366               25,350       522,390                       575,756  
Recognition of the fair value of share-based compensation
                            13,430                                               13,430  
Treasury shares purchased
                                            (12,931 )     (303,898 )                     (303,898 )
Stock options exercised
                            (2,073 )             1,439       30,911                       28,838  
Other
                            119               (43 )     (1,186 )                     (1,067 )
 
 
                                                                               
Balance, end of period
                257,866       2,556,168             (19,945 )     (445,359 )     32,076       986,861       3,129,746  
 
 
                                                                               
Nine Months Ended September 30, 2007:
                                                                               
Balance, beginning of period
                257,866       2,560,569             (22,392 )     (506,946 )     (55,066 )     1,015,769       3,014,326  
Comprehensive Income:
                                                                               
Net income
                                                                    314,449       314,449  
Unrealized net losses on investment securities arising during the period, net of reclassification (1) for net realized gains, net of tax of ($9,497)
                                                            (17,475 )             (17,475 )
Unrealized losses on cash flow hedging derivatives, net of tax of ($4,101)
                                                            (7,616 )             (7,616 )
Amortization included in net periodic benefit costs:
                                                                               
Net actuarial loss, net of tax of ($2,809)
                                                            5,216               5,216  
Prior service costs, net of tax of ($161)
                                                            300               300  
Transition obligation, net of tax of ($291)
                                                            540               540  
 
                                                                               
Total comprehensive income
                                                                            295,414  
 
                                                                               
Assignment of $0.01 par value per share for each share of Common Stock
                            (2,557,990 )     2,557,990                                        
Cash dividends declared ($0.795 per share)
                                                                    (222,217 )     (222,217 )