Huntington Bancshares Incorporated Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED September 30, 2005

Commission File Number 0-2525

Huntington Bancshares Incorporated


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

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

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

Yes þ No o

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

Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

There were 228,197,076 shares of Registrant’s without par value common stock outstanding on October 31, 2005.

Part 1. Financial Information

Item 1. Financial Statements

Huntington Bancshares Incorporated

Condensed Consolidated Balance Sheets


	September 30,			December 31,			September 30,
(in thousands, except number of shares)	2005			2004			2004
	*(Unaudited)*						(Unaudited)
Assets
Cash and due from banks	$	803,425		$	877,320		$	1,053,358
Federal funds sold and securities purchased under resale agreements		78,325			628,040			838,833
Interest bearing deposits in banks		22,379			22,398			36,155
Trading account securities		191,418			309,630			120,334
Loans held for sale		449,096			223,469			205,913
Investment securities		4,304,898			4,238,945			4,150,044
Loans and leases		24,496,287			23,560,277			22,587,259
Allowance for loan and lease losses		(253,943	)		(271,211	)		(282,650	)

Net loans and leases		24,242,344			23,289,066			22,304,609

Operating lease assets		274,190			587,310			717,411
Bank owned life insurance		993,407			963,059			954,911
Premises and equipment		358,876			355,115			356,438
Goodwill and other intangible assets		217,703			215,807			216,011
Customers’ acceptance liability		7,463			11,299			8,787
Accrued income and other assets		819,464			844,039			845,436

Total assets	$	32,762,988		$	32,565,497		$	31,808,240


Liabilities and shareholders’ equity
Liabilities
Deposits	$	22,349,122		$	20,768,161		$	20,109,025
Short-term borrowings		1,502,566			1,207,233			1,215,887
Federal Home Loan Bank advances		1,155,656			1,271,088			1,270,454
Other long-term debt		2,795,431			4,016,004			4,094,185
Subordinated notes		1,034,343			1,039,793			1,040,901
Allowance for unfunded loan commitments and letters of credit		38,098			33,187			30,007
Bank acceptances outstanding		7,463			11,299			8,787
Deferred federal income tax liability		768,344			783,628			723,525
Accrued expenses and other liabilities		489,290			897,466			854,552

Total liabilities		30,140,313			30,027,859			29,347,323


Shareholders’ equity
Preferred stock — authorized 6,617,808 shares; none outstanding		—			—			—
Common stock — without par value; authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 229,005,823; 231,605,281 and 230,153,486 shares, respectively		2,490,919			2,484,204			2,482,904
Less 28,860,432; 26,260,974 and 27,712,769 treasury shares, respectively		(575,941	)		(499,259	)		(526,967	)
Accumulated other comprehensive loss		(21,839	)		(10,903	)		(13,812	)
Retained earnings		729,536			563,596			518,792

Total shareholders’ equity		2,622,675			2,537,638			2,460,917

Total liabilities and shareholders’ equity	$	32,762,988		$	32,565,497		$	31,808,240

See notes to unaudited condensed consolidated financial statements

Huntington Bancshares Incorporated

Condensed Consolidated Statements of Income
(Unaudited)


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in thousands, except per share amounts)	2005		2004			2005		2004
Interest and fee income
Loans and leases
Taxable	$	366,718	$	285,042		$	1,044,994	$	824,056
Tax-exempt		154		222			509		929
Investment securities
Taxable		38,507		41,588			114,097		135,348
Tax-exempt		5,523		4,431			14,171		13,503
Other		9,956		6,719			25,518		14,264

Total interest income		420,858		338,002			1,199,289		988,100

Interest expenses
Deposits		119,376		64,812			313,103		183,810
Short-term borrowings		10,901		3,121			22,815		9,222
Federal Home Loan Bank advances		7,351		8,426			24,697		24,565
Subordinated notes and other long-term debt		41,593		34,585			119,939		98,197

Total interest expense		179,221		110,944			480,554		315,794

Net interest income		241,637		227,058			718,735		672,306
Provision for credit losses		17,699		11,785			50,468		42,408

Net interest income after provision for credit losses		223,938		215,273			668,267		629,898

Operating lease income		29,262		64,412			114,091		231,985
Service charges on deposit accounts		44,817		43,935			125,751		129,368
Trust services		19,671		17,064			56,980		50,095
Brokerage and insurance income		13,948		13,200			40,518		41,920
Bank owned life insurance income		10,104		10,019			30,347		31,813
Other service charges and fees		11,449		10,799			32,860		30,957
Mortgage banking income		21,116		4,448			30,801		23,474
Securities gains		101		7,803			715		13,663
Gains on sales of automobile loans		502		312			756		14,206
Other income		9,770		17,899			52,141		68,177

Total non-interest income		160,740		189,891			484,960		635,658

Personnel costs		117,476		121,729			365,547		363,068
Operating lease expense		22,823		54,885			89,650		188,158
Net occupancy		16,653		16,838			53,152		49,859
Outside data processing and other services		18,062		17,527			54,945		53,552
Equipment		15,531		15,295			47,031		47,609
Professional services		8,323		12,219			27,129		27,354
Marketing		6,779		5,000			20,674		20,908
Telecommunications		4,512		5,359			14,195		15,191
Printing and supplies		3,102		3,201			9,489		9,315
Amortization of intangibles		203		204			611		612
Restructuring reserve releases		—		(1,151	)		—		(1,151	)
Other expense		19,588		22,317			57,042		66,755

Total non-interest expense		233,052		273,423			739,465		841,230

Income before income taxes		151,626		131,741			413,762		424,326
Provision for income taxes		43,052		38,255			102,244		116,540

Net income	$	108,574	$	93,486		$	311,518	$	307,786


Average common shares — basic		229,830		229,848			231,290		229,501
Average common shares — diluted		233,456		234,348			234,727		233,307

Per common share
Net income — basic	$	0.47	$	0.41		$	1.35	$	1.34
Net income — diluted		0.47		0.40			1.33		1.32
Cash dividends declared		0.215		0.20			0.63		0.55

See notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Changes in Shareholders’ Equity


												Accumulated
												Other
	Common Stock					Treasury Shares						Comprehensive			Retained
(in thousands)	Shares		Amount			Shares			Amount			Income			Earnings/			Total
Nine Months Ended September 30, 2004 (Unaudited):
Balance, beginning of period		257,866	$	2,483,542			(28,858	)	$	(548,576	)	$	2,678		$	337,358		$	2,275,002
Comprehensive Income:
Net income																307,786			307,786
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income													(19,555	)					(19,555	)
Unrealized gains on derivative instruments used in cash flow hedging relationships													3,065						3,065

Total comprehensive income																			291,296

Cash dividends declared ($0.55 per share)																(126,352	)		(126,352	)
Stock options exercised				(564	)		985			18,865									18,301
Other				(74	)		160			2,744									2,670


Balance, end of period (Unaudited)		257,866	$	2,482,904			(27,713	)	$	(526,967	)	$	(13,812	)	$	518,792		$	2,460,917


Nine Months Ended September 30, 2005 (Unaudited):
Balance, beginning of period		257,866	$	2,484,204			(26,261	)	$	(499,259	)	$	(10,903	)	$	563,596		$	2,537,638
Comprehensive Income:
Net income																311,518			311,518
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income													(18,304	)					(18,304	)
Unrealized gains on derivative instruments used in cash flow hedging relationships													7,368						7,368

Total comprehensive income																			300,582

Cash dividends declared ($0.63 per share)																(145,578	)		(145,578	)
Treasury shares purchased							(4,416	)		(108,610	)								(108,610	)
Stock options exercised				3,172			1,729			33,353									36,525
Other				3,543			88			(1,425	)								2,118


Balance, end of period (Unaudited)		257,866	$	2,490,919			(28,860	)	$	(575,941	)	$	(21,839	)	$	729,536		$	2,622,675

See notes to unaudited condensed consolidated financial statements.

Huntington Bancshares Incorporated

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended
	September 30,
(in thousands of dollars)	2005			2004

Operating activities
Net income	$	311,518		$	307,786
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		50,468			42,408
Depreciation on operating lease assets		82,119			171,152
Amortization of mortgage servicing rights		14,574			13,866
Other depreciation and amortization		56,780			67,923
Mortgage servicing rights impairment charges (recovery)		(3,986	)		(640	)
Deferred income tax (benefit) expense		(9,422	)		83,140
Decrease (increase) in trading account securities		118,212			(112,745	)
Originations of loans held for sale		(1,603,271	)		(1,364,329	)
Principal payments on and proceeds from loans held for sale		1,704,813			1,384,895
Gains on sales of investment securities		(715	)		(13,663	)
Gains on sales/securitizations of loans		(756	)		(12,693	)
Increase of cash surrender value of bank owned life insurance		(30,347	)		(31,813	)
(Decrease) increase in payable to investors in sold loans		(128,469	)		33,053
Other, net		(228,596	)		(44,003	)

Net cash provided by operating activities		332,922			524,337


Investing activities
Decrease (increase) in interest bearing deposits in banks		19			(2,528	)
Proceeds from:
Maturities and calls of investment securities		333,605			746,386
Sales of investment securities		1,715,426			1,655,459
Purchases of investment securities		(2,146,993	)		(1,530,657	)
Proceeds from sales/securitizations of loans		—			1,534,395
Net loan and lease originations, excluding sales		(1,332,014	)		(3,216,666	)
Purchases of operating lease assets		(16,546	)		(11,479	)
Proceeds from sale of operating lease assets		239,194			368,663
Proceeds from sale of premises and equipment		189			340
Purchases of premises and equipment		(42,069	)		(43,924	)
Proceeds from sales of other real estate		47,755			9,800

Net cash used for investing activities		(1,201,434	)		(490,211	)


Financing activities
Increase in deposits		1,587,653			1,610,167
Increase (decrease) in short-term borrowings		295,333			(236,417	)
Proceeds from issuance of subordinated notes		—			148,830
Maturity of subordinated notes		—			(100,000	)
Proceeds from Federal Home Loan Bank advances		809,589			454
Maturity of Federal Home Loan Bank advances		(925,021	)		(3,000	)
Proceeds from issuance of long-term debt		—			675,000
Maturity of long-term debt		(1,308,145	)		(1,130,000	)
Dividends paid on common stock		(142,422	)		(121,773	)
Repurchases of common stock		(108,610	)		—
Net proceeds from issuance of common stock		36,525			18,301

Net cash provided by financing activities		244,902			861,562

Change in cash and cash equivalents		(623,610	)		895,688
Cash and cash equivalents at beginning of period		1,505,360			996,503

Cash and cash equivalents at end of period	$	881,750		$	1,892,191


Supplemental disclosures:
Income taxes paid	$	146,911		$	14,031
Interest paid		447,864			302,801
Non-cash activities
Mortgage loans securitized		—			115,929
Common stock dividends accrued, paid in subsequent quarter		39,167			36,254

See notes to unaudited condensed consolidated financial statements.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

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

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

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

Note 2 – New Accounting Pronouncements

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

Statement 123R will require the immediate recognition at the grant date of the full share-based compensation expense for grants to retirement eligible employees, as the explicit vesting period is non-substantive. The estimated effect of applying the explicit vesting period approach versus the non-substantive approach is not material to any period presented.

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

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

Financial Accounting Standards Board (FASB) Statement No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement 154) – In May 2005, the FASB issued Statement 154, which replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.

FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2) – In December 2003, a law was enacted that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor postretirement benefit plans providing prescription drug coverage. FSP 106-2 specifies that any Medicare subsidy must be taken into account in measuring the employer’s postretirement health care benefit obligation and will also reduce the net periodic postretirement cost in future periods. During the first quarter of 2005, government authorities issued further clarification on certain aspects of the Medicare Act. Huntington will register for the Medicare subsidy and the expected impact of a $15.5 million reduction in the post retirement obligation will be recognized over a 10-year period beginning October 1, 2005.

Proposed FASB interpretation of FASB Statement No. 109 – Accounting for Uncertain Tax Positions – In July 2005, the FASB issued an exposure draft of a proposed interpretation on accounting for uncertain tax positions under SFAS No. 109, Accounting for Income Taxes. The Exposure Draft contains proposed guidance on the recognition and measurement of uncertain tax positions. If adopted as proposed, the Company would be required to recognize, in its financial statements, the best estimate of the impact of a tax position, only if that tax position is probable of being sustained on audit based solely on the technical merits of the position. The proposed effective date for the Interpretation was originally scheduled for December 31, 2005 with a cumulative effect of a change in accounting principle to be recorded upon the initial adoption. The FASB now expects to issue a final Interpretation, which would include amendments to Statement 109, in the first quarter of 2006. The Company is currently evaluating the impact this proposed interpretation will have on its financial statements.

Note 3 – Securities and Exchange Commission Formal Investigation

On June 2, 2005, Huntington filed a Form 8-K announcing that the Commission approved the settlement of its previously announced formal investigation into certain financial accounting matters. Huntington consented to pay a penalty of $7.5 million. This civil money penalty had no 2005 financial impact on Huntington’s results, as reserves for this amount were established and expensed in 2004.

Note 4 – Formal Regulatory Supervisory Agreements

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

On October 6, 2005, Huntington announced that the OCC had lifted its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. Huntington has been verbally advised that it is in full compliance with the financial holding company and financial subsidiary requirements under the Gramm-Leach-Bliley Act (GLB Act). This notification reflects that Huntington and the Bank meet both the well-capitalized and well-managed criteria under the GLB Act. Management believes that the changes it has already made, and is in the process of making, will address the FRBC issues fully and comprehensively. No assurances, however, can be provided as to the ultimate timing or outcome of this matter.

Note 5 – Pending Acquisition

On January 27, 2004, Huntington announced the signing of a definitive agreement to acquire Unizan Financial Corp. (Unizan), a financial holding company based in Canton, Ohio. On November 12, 2004, Huntington announced that it withdrew its application with the FRBC to acquire Unizan and that Huntington and Unizan jointly announced they had entered into an amendment to their January 26, 2004 merger agreement extending the term of the agreement for one year from January 27, 2005 to January 27, 2006, with an automatic extension of three months if it is reasonably likely that regulatory approval will be received within three months after January 27, 2006. On October 6, 2005, Huntington announced that after consultation with the FRBC, that it planned to proceed with the filing of the application to acquire Unizan. The application was submitted to the FRBC on October 24, 2005. No assurances, however, can be provided as to the ultimate timing or outcome of this matter.

Note 6 – Loan Sales and Securitizations

Automobile loans

Huntington sold $213.4 million and $149.6 million of automobile loans in the third quarter of 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, sales of automobile loans totaled $266.9 million and $1.5 billion, respectively. Pre-tax gains from the sales of automobile loans totaled $0.5 million and $0.3 million in third quarter of 2005 and 2004, respectively, and $0.8 million and $14.2 million for the nine months ended September 30, 2005 and 2004, respectively.

A servicing asset is established based on the relative fair values of both assets sold and retained at the time of the loan sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely heavily on the predicted payoff assumption, and if actual payoff is quicker than expected, then future value would be impaired.

Changes in the carrying value of automobile loan servicing rights for the three months and nine months ended September 30, 2005 and 2004, and the fair value at the end of each period were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands of dollars)	2005			2004			2005			2004

Carrying value, beginning of period	$	14,262		$	25,922		$	20,286		$	17,662
New servicing assets		976			1,854			1,308			16,249
Amortization		(2,754	)		(3,918	)		(9,044	)		(10,053	)
Impairment charges		—			—			(66	)		—

Carrying value, end of period	$	12,484		$	23,858		$	12,484		$	23,858


Fair value, end of period	$	13,072		$	24,990		$	13,072		$	24,990

Huntington has retained servicing responsibilities and receives annual servicing fees from 0.55% to 1.00% of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing assets, amounted to $3.8 million and $2.8 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, servicing income was $8.8 million and $7.2 million, respectively. There were no material pre-tax gains from automobile loan securitizations in 2005 or 2004.

Residential Mortgage Loans

No sales or securitizations of residential mortgage loans held for investment were made in the first nine months of 2005. For the three months and nine months ended September 30, 2004, Huntington sold $156.1 million and $199.8 million of residential mortgage loans held for investment, resulting in a net pre-tax gain of $0.1 million and $0.5 million respectively. Huntington also securitized $115.9 million of residential mortgage loans in the first quarter of 2004, and

retained all of the resulting securities. Accordingly, the securitized amounts were reclassified from loans to investment securities.

A mortgage servicing right (MSR) is established only when the loans are sold or when servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. The initial carrying value of the asset is established based on its fair value at the time of sale using assumptions that are consistent with assumptions used at the time to estimate the fair value of the total MSR portfolio. All servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and are included in other assets.

Changes in the carrying value of mortgage servicing rights for the three months and nine months ended September 30, 2005 and 2004, and the fair value at the end of each period were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands of dollars)	2005			2004			2005			2004

Carrying value, beginning of period	$	71,150		$	79,167		$	77,107		$	71,087
New servicing assets		8,959			5,960			19,541			18,742
Amortization		(4,626	)		(4,468	)		(14,574	)		(13,865	)
Temporary impairment (charges) recovery		10,457			(4,119	)		3,986			640
Sales		—			—			(120	)		(64	)

Carrying value, end of period	$	85,940		$	76,540		$	85,940		$	76,540


Fair value, end of period	$	100,242		$	80,405		$	100,242		$	80,405

Servicing rights are evaluated quarterly for impairment based on the fair value of those rights, using a disaggregated approach. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. Temporary impairment is recognized in a valuation allowance against the mortgage servicing rights. Huntington also analyzes its mortgage servicing rights periodically for other-than-temporary impairment. Other-than-temporary impairment is recognized as a direct reduction of the carrying value of the mortgage servicing right and cannot be recovered. Servicing rights are amortized over the period of, and in proportion to, the estimated future net servicing revenue. Amortization is recorded as a reduction of servicing income, which is reflected in non-interest income in Huntington’s consolidated income statement.

Changes in the impairment allowance of mortgage servicing rights for the three months and nine months ended September 30, 2005 and 2004, were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands of dollars)	2005			2004			2005			2004

Balance, beginning of period	$	(11,246	)	$	(1,394	)	$	(4,775	)	$	(6,153	)
Impairment charges		(4,308	)		(4,119	)		(15,719	)		(14,654	)
Impairment recovery		14,765			—			19,705			15,294

Balance, end of period	$	(789	)	$	(5,513	)	$	(789	)	$	(5,513	)

Note 7 — Investment Securities

Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of investment securities at September 30, 2005, December 31, 2004, and September 30, 2004:


	September 30, 2005				December 31, 2004				September 30, 2004
	Amortized				Amortized				Amortized
(in thousands of dollars)	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value

U.S. Treasury
Under 1 year	$	—	$	—	$	—	$	—	$	—	$	—
1-5 years		23,951		23,501		24,233		24,304		24,230		24,551
6-10 years		249		260		754		832		754		842
Over 10 years		—		—		—		—		—		—

Total U.S. Treasury		24,200		23,761		24,987		25,136		24,984		25,393

Federal Agencies
Mortgage-backed securities
Under 1 year		—		—		—		—		—		—
1-5 years		32,779		32,129		1,362		1,390		2,773		2,831
6-10 years		—		—		38,814		38,589		100,827		101,157
Over 10 years		1,059,544		1,035,760		945,670		933,538		939,050		929,892

Total mortgage-backed securities		1,092,323		1,067,889		985,846		973,517		1,042,650		1,033,880

Other agencies
Under 1 year		—		—		500		503		499		510
1-5 years		535,147		519,494		535,502		530,670		564,302		562,705
6-10 years		73,848		70,258		450,952		441,072		317,312		307,070
Over 10 years		—		—		—		—		—		—

Total other agencies		608,995		589,752		986,954		972,245		882,113		870,285

Total U.S. Treasury and federal agencies		1,725,518		1,681,402		1,997,787		1,970,898		1,949,747		1,929,558

Municipal securities
Under 1 year		65		65		5,997		6,032		7,180		7,199
1-5 years		166		165		9,990		10,392		9,396		9,596
6-10 years		134,432		134,140		83,102		83,771		86,677		87,788
Over 10 years		404,542		405,519		311,525		316,029		293,322		297,519

Total municipal securities		539,205		539,889		410,614		416,224		396,575		402,102

Private label CMO
Under 1 year		—		—		—		—		—		—
1-5 years		—		—		—		—		—		—
6-10 years		—		—		—		—		—		—
Over 10 years		412,003		404,274		462,394		458,027		564,084		560,563

Total private label CMO		412,003		404,274		462,394		458,027		564,084		560,563

Asset backed securities
Under 1 year		—		—		—		—		—		—
1-5 years		32,970		32,970		30,000		30,000		30,000		29,944
6-10 years		—		—		8,084		8,155		9,725		9,838
Over 10 years		1,463,760		1,466,301		1,160,212		1,161,827		1,051,982		1,053,020

Total asset backed securities		1,496,730		1,499,271		1,198,296		1,199,982		1,091,707		1,092,802

Other
Under 1 year		400		400		2,100		2,118		1,601		1,612
1-5 years		11,604		11,774		9,102		9,384		9,612		9,968
6-10 years		1,555		1,536		2,913		2,980		2,253		2,351
Over 10 years		104,211		104,460		169,872		173,131		144,201		144,707
Marketable equity securities		61,545		61,892		5,526		6,201		5,965		6,381

Total other		179,315		180,062		189,513		193,814		163,632		165,019

Total investment securities	$	4,352,771	$	4,304,898	$	4,258,604	$	4,238,945	$	4,165,745	$	4,150,044

Duration in years ⁽¹⁾				2.8				2.8				3.0


⁽¹⁾		The average duration assumes a market driven pre-payment rate on securities subject to pre-payment.

Based upon its assessment, Management does not believe any individual unrealized loss at September 30, 2005, represents an other-than-temporary impairment. In addition, Huntington has both the intent and the ability to hold these securities for a time necessary to recover the amortized cost. There were no other-than-temporary impairments of any securities recognized in the nine-month period ended September 30, 2005. At September 30, 2004, Management determined that $11.0 million of equity securities, with unrealized losses of $0.9 million were other-than-temporarily impaired. Consequently, Huntington recognized the unrealized losses in the third quarter of 2004.

There were no securities classified as held to maturity at September 30, 2005. Included in investment securities at December 31, 2004 and September 30, 2004 were $2.0 million and $2.9 million of municipal securities classified as held to maturity. These securities were accounted for at their historical cost.

Note 8 – Other Comprehensive Income

The components of Huntington’s other comprehensive income in the three and nine months ended September 30 were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands of dollars)	2005			2004			2005			2004

Unrealized holding gains and losses on securities available for sale arising during the period:
Unrealized net (losses) gains	$	(36,215	)	$	58,167		$	(27,499	)	$	(16,588	)
Related tax benefit (expense)		12,729			(20,484	)		9,660			5,914

Net		(23,486	)		37,683			(17,839	)		(10,674	)


Reclassification adjustment for net gains from sales of securities available for sale realized during the period:
Realized net gains		(101	)		(7,803	)		(715	)		(13,663	)
Related tax expense		35			2,731			250			4,782

Net		(66	)		(5,072	)		(465	)		(8,881	)


Total unrealized holding (losses) gains on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income		(23,552	)		32,611			(18,304	)		(19,555	)


Unrealized gains and losses on derivatives used in cash flow hedging relationships arising during the period:
Unrealized net gains (losses)		3,743			(29,568	)		11,335			4,715
Related tax (expense) benefit		(1,310	)		10,349			(3,967	)		(1,650	)

Net		2,433			(19,219	)		7,368			3,065


Total other comprehensive (loss) income	$	(21,119	)	$	13,392		$	(10,936	)	$	(16,490	)

Activity in accumulated other comprehensive income for the nine months ended September 30, 2005 and 2004 was as follows:


	Unrealized gains and			Unrealized gains and losses
	losses on Securities			on derivative instruments			Minimum pension
(in thousands of dollars)	available for sale			used in cash flow hedging			liability			Total

Balance, December 31, 2003	$	9,429		$	(5,442	)	$	(1,309	)	$	2,678
Period change		(19,555	)		3,065			—			(16,490	)

Balance, September 30, 2004	$	(10,126	)	$	(2,377	)	$	(1,309	)	$	(13,812	)


Balance, December 31, 2004	$	(12,683	)	$	4,252		$	(2,472	)	$	(10,903	)
Period change		(18,304	)		7,368			—			(10,936	)

Balance, September 30, 2005	$	(30,987	)	$	11,620		$	(2,472	)	$	(21,839	)

Note 9 – Earnings per Share

Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares upon the exercise of stock options. The calculation of basic and diluted earnings per share for each of the three and nine months ended September 30 is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands of dollars, except per share amounts)	2005		2004		2005		2004

Net income	$	108,574	$	93,486	$	311,518	$	307,786

Average common shares outstanding		229,830		229,848		231,290		229,501
Dilutive potential common shares		3,626		4,500		3,437		3,806

Diluted average common shares outstanding		233,456		234,348		234,727		233,307


Earnings per share
Basic	$	0.47	$	0.41	$	1.35	$	1.34
Diluted		0.47		0.40		1.33		1.32

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

Options on approximately 5.7 million and 2.5 million shares were outstanding at September 30, 2005 and 2004, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. The weighted average exercise price for these options was $25.68 per share and $27.04 per share at the end of the same respective periods.

On January 7, 2005, Huntington released from escrow 86,118 shares of Huntington common stock to former shareholders of LeaseNet, Inc., which were previously issued in September 2002. A total of 373,896 common shares, previously held in escrow, was returned to Huntington and had no impact on dilutive common shares outstanding. All shares in escrow had been accounted for as treasury stock.

Note 10 – Stock-Based Compensation

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004

Number of stock options granted during the period *(in thousands)*		3,203.8			3,029.6			3,328.2			3,124.6

Weighted-average fair value of options granted during the period	$	5.38		$	5.78		$	5.36		$	5.78

Assumptions
Risk-free interest rate		4.05	%		3.78	%		4.05	%		3.78	%
Expected dividend yield		3.29			3.19			3.30			3.19
Expected volatility of Huntington’s common stock		26.3			30.9			26.3			30.9
Expected option term (years)		6.0			6.0			6.0			6.0

Pro forma results (in millions of dollars)
Net income, as reported	$	108.6		$	93.5		$	311.5		$	307.8
Pro forma expense, net of tax		(2.9	)		(3.4	)		(8.7	)		(9.0	)

Pro forma net income	$	105.7		$	90.1		$	302.8		$	298.8


Net income per common share:
Basic, as reported	$	0.47		$	0.41		$	1.35		$	1.34
Basic, pro forma		0.46			0.39			1.31			1.30
Diluted, as reported		0.47			0.40			1.33			1.32
Diluted, pro forma		0.45			0.38			1.29			1.28

Note 11 — Benefit Plans

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

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


	Pension Benefits						Post Retirement Benefits
	Three Months Ended						Three Months Ended
	September 30,						September 30,
(in thousands of dollars)	2005			2004			2005		2004

Service cost	$	3,547		$	3,040		$	354	$	326
Interest cost		4,754			4,371			777		802
Expected return on plan assets		(6,716	)		(5,383	)		—		—
Amortization of transition asset		(1	)		—			276		276
Amortization of prior service cost		—			—			95		146
Settlements		750			1,000			—		—
Recognized net actuarial loss		2,672			1,984			—		—

Benefit expense	$	5,006		$	5,012		$	1,502	$	1,550


	Pension Benefits						Post Retirement Benefits
	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands of dollars)	2005			2004			2005		2004

Service cost	$	10,639		$	9,118		$	1,060	$	976
Interest cost		14,259			13,112			2,333		2,406
Expected return on plan assets		(19,526	)		(16,147	)		—		—
Amortization of transition asset		(3	)		—			828		828
Amortization of prior service cost		1			—			284		437
Settlements		2,250			3,000			—		—
Recognized net actuarial loss		8,017			5,952			—		—

Benefit expense	$	15,637		$	15,035		$	4,505	$	4,647

There is no expected minimum contribution for 2005 to the Plan. Although not required, Huntington made a contribution to the Plan of $63.7 million in April 2005.

Huntington also sponsors other retirement plans, the most significant being the Supplemental Executive Retirement Plan and the Supplemental Retirement Income Plan. These plans are nonqualified plans that provide certain former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. The cost of providing these plans was $0.5 million for both three-month periods ended September 30, 2005 and 2004. For the respective nine-month periods, the cost was $1.6 million and $1.5 million.

Huntington has a defined contribution plan that is available to eligible employees. Matching contributions by Huntington equal 100% on the first 3%, then 50% on the next 2%, of participant elective deferrals. The cost of providing this plan was $2.4 million and $2.3 million for the three months ended September 30, 2005 and 2004, respectively. For the respective nine-month periods, the cost was $7.3 million and $7.0 million.

Note 12 — Commitments and Contingent Liabilities

Commitments to extend credit:

In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial statements. The contract amount of these financial agreements at September 30, 2005, December 31, 2004, and September 30, 2004, were as follows:

September 30,

December 31,

September 30,

(in millions of dollars)

2005

2004

Contract amount represents credit risk

Commitments to extend credit

Commercial

4,989

5,076

5,094

Consumer

3,177

2,928

2,869

Commercial real estate

1,369

854

1,392

Standby letters of credit

959

945

959

Commercial letters of credit

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

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $3.7 million, $4.1 million, and $3.9 million at September 30, 2005, December 31, 2004, and September 30, 2004, respectively.

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

Commitments to sell loans:

Huntington enters into forward contracts relating to its mortgage banking business. At September 30, 2005, December 31, 2004, and September 30, 2004, Huntington had commitments to sell residential real estate loans of $566.8 million, $311.3 million, and $351.5 million, respectively. These contracts mature in less than one year.

During the 2005 second quarter, Huntington entered into a two-year agreement to sell a minimum of 50% of monthly automobile loan production, provided the production meets certain pricing, asset quality, and volume parameters. At September 30, 2005, approximately $52 million of automobile loans related to this commitment were classified as held for sale.

Litigation:

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

Note 13 — Derivative Financial Instruments

A variety of derivative financial instruments, principally interest rate swaps, are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These derivative financial instruments provide flexibility in adjusting the Company’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements. By using derivatives to manage interest rate risk, the effect is a smaller, more efficient balance sheet, with a lower wholesale funding requirement and a higher net interest margin. All derivatives are reflected at fair value in the consolidated balance sheet.

Market risk, which is the possibility that economic value of net assets or net interest income will be adversely affected by changes in interest rates or other economic factors, is managed through the use of derivatives. Derivatives are used to meet customers’ financing needs and, like other financial instruments, contain an element of credit risk, which is the possibility that Huntington will incur a loss because its counter-party fails to meet the contractual obligations of the derivative. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contractual provisions.

Asset and Liability Management

Derivatives that are used in asset and liability management are classified as fair value hedges or cash flow hedges and are required to meet specific criteria. To qualify as a hedge, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge. This includes identifying the item and risk being hedged, the derivative being used, and how the effectiveness of the hedge is being assessed. A derivative must be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. Correlation is evaluated on a retrospective and prospective basis using quantitative measures. If a hedge relationship is found to be ineffective, the derivative may no longer qualify as a hedge. Any excess gains or losses attributable to ineffectiveness are recognized in other income.

For fair value hedges, deposits, short-term borrowings, and long-term debt are effectively converted to variable-rate obligations by entering into interest rate swap contracts whereby fixed-rate interest is received in exchange for variable-rate interest without the exchange of the contract’s underlying notional amount. Forward contracts, used primarily in connection with mortgage banking activities, settle in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. The changes in fair value of the hedged item and the hedging instrument are reflected in current earnings.

For cash flow hedges, interest rate swap contracts are entered into that pay fixed-rate interest in exchange for the receipt of variable-rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its floating-rate debt to fixed-rate. This reduces the potentially adverse impact of increases in interest rates on future interest expense. In like fashion, certain LIBOR-based commercial and industrial loans are effectively converted to fixed-rate by entering into contracts that swap variable-rate interest for fixed-rate interest over the life of the contracts.

To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings, but are reported as a component of accumulated other comprehensive income in shareholders’ equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in earnings.

Derivatives used to manage interest rate risk at September 30, 2005, are shown in the table below:


			Average					Weighted-Average
	Notional		Maturity		Fair			Rate
(in thousands of dollars)	Value		(years)		Value			Receive			Pay

Asset conversion swaps
Receive fixed — generic	$	350,000		2.6	$	(6,464	)		3.41	%		3.67	%
Pay fixed — generic		50,000		1.8		393			3.92			3.83

Total asset conversion swaps		400,000		2.5		(6,071	)		3.47			3.69


Liability conversion swaps
Receive fixed — generic		1,480,000		5.9		2,664			4.22			3.91
Receive fixed — callable		726,250		3.0		(12,220	)		4.30			3.68
Receive fixed — forwards		10,000		5.5		—			4.38			N/A
Pay fixed — generic		1,501,000		2.1		21,613			3.74			3.23
Pay fixed — forwards		200,000		4.4		(215	)		N/A			4.57

Total liability conversion swaps		3,917,250		3.8		11,842			4.04			3.64

Total swap portfolio	$	4,317,250		3.7	$	5,771			3.98	%		3.64	%

N/A, not applicable

These values must be viewed in the context of the overall financial structure of Huntington, including the aggregate net position of all on- and off-balance sheet financial instruments.

As is the case with cash securities, the fair value of interest rate swaps is largely a function of financial market expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels. Management made no assumptions regarding future changes in interest rates with respect to the variable-rate information presented in the table above.

The next table represents the gross notional value of derivatives used to manage interest rate risk at September 30, 2005, identified by the underlying interest rate-sensitive instruments. The notional amounts shown in the tables above and below should be viewed in the context of overall interest rate risk management activities to assess the impact on the net interest margin.


	Fair Value		Cash Flow
(in thousands of dollars)	Hedges		Hedges		Total

Instruments associated with:
Investment securities	$	50,000	$	25,000	$	75,000
Loans		—		325,000		325,000
Deposits		766,250		—		766,250
Federal Home Loan Bank advances		—		776,000		776,000
Subordinated notes		500,000		—		500,000
Other long-term debt		950,000		925,000		1,875,000

Total notional value at September 30, 2005	$	2,266,250	$	2,051,000	$	4,317,250

Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate the credit risk associated with both the derivatives used for asset and liability management and used in trading activities. At September 30, 2005 and 2004, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $15.1 million and $11.7 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.

These derivative financial instruments were entered into for the purpose of altering the interest rate risk embedded in Huntington’s assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest

earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amount resulted in an increase to net interest income of $5.6 million and $7.0 million, for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, the impact to net interest income was an increase of $20.1 million and $17.0 million, respectively.

Derivatives Used in Mortgage Banking Activities

Huntington also uses derivatives, principally loan sale commitments, in the hedging of its mortgage loan commitments and its mortgage loans held for sale. For derivatives that are used in hedging mortgage loans held for sale, ineffective hedge gains and losses are reflected in mortgage banking revenue in the income statement. Mortgage loan commitments and the related hedges are carried at fair value on the consolidated balance sheet with changes in fair value reflected in mortgage banking revenue. The following is a summary of the derivative assets and liabilities that Huntington used in its mortgage banking activities as of September 30, 2005 and 2004:


	At September 30,
(in thousands of dollars)	2005			2004

Derivative assets:
Interest rate lock agreements	$	723		$	1,183
Forward trades		1,732			169

Total derivative assets		2,455			1,352


Derivative liabilities:
Interest rate lock agreements		(1,314	)		(398	)
Forward trades		(235	)		(2,642	)

Total derivative liabilities		(1,549	)		(3,040	)


Net derivative asset (liability)	$	906		$	(1,688	)

Derivatives Used in Trading Activities

Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments used in trading activities during the first nine months of 2005 and 2004 consisted predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but not credit risk. Purchased options contain both credit and market risk. They are used to manage fluctuating interest rates as exposure to loss from interest rate contracts changes.

Supplying these derivatives to customers results in fee income. These instruments are carried at fair value in other assets with gains and losses reflected in other non-interest income. Total trading revenue for customer accommodation was $2.3 million and $1.6 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, total trading revenue was $6.0 million and $6.4 million respectively. The total notional value of derivative financial instruments used by Huntington on behalf of customers (for which the related interest rate risk is offset by third parties) was $4.4 billion and $4.7 billion at September 30, 2005 and 2004, respectively. Huntington’s credit risk from interest rate swaps used for trading purposes was $60.2 million and $62.1 million at the same dates.

In connection with its securitization activities, interest rate caps were purchased with a notional value totaling $1.0 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.0 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income in accordance with accounting principles generally accepted in the United States.

Note 14 — Shareholders’ Equity

Share Repurchase Program:

Effective April 27, 2004, the board of directors authorized a new share repurchase program (the 2004 Repurchase Program) which cancelled the 2003 prior share repurchase program and authorized Management to repurchase not more than 7,500,000 shares of Huntington common stock. On June 9, 2005, Huntington reactivated its share repurchase program upon settlement of the SEC formal investigation. During the third quarter, Huntington repurchased 2,597,700 shares under the 2004 Repurchase Program.


					Total Number of Shares		Maximum Number of
	Total Number		Average		Purchased as Part of		Shares that May Yet Be
	of Shares		Price Paid		Publicly Announced Plans		Purchased Under the
Period	Purchased		Per Share		or Programs ⁽¹⁾		Plans or Programs⁽¹⁾

July 1, 2005 to July 31, 2005		600,000	$	25.24		2,418,000		5,082,000
August 1, 2005 to August 31, 2005		1,997,700	$	24.65		4,415,700		3,084,300
September 1, 2005 to September 30, 2005		—		—		4,415,700		3,084,300

Total		2,597,700	$	24.78		4,415,700		3,084,300


⁽¹⁾Information is as of the end of the period.

On October 18, 2005, the Company announced that the board of directors authorized a new program for the repurchase of up to 15 million shares (the 2005 Repurchase Program). The 2005 Repurchase Program expires upon the purchase of the maximum number of shares authorized under the program. The 2004 Repurchase Program, with 3.1 million shares remaining, was cancelled and replaced by the 2005 Repurchase Program. The Company expects to repurchase the shares from time-to-time in the open market or through privately negotiated transactions depending on market conditions.

Rights Agreement:

Holders of Huntington common stock were entitled to certain rights as set forth in a Rights Agreement dated as of February 22, 1990 amended August 16, 1995 (the “Rights Agreement), between Huntington and The Huntington National Bank, successor to The Huntington Trust Company, N.A., as rights agent. These rights were evidenced by the certificates representing shares of Huntington common stock, each of which bore a legend referencing the rights. The Rights Agreement expired on August 16, 2005. With the expiration of the Rights Agreement, the legend on Huntington common stock certificates referencing the rights has no force or effect.

Note 15 — Segment Reporting

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

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

Regional Banking: This segment provides products and services to consumer, small business, and commercial customers. These products and services are offered in seven operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky through the Company’s banking network of 338 branches, over 900 ATMs, plus Internet and telephone banking channels. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, small business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail Banking accounts for 61% and 79% of total Regional Banking loans and deposits, respectively. Commercial Banking serves middle market and large commercial banking relationships, which use a variety of banking products and services including, but not limited to, commercial loans, international trade, cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.

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

Private Financial and Capital Markets Group: The Private Financial division provides products and services designed to meet the needs of the Company’s higher net worth customers with revenue derived through trust, asset management, investment advisory, brokerage, insurance, and private banking products and services. The Capital Markets division focuses on financial solutions for corporate and institutional customers including investment banking, sales and trading of securities, mezzanine capital financing, and risk management products.

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

Use of Operating Earnings to Measure Segment Performance

Management uses earnings on an operating basis, rather than on a GAAP basis, to measure underlying performance trends for each business segment and to determine the success of strategies and future earnings capabilities. Operating earnings represent GAAP earnings adjusted to exclude the impact of the significant items listed in the reconciliation table below. For the three months and nine months ending September 30, 2005, operating earnings were the same as reported GAAP earnings.

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


	Three Months Ended September 30,
Income Statements	Regional			Dealer						Treasury/			Huntington
(in thousands of dollars)	Banking			Sales			PFCMG			Other			Consolidated

2005
Net interest income	$	197,435		$	35,830		$	18,423		$	(10,051	)	$	241,637
Provision for credit losses		(10,834	)		(5,532	)		(1,333	)		—			(17,699	)
Non-interest income		81,118			38,453			34,239			6,930			160,740
Non-interest expense		(146,467	)		(42,835	)		(32,789	)		(10,961	)		(233,052	)
Income taxes		(42,438	)		(9,071	)		(6,489	)		14,946			(43,052	)

Operating earnings and net income, as reported	$	78,814		$	16,845		$	12,051		$	864		$	108,574


2004
Net interest income	$	173,181		$	37,241		$	15,698		$	938		$	227,058
Provision for credit losses		(5,120	)		(6,108	)		(557	)		—			(11,785	)
Non-interest income		77,673			72,826			29,731			9,349			189,579
Non-interest expense		(149,744	)		(77,147	)		(29,670	)		(18,013	)		(274,574	)
Income taxes		(33,597	)		(9,384	)		(5,321	)		10,559			(37,743	)

Operating earnings		62,393			17,428			9,881			2,833			92,535
Gain on sale of automobile loans, net of tax		—			384			—			(181	)		203
Restructuring releases, net of taxes		—			—			—			748			748

Net income, as reported	$	62,393		$	17,812		$	9,881		$	3,400		$	93,486


	Nine Months Ended September 30,
Income Statements	Regional			Dealer						Treasury/			Huntington
(in thousands of dollars)	Banking			Sales			PFCMG			Other			Consolidated

2005
Net interest income	$	576,562		$	110,624		$	54,562		$	(23,013	)	$	718,735
Provision for credit losses		(31,749	)		(17,027	)		(1,692	)		—			(50,468	)
Non-Interest income		228,944			137,648			99,348			19,020			484,960
Non-Interest expense		(444,884	)		(147,254	)		(99,039	)		(48,288	)		(739,465	)
Provision for income taxes		(115,105	)		(29,397	)		(18,613	)		60,871			(102,244	)

Operating earnings and net income, as reported	$	213,768		$	54,594		$	34,566		$	8,590		$	311,518


2004
Net interest income	$	493,818		$	110,196		$	45,354		$	22,938		$	672,306
Provision for credit losses		(3,376	)		(36,065	)		(2,967	)		—			(42,408	)
Non-Interest income		231,796			257,645			97,136			34,875			621,452
Non-Interest expense		(444,104	)		(254,279	)		(94,092	)		(49,906	)		(842,381	)
Provision for income taxes		(97,348	)		(27,124	)		(15,901	)		29,208			(111,165	)

Operating earnings		180,786			50,373			29,530			37,115			297,804
Gain on sale of automobile loans, net of tax		—			8,598			—			636			9,234
Restructuring releases, net of taxes		—			—			—			748			748

Net income, as reported	$	180,786		$	58,971		$	29,530		$	38,499		$	307,786


			Assets at						Deposits at
Balance Sheets	September 30,		December 31,		September 30,		September 30,		December 31,		September 30,
(in millions of dollars)	2005		2004		2004		2005		2004		2004

Regional Banking	$	19,014	$	17,864	$	17,253	$	17,856	$	17,411	$	16,950
Dealer Sales		5,722		6,100		5,957		72		75		69
PFCMG		2,028		1,959		1,833		1,186		1,176		1,127
Treasury / Other		5,999		6,642		6,765		3,235		2,106		1,963

Total	$	32,763	$	32,565	$	31,808	$	22,349	$	20,768	$	20,109

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

INTRODUCTION

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

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

Forward-Looking Statements

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

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

Management encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. Huntington assumes no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.

Risk Factors

Huntington, like other financial companies, is subject to a number of risks, many of which are outside of Management’s control. Management strives to mitigate those risks while optimizing returns. Among the risks assumed are: (1) credit risk, which is the risk that loan and lease customers or other counter parties will be unable to perform their contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely affect Huntington’s financial condition or results of operations, (3) liquidity risk, which is the risk that Huntington and / or the Bank will have insufficient cash or access to cash to meet operating needs, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or external events. The description of Huntington’s business contained in Item 1 of its 2004 Form 10-K, while not all-inclusive, discusses a number of business risks that, in addition to the other information in this report, readers should carefully consider.

SEC Formal Investigation

On June 2, 2005, Huntington filed a Form 8-K announcing that the Commission approved the settlement of its previously announced formal investigation into certain financial accounting matters.

Formal Regulatory Supervisory Agreements and Pending Acquisition

No assurances, however, can be provided as to the ultimate timing or outcome of these matters.

SUMMARY DISCUSSION OF RESULTS

Earnings comparisons from the first quarter of 2004 through the third quarter of 2005 are impacted by a number of factors, some related to changes in the economic and competitive environment, while others reflected specific Management strategies or changes in accounting practices. Understanding the nature and implications of these factors on financial results is important in understanding the Company’s income statement, balance sheet, and credit quality trends and the comparison of the current quarter and year-to-date performance with comparable prior-year periods. The key factors impacting the current reporting period comparisons are more fully described in the Significant Factors Influencing Financial Performance Comparisons section, which follows the summary of results below.

2005 Third Quarter versus 2004 Third Quarter

Net income for the third quarter of 2005 was $108.6 million, or $0.47 per common share, up 16% and 18%, respectively, from $93.5 million, or $0.40 per common share, in the year-ago quarter. This $15.1 million increase in net income primarily reflected:

	•		$40.4 million, or 15%, decline in non-interest expense, primarily reflecting a $32.1 million decline in operating lease expenses as that portfolio continued to run off, as all new automobile leases since April 2002 have been direct finance leases.

	•		$14.6 million, or 6%, increase in net interest income reflecting a 6% increase in average earning assets as the net interest margin was relatively unchanged at 3.31% compared with 3.30% in the year-ago quarter. The increase in average earning assets reflected 10% growth in average total loans and leases, including 12% growth in average consumer loans and 8% growth in average total commercial loans, partially offset by a 14% decline in average investment securities.

Partially offset by:

	•		$29.2 million, or 15%, decline in non-interest income, due primarily to a $35.2 million decline in operating lease income, as that portfolio continued to run-off, a $10.5 million increase in MSR related hedging losses, and a $7.7 million decline in security gains. These negative impacts were partially offset by a $16.7 million increase in mortgage banking income, reflecting a $10.5 million recovery of MSR temporary impairment in the current quarter compared with $4.1 million of MSR temporary impairment in the year-ago quarter. Other positive factors in non-interest income between quarters included growth in trust service income, deposit service charges, brokerage and insurance income, and other service charges and fees.

	•		$5.9 million increase in the provision for credit losses primarily due to loan growth as credit quality remained relatively stable between periods.

	•		$4.8 million increase in income tax expense. The effective tax rate in the 2005 third quarter was 28.4%, down from 29.0% in the year-ago quarter, reflecting higher pre-tax income and the net impact of repatriating foreign earnings, fully offset by the benefit of a federal tax loss carry back.

The return on average assets (ROA) and return on average equity (ROE) in the 2005 third quarter were 1.32% and 16.5%, respectively, up from 1.18% and 15.4%, respectively, in the year-ago quarter. Period end capital was strong with a September 30, 2005, tangible equity to assets ratio of 7.39%, up from 7.11% at the end of the year-ago period.

2005 Third Quarter versus 2005 Second Quarter

Compared with 2005 second quarter net income of $106.4 million, or $0.45 per common share, 2005 third quarter net income and earnings per share increased 2% and 4%, respectively. This $2.1 million, or $0.02 per common share, increase in net income primarily reflected:

	•		$15.1 million, or 6%, decline in non-interest expense, reflecting a $6.1 million decline in operating lease expenses, a $6.6 million decline in personnel costs, and a $1.0 million decline in professional services, as well as lower expenses in a number of other expense categories.

	•		$4.6 million increase in non-interest income, primarily reflecting a $23.5 million increase in mortgage banking income, as the current quarter included a $10.5 million MSR temporary impairment recovery in the current quarter

compared with a $10.2 million MSR temporary impairment in the prior quarter, and a $3.3 million, or 8%, increase in service charges on deposit accounts. Also contributing to the increase in non-interest income from the prior quarter were increases in trust services income, and brokerage and insurance income. These benefits were partially offset by a $15.2 million decline in other income, which reflected $12.8 million of MSR-related trading hedge losses in the current quarter compared with $5.7 million of MSR-related trading gains in the prior quarter, and the absence of any equity investment write-offs in the current period compared with $2.1 million of such write-offs in the second quarter.

Partially offset by:

	•		$4.8 million increase in provision for credit losses, primarily reflecting the relatively stable credit quality in the current quarter compared with improving trends in the prior periods.

	•		$0.3 million decline in net interest income primarily reflecting a 5 basis point decline in the net interest margin to 3.31% from 3.36%, partially offset by slight growth in earning assets. Average loans and leases were little changed, reflecting a combination of factors. Average residential mortgages and home equity loans and lines increased 2% and 1%, respectively, from the prior quarter with average middle market commercial real estate (CRE) and small business commercial (C&I) and CRE up 2% and 1%, respectively. However, average middle market C&I declined 4%, driven mostly by a decline in dealer floor plan loans resulting from lower dealer automobile inventories due to the success of domestic automobile manufacturers’ “employee pricing” offers. In addition, average automobile loans and leases declined 1%, reflecting the sale of automobile loans as part of the ongoing strategy to sell 50% to 75% of originated automobile loans.

	•		$12.4 million increase in income tax expense as the effective tax rate in the 2005 third quarter was 28.4%, up from 22.3% in the 2005 second quarter. The higher effective tax rate reflected a combination of factors, including higher pre-tax income and the net impact of repatriating foreign earnings.

The ROA and ROE in the 2005 second quarter were 1.31% and 16.3%, respectively, with a tangible equity to assets ratio of 7.36% at June 30, 2005. The ROA and ROE in the 2005 third quarter were 1.32% and 16.5%, respectively.

2005 First Nine Months versus 2004 First Nine Months

Net income for the first nine months of 2005 was $311.5 million, or $1.33 per common share, both up 1% from $307.8 million, or $1.32 per common share, in the comparable year-ago period. This $3.7 million increase in net income primarily reflected:

	•		$101.8 million, or 12%, decline in non-interest expense, primarily reflecting a $98.5 million decline in operating lease expenses, a $9.7 million decrease in other expenses, including $5.8 million of costs related to investments in partnerships generating tax benefits in the year-ago period, partially offset by increases spread over several expense categories.

	•		$46.4 million, or 7%, increase in net interest income reflecting a 7% increase in average earning assets and a 2 basis point improvement in the net interest margin to 3.33% from 3.31%. The increase in average earning assets reflected 11% growth in average total loans and leases, including 13% growth in average consumer loans and 9% growth in average total commercial loans, partially offset by an 18% decline in average investment securities.

	•		$14.3 million decline in income tax expense as the effective tax rate for the first nine months of 2005 was 24.7%, down from 27.5% in the year-ago period. The lower 2005 income tax expense reflected a combination of factors including the benefit of a federal tax loss carry back, partially offset by the net impact of repatriating foreign earnings in 2005 and higher pre-tax income in 2004.

Partially offset by:

•

$150.7 million, or 24%, decline in non-interest income. Contributing to the decrease were a $117.9 million decline in operating lease income, a $16.0 million decline in other income reflecting MSR-hedge related trading losses, lower gains from the sale of automobile loans, a decline in securities gains, and lower service charges on deposit accounts, brokerage and insurance income, and bank owned life insurance income. These declines were partially offset by increases in mortgage banking income, trust services income, and other service charges and fees.

Table 1 — Selected Quarterly Income Statement Data


	2005									2004						3Q05 vs 3Q04
(in thousands of dollars, except per share amounts)	Third			Second			First			Fourth			Third			Amount			Percent

Interest income	$	420,858		$	402,326		$	376,105		$	359,215		$	338,002		$	82,856			24.5	%
Interest expense		179,221			160,426			140,907			120,147			110,944			68,277			61.5

Net interest income		241,637			241,900			235,198			239,068			227,058			14,579			6.4
Provision for credit losses		17,699			12,895			19,874			12,654			11,785			5,914			50.2

Net interest income after provision for credit losses		223,938			229,005			215,324			226,414			215,273			8,665			4.0

Service charges on deposit accounts		44,817			41,516			39,418			41,747			43,935			882			2.0
Trust services		19,671			19,113			18,196			17,315			17,064			2,607			15.3
Brokerage and insurance income		13,948			13,544			13,026			12,879			13,200			748			5.7
Bank owned life insurance income		10,104			10,139			10,104			10,484			10,019			85			0.8
Other service charges and fees		11,449			11,252			10,159			10,617			10,799			650			6.0
Mortgage banking income (loss)		21,116			(2,376	)		12,061			8,822			4,448			16,668			N.M.
Securities gains (losses)		101			(343	)		957			2,100			7,803			(7,702	)		(98.7	)
Gains on sales of automobile loans		502			254			—			—			312			190			60.9
Other income		9,770			24,974			17,397			23,870			17,899			(8,129	)		(45.4	)

Sub-total before operating lease income		131,478			118,073			121,318			127,834			125,479			5,999			4.8
Operating lease income		29,262			38,097			46,732			55,106			64,412			(35,150	)		(54.6	)

Total non-interest income		160,740			156,170			168,050			182,940			189,891			(29,151	)		(15.4	)

Personnel costs		117,476			124,090			123,981			122,738			121,729			(4,253	)		(3.5	)
Net occupancy		16,653			17,257			19,242			26,082			16,838			(185	)		(1.1	)
Outside data processing and other services		18,062			18,113			18,770			18,563			17,527			535			3.1
Equipment		15,531			15,637			15,863			15,733			15,295			236			1.5
Professional services		8,323			9,347			9,459			9,522			12,219			(3,896	)		(31.9	)
Marketing		6,779			7,441			6,454			5,581			5,000			1,779			35.6
Telecommunications		4,512			4,801			4,882			4,596			5,359			(847	)		(15.8	)
Printing and supplies		3,102			3,293			3,094			3,148			3,201			(99	)		(3.1	)
Amortization of intangibles		203			204			204			205			204			(1	)		(0.5	)
Restructuring reserve releases		—			—			—			—			(1,151	)		1,151			N.M.
Other expense		19,588			19,074			18,380			26,526			22,317			(2,729	)		(12.2	)

Sub-total before operating lease expense		210,229			219,257			220,329			232,694			218,538			(8,309	)		(3.8	)
Operating lease expense		22,823			28,879			37,948			48,320			54,885			(32,062	)		(58.4	)

Total non-interest expense		233,052			248,136			258,277			281,014			273,423			(40,371	)		(14.8	)

Income before income taxes		151,626			137,039			125,097			128,340			131,741			19,885			15.1
Provision for income taxes		43,052			30,614			28,578			37,201			38,255			4,797			12.5

Net income	$	108,574		$	106,425		$	96,519		$	91,139		$	93,486		$	15,088			16.1	%


Average common shares — diluted		233,456			235,671			235,053			235,502			234,348			(892	)		(0.4	)%

Per common share
Net income — diluted	$	0.47		$	0.45		$	0.41		$	0.39		$	0.40		$	0.07			17.5
Cash dividends declared		0.215			0.215			0.200			0.200			0.200			0.015			7.5

Return on average total assets		1.32	%		1.31	%		1.20	%		1.13	%		1.18	%		0.14	%		11.9
Return on average total shareholders’ equity		16.5			16.3			15.5			14.6			15.4			1.1			7.1
Net interest margin ⁽¹⁾		3.31			3.36			3.31			3.38			3.30			0.01			0.3
Efficiency ratio ⁽²⁾		57.4			61.8			63.7			66.4			66.3			(8.9	)		(13.4	)
Effective tax rate		28.4			22.3			22.8			29.0			29.0			(0.6	)		(2.1	)

Revenue — fully taxable equivalent (FTE)
Net interest income	$	241,637		$	241,900		$	235,198		$	239,068		$	227,058		$	14,579			6.4
FTE adjustment		3,734			2,961			2,861			2,847			2,864			870			30.4

Net interest income ⁽¹⁾		245,371			244,861			238,059			241,915			229,922			15,449			6.7
Non-interest income		160,740			156,170			168,050			182,940			189,891			(29,151	)		(15.4	)

Total revenue⁽¹⁾	$	406,111		$	401,031		$	406,109		$	424,855		$	419,813		$	(13,702	)		(3.3	)%

N.M., not a meaningful value.


(1)		On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.

(2)		Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses).

Table 2 — Selected Year to Date Income Statement Data


	Nine Months Ended September 30,						Change
(in thousands of dollars, except per share amounts)	2005			2004			Amount			Percent

Interest income	$	1,199,289		$	988,100		$	211,189			21.4	%
Interest expense		480,554			315,794			164,760			52.2

Net interest income		718,735			672,306			46,429			6.9
Provision for credit losses		50,468			42,408			8,060			19.0

Net interest income after provision for credit losses		668,267			629,898			38,369			6.1

Service charges on deposit accounts		125,751			129,368			(3,617	)		(2.8	)
Trust services		56,980			50,095			6,885			13.7
Brokerage and insurance income		40,518			41,920			(1,402	)		(3.3	)
Bank owned life insurance income		30,347			31,813			(1,466	)		(4.6	)
Other service charges and fees		32,860			30,957			1,903			6.1
Mortgage banking income		30,801			23,474			7,327			31.2
Securities gains		715			13,663			(12,948	)		(94.8	)
Gains on sales of automobile loans		756			14,206			(13,450	)		(94.7	)
Other income		52,141			68,177			(16,036	)		(23.5	)

Sub-total before operating lease income		370,869			403,673			(32,804	)		(8.1	)
Operating lease income		114,091			231,985			(117,894	)		(50.8	)

Total non-interest income		484,960			635,658			(150,698	)		(23.7	)

Personnel costs		365,547			363,068			2,479			0.7
Net occupancy		53,152			49,859			3,293			6.6
Outside data processing and other services		54,945			53,552			1,393			2.6
Equipment		47,031			47,609			(578	)		(1.2	)
Professional services		27,129			27,354			(225	)		(0.8	)
Marketing		20,674			20,908			(234	)		(1.1	)
Telecommunications		14,195			15,191			(996	)		(6.6	)
Printing and supplies		9,489			9,315			174			1.9
Amortization of intangibles		611			612			(1	)		(0.2	)
Restructuring reserve releases		—			(1,151	)		1,151			N.M.
Other expense		57,042			66,755			(9,713	)		(14.6	)

Sub-total before operating lease expense		649,815			653,072			(3,257	)		(0.5	)
Operating lease expense		89,650			188,158			(98,508	)		(52.4	)

Total non-interest expense		739,465			841,230			(101,765	)		(12.1	)

Income before income taxes		413,762			424,326			(10,564	)		(2.5	)
Provision for income taxes		102,244			116,540			(14,296	)		(12.3	)

Net income	$	311,518		$	307,786		$	3,732			1.2	%

Average common shares — diluted		234,727			233,307			1,420			0.6	%

Per Common Share
Net income per common share — diluted	$	1.33		$	1.32		$	0.01			0.8	%
Cash dividends declared		0.630			0.550			0.080			14.5

Return on average total assets		1.28	%		1.32	%		(0.04	)%		(3.0	)%
Return on average total shareholders’ equity		16.1			17.6			(1.50	)		(8.5	)
Net interest margin⁽¹⁾		3.33			3.31			0.02			0.6
Efficiency ratio⁽²⁾		60.9			64.5			(3.60	)		(5.6	)
Effective tax rate		24.7			27.5			(2.76	)		(10.1	)

Revenue — fully taxable equivalent (FTE)
Net interest income	$	718,735		$	672,306		$	46,429			6.9	%
FTE adjustment		9,556			8,806			750			8.5

Net interest income ⁽¹⁾		728,291			681,112			47,179			6.9
Non-interest income		484,960			635,658			(150,698	)		(23.7	)

Total revenue ⁽¹⁾	$	1,213,251		$	1,316,770		$	(103,519	)		(7.9	)%


N.M., not a meaningful value.

⁽¹⁾		On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.

⁽²⁾		Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains.

Significant Factors Influencing Financial Performance Comparisons

Earnings comparisons from the first quarter of 2004 through the third quarter of 2005 were impacted by a number of factors, some related to changes in the economic and competitive environment, while others reflected specific Management strategies or changes in accounting practices. Those key factors are summarized below.

	1.		Automobile leases originated through April 2002 are accounted for as operating leases. Automobile leases originated before May 2002 are accounted for using the operating lease method of accounting because they do not qualify as direct financing leases. Operating leases are carried in other assets with the related rental income, other revenue, and credit recoveries reflected as operating lease income, a component of non-interest income. Under this accounting method, depreciation expenses, as well as other costs and charge-offs, are reflected as operating lease expense, a component of non-interest expense. With no new operating leases originated since April 2002, the operating lease assets have declined rapidly. It is anticipated that the level of operating lease assets and related operating lease income and expense will decline to a point of diminished materiality sometime in 2006. However, until that point is reached, their downward trend influences total non-interest income and non-interest expense trends.

			In contrast, automobile leases originated since April 2002 are accounted for as direct financing leases, an interest-bearing asset included in total loans and leases with the related income reflected as interest income and included in the calculation of the net interest margin. Credit charge-offs and recoveries are reflected in the allowance for loan and lease losses (ALLL), with related changes in the ALLL reflected in the provision for credit losses. The relative newness and rapid growth of the direct financing lease portfolio has resulted in higher reported automobile lease growth rates than in a more mature portfolio, especially in 2002 through 2004. To better understand overall trends in automobile lease exposure, it is helpful to compare trends in the combined total of direct financing leases plus operating leases (see the Company’s 2004 Form 10-K for additional discussion).

	2.		Mortgage servicing rights (MSRs) and related hedging. Interest rate levels throughout this period have remained low by historical standards. Though generally increasing throughout this period, they have also been volatile, with increases in one period followed by declines in another and vice versa. This has impacted the valuation of MSRs, which can be volatile when rates change.

	•		Since the second quarter of 2002, the Company generally has retained the servicing on mortgage loans it originates and sells. MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. Thus, as interest rates decline, less future income is expected and the value of MSRs declines and becomes impaired when the valuation is less than the recorded book value. The Company recognizes temporary impairment due to change in interest rates through a valuation reserve and records a direct write-down of the book value of its MSRs for other-than-temporary declines in valuation. Changes and fluctuations in interest rate levels between quarters resulted in some quarters reporting an MSR temporary impairment, with others reporting a recovery of previously reported MSR temporary impairment. Such swings in MSR valuations have significantly impacted quarterly mortgage banking income and quarterly trends throughout this period.

	•		Beginning in 2004, the Company uses gains or losses on investment securities, and gains or losses and net interest income on trading account assets, to offset MSR temporary valuation changes. Valuation of trading and investment securities generally react to interest rate changes in an opposite direction compared with changes in MSR valuations. As a result, changes in interest rate levels that impacted MSR valuations also resulted in securities or trading gains or losses. As such, in quarters where an MSR temporary impairment is recognized, investment securities and/or trading account assets are sold resulting in a gain on sale, and vice versa. Investment securities gains or losses are reflected in the income statement in a single non-interest income line item, whereas trading gains or losses are a component of other non-interest income on the income statement. MSR-related trading assets also generate modest net interest income. The earnings impact of the MSR valuation change, and the combination of securities and/or trading gains/losses may not exactly offset due to, among other factors, the difference in the

magnitude and/or timing of when the MSR valuation is determined and recorded, compared with when the securities are sold and any gain or loss is recorded (see Tables 3 and 8).

	3.		The sale of automobile loans. A key strategy over this time period was to lower the credit exposure to automobile loans and leases to 20% or less of total credit exposure, primarily by selling automobile loans. This objective was achieved during the 2005 first quarter. These sales of higher-rate, higher-risk loans impacted results in a number of ways including: lower growth rates in automobile, total consumer, and total loans; and lower net interest income and margin than otherwise would be the case if the loans were not sold. In addition, during 2004 such sales resulted in the generation of significant gains as large pools of automobile loans were sold in order to achieve the objective, with such gains reflected in non-interest income. In the 2005 second quarter, the Company entered into an arrangement to sell 50%-75% of automobile loan production to a third party on an on-going basis and retain the loan servicing as part of a strategy to manage automobile loans and leases total credit exposure. This flow-sale program has resulted in modest gains in 2005, which Management views as recurring given their on-going nature (see Table 3).

	4.		Significant C&I and CRE charge-offs and recoveries. A single commercial credit recovery in the 2004 second quarter on a loan previously charged off in the 2002 fourth quarter favorably impacted the 2004 second quarter and nine-month provision expense, as well as middle-market commercial and industrial, total commercial, and total net charge-offs for the quarter and nine-month period (see Tables 16 and 17). In addition, in the 2005 first quarter, a single large commercial credit was charged-off. This impacted 2005 first quarter and nine-month period total net charge-offs and provision expense (see Tables 3, 14, and 15).

	5.		Expenses and accruals associated with the SEC formal investigation and banking regulatory formal written agreements. On June 2, 2005, Huntington filed an 8-K announcing that the Commission approved the settlement of its previously announced formal investigation into certain financial accounting matters.

The SEC formal investigation and regulatory agreements resulted in certain expenses and accruals as detailed below:


2004				2005
First quarter	$	0.7	million	First quarter	$	2.0	million
Second quarter		0.9		Second quarter		1.7
Third quarter		5.5		Third quarter		(0.1	)

First nine months	$	7.1	million	First nine months	$	3.6	million

Fourth quarter		6.5

Full year	$	13.6	million

Other significant non-run rate items. From the first quarter of 2004 through the third quarter of 2005, and in addition to other items discussed separately in this section, a number of significant non-run rate items impacted financial results. These included:

	•		$3.6 million pre-tax of severance and other expenses in the 2005 second quarter and $4.6 million pre-tax nine-month results associated with the consolidation of certain operations functions, including the closing of an item-processing center in Michigan, which influences comparisons with both the year-ago quarter, as well as prior quarter. These expenses included $2.0 million in severance-related personnel costs, $0.8 million in net occupancy, $0.5 million in equipment expense, and $0.3 million in other expense. This item impacted non-interest expense.

	•		$2.1 million pre-tax write-off of an equity investment in the 2005 second quarter and nine-month results. This item impacted non-interest income.

	•		$1.8 million pre-tax of Unizan system conversion expense in the 2004 third quarter and $2.7 million pre-tax in the 2004 nine-month results. This item impacted non-interest expense.

Effective tax rate. The effective tax rate through-out this period included the after-tax positive impact on net income due to a federal tax loss carry back. In addition, the after-tax rate also included the positive impact of tax exempt income, bank owned life insurance, asset securitization activities, and general business credits from investments in low income housing and historic property partnerships. The lower effective tax rate is expected

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


	Impact ⁽²⁾
(in millions, except per share amounts)	Amount⁽³⁾			EPS
Three Months Ended:

September 30, 2005 — GAAP earnings	$	108.6	⁽⁴⁾	$	0.47
Net impact of federal tax loss carry back		6.8	⁽⁴⁾		0.03
Net impact of repatriating foreign earnings		(5.0	)⁽⁴⁾		(0.02	)
Mortgage servicing right (MSR) recovery net of hedge-related trading losses		(2.1	)		(0.01	)

June 30, 2005 — GAAP earnings	$	106.4	⁽⁴⁾	$	0.45
Net impact of federal tax loss carry back		6.6	⁽⁴⁾		0.03
MSR temporary impairment net of hedge-related trading gains		(4.0	)		(0.01	)
Severance and consolidation expenses		(3.6	)		(0.01	)
Write-off of equity investment		(2.1	)		(0.01	)

September 30, 2004 — GAAP earnings	$	93.5	⁽⁴⁾	$	0.40
Investment securities gains		7.8			0.02
MSR temporary impairment net of hedge-related trading losses		(6.5	)		(0.02	)
SEC reated expenses / accruals		(5.5	)		(0.02	)
Unizan system conversion expense		(1.8	)		(0.01	)

Nine Months Ended:

September 30, 2005 — GAAP earnings	$	311.5	⁽⁴⁾	$	1.33
Net impact of federal tax loss carry back		19.8	⁽⁴⁾		0.09
Net impact of repatriating foreign earnings		(5.0	)⁽⁴⁾		(0.02	)
MSR temporary impairment net of hedge-related trading losses		(5.7	)		(0.02	)
Single C&I charge-off impact, net of allocated reserves		(6.4	)		(0.02	)
Severance and consolidation expenses		(3.6	)		(0.01	)
Write-off of equity investment		(2.1	)		(0.01	)
SEC and regulatory related expenses		(3.6	)		(0.02	)

September 30, 2004 — GAAP earnings	$	307.8	⁽⁴⁾	$	1.32
Gains on sales of automobile loans		14.2			0.04
Investment securities gains		13.7			0.04
Single commercial credit recovery		9.7			0.03
MSR temporary impairment net of hedge-related trading losses		(6.2	)		(0.03	)
SEC reated expenses / accruals		(7.1	)		(0.02	)
Unizan system conversion expense		(2.7	)		(0.01	)


⁽¹⁾		Includes significant items with $0.01 EPS impact or greater

⁽²⁾		Favorable (unfavorable) impact on GAAP earnings

⁽³⁾		Pre-tax unless otherwise noted

⁽⁴⁾		After-tax

RESULTS OF OPERATIONS

Net Interest Income

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

2005 Third Quarter versus 2004 Third Quarter

Fully taxable equivalent net interest income increased $15.4 million, or 7%, from the year-ago quarter, primarily reflecting the favorable impact of a $1.7 billion, or 6%, increase in average earning assets, as well as a one basis point increase in the net interest margin. The fully taxable equivalent net interest margin was 3.31% compared with 3.30% in the year-ago quarter. The stable net interest margin reflected a combination of factors. These included the benefit from growth in higher-yielding loans and redirecting part of the proceeds from maturing securities to fund loan growth, as well as an increase in both the proportion and the contribution of net free funds on the balance sheet. These positives were partially offset by the negative impacts from the flattening of the yield curve and share repurchase activity.

Average total loans and leases increased $2.3 billion, or 10%, from the 2004 third quarter, reflecting growth in both consumer loans and commercial loans. Total average consumer loans increased $1.5 billion, or 12%, from the year-ago quarter, reflecting growth across all consumer loan categories. Average residential mortgages increased $0.7 billion, or 19%, and average home equity loans increased $0.3 billion, or 8%. Though residential mortgage and home equity growth rates were strong, the annualized 2005 third quarter growth rates of 8% and 4%, respectively, were approximately half the year-over-year growth rates. This reflected our commitment to maintaining underwriting and pricing discipline in a competitive market.

Compared with the year-ago quarter, average total automobile loans and leases increased $0.4 billion, or 10%. Average automobile loans increased $0.2 billion, or 12%, reflecting 30% higher automobile loan production levels, stimulated by manufacturer employee pricing discounts in the current quarter, partially offset by loan sales over the past 12 months. Average direct financing leases increased $0.2 billion, or 8%, from the year-ago quarter reflecting the migration from operating leases, despite 56% lower production levels reflecting lower automobile lease demand and aggressive price competition. Average operating lease assets declined $0.5 billion, or 61%, as this portfolio continued to run off. Total automobile loan and lease exposure at quarter end was 19%, down from 21% a year ago.

Average total commercial loans increased $0.8 billion, or 8%, from the year-ago quarter. This increase reflected a $0.4 billion, or 10%, increase in middle market commercial and industrial (C&I) loans despite the negative impact from the current quarter decline in automobile dealer floor plan loans. Average middle market commercial real estate (CRE) loans increased $0.2 billion, or 6%, with small business C&I and CRE loans increasing $0.2 billion, or 8%.

Average total investment securities declined $0.7 billion, or 14%, from the year-ago quarter. This decline reflected a combination of factors including lowering the level of excess liquidity and funding loan growth.

Average total core deposits in the 2005 third quarter were $17.2 billion, up $0.7 billion, or 4%, from the year-ago quarter. The largest contributor to this growth was a $0.7 billion, or 31%, increase in retail certificates of deposit. Interest bearing demand deposits grew $0.2 billion, or 2%, with all of the increase reflecting growth in commercial money market deposits, as consumer money market accounts declined. Non-interest bearing demand deposits increased $0.1 billion, or 4%, reflecting growth in both consumer and commercial non-interest bearing deposits. These increases were partially offset by a $0.3 billion, or 10%, decline in savings and other domestic time deposits.

2005 Third Quarter versus 2005 Second Quarter

Compared with the 2005 second quarter, fully taxable equivalent net interest income increased $0.5 million reflecting a $0.2 billion, or 1%, increase in average earning assets, offset by a 5 basis point decline in the net interest margin to 3.31% from 3.36%. Of the 5 basis point decline, 2 basis points related to lower yields on mezzanine-related loans and one basis point related to the impact of share repurchases. The remainder reflected continued loan and deposit pricing pressures, as well as the overall impact of a flatter yield curve.

Average total loans and leases in the third quarter were virtually unchanged from the 2005 second quarter as

growth in average consumer loans was offset by a decline in average commercial loans.

Total average commercial loans decreased $0.1 billion, or 1%, from the second quarter due to a $193 million, or 4%, decrease in average C&I loans, partially offset by a 2% increase in average CRE loans. Of the decline in average C&I loans, approximately $157 million related to a decline in dealer floor plan loans primarily reflecting lower utilization rates, as dealer automobile inventories fell. Growth in average small business C&I and CRE loans was 1%, slightly below the growth rates in the 2005 first and second quarters.

Compared with the 2005 second quarter, average total consumer loans increased $0.1 billion, or 1%, primarily reflecting a 2% increase in residential mortgages and a 1% increase in average home equity loans. Growth rates in residential mortgages and home equity loans have slowed in each of the last three linked quarters. Average automobile loans and leases decreased 1%, reflecting a 2% decline in average automobile direct financing leases. Average automobile loans were little changed, as growth due to higher automobile loan production was offset by loan sales.

Average investment securities increased $0.1 billion, or 2%, from the 2005 second quarter.

Compared with the 2005 second quarter, average total core deposits increased $0.2 billion, or 1%. This primarily reflected a $0.4 billion, or 16%, increase in retail certificates of deposits, primarily consumer driven. Non-interest bearing deposits also increased 2%, with all of this related to growth in commercial non-interest bearing deposits, as consumer non-interest bearing deposits declined. These increases were partially offset by a $0.1 billion, or 4%, decline in savings and other time deposits, and a $0.1 billion, or 2%, decline in interest bearing demand deposits.

Tables 4 and 5 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

Table 4 — Condensed Consolidated Quarterly Average Balance Sheets


	Average Balances															Change
Fully taxable equivalent basis	2005									2004						3Q05 vs 3Q04
(in millions of dollars)	Third			Second			First			Fourth			Third			Amount			Percent

Assets
Interest bearing deposits in banks	$	54		$	54		$	53		$	60		$	55		$	(1	)		(1.8	)%
Trading account securities		274			236			200			228			148			126			85.1
Federal funds sold and securities purchased under resale agreements		142			225			475			695			318			(176	)		(55.3	)
Loans held for sale		427			276			203			229			283			144			50.9
Investment securities:
Taxable		3,523			3,589			3,932			3,858			4,340			(817	)		(18.8	)
Tax-exempt		537			411			409			404			398			139			34.9

Total investment securities		4,060			4,000			4,341			4,262			4,738			(678	)		(14.3	)
Loans and leases:⁽¹⁾
Commercial:
Middle market commercial and industrial		4,708			4,901			4,710			4,503			4,298			410			9.5
Construction		1,720			1,678			1,642			1,577			1,514			206			13.6
Commercial		1,922			1,905			1,883			1,852			1,913			9			0.5

Middle market commercial real estate		3,642			3,583			3,525			3,429			3,427			215			6.3
Small business commercial and industrial and commercial real estate		2,251			2,230			2,183			2,136			2,081			170			8.2

Total commercial		10,601			10,714			10,418			10,068			9,806			795			8.1

Consumer:
Automobile loans		2,078			2,069			2,008			1,913			1,857			221			11.9
Automobile leases		2,424			2,468			2,461			2,388			2,250			174			7.7

Automobile loans and leases		4,502			4,537			4,469			4,301			4,107			395			9.6
Home equity		4,681			4,636			4,570			4,489			4,337			344			7.9
Residential mortgage		4,157			4,080			3,919			3,695			3,484			673			19.3
Other loans		507			491			480			479			461			46			10.0

Total consumer		13,847			13,744			13,438			12,964			12,389			1,458			11.8

Total loans and leases		24,448			24,458			23,856			23,032			22,195			2,253			10.2
Allowance for loan and lease losses		(256	)		(270	)		(282	)		(283	)		(288	)		32			11.1

Net loans and leases		24,192			24,188			23,574			22,749			21,907			2,285			10.4

Total earning assets		29,405			29,249			29,128			28,506			27,737			1,668			6.0

Operating lease assets		309			409			529			648			800			(491	)		(61.4	)
Cash and due from banks		867			865			909			880			928			(61	)		(6.6	)
Intangible assets		217			218			218			216			216			1			0.5
All other assets		2,197			2,149			2,079			2,094			2,066			131			6.3

Total assets	$	32,739		$	32,620		$	32,581		$	32,061		$	31,459		$	1,280			4.1	%


Liabilities and shareholders’ equity
Deposits:
Demand deposits — non-interest bearing	$	3,406		$	3,352		$	3,314		$	3,401		$	3,276		$	130			4.0	%
Demand deposits — Interest bearing		7,539			7,677			7,925			7,658			7,384			155			2.1
Savings and other domestic time deposits		3,095			3,230			3,309			3,395			3,436			(341	)		(9.9	)
Retail certificates of deposit		3,157			2,720			2,496			2,454			2,414			743			30.8

Total core deposits		17,197			16,979			17,044			16,908			16,510			687			4.2
Domestic time deposits of $100,000 or more		1,271			1,248			1,249			990			886			385			43.5
Brokered deposits and negotiable CDs		3,286			3,249			2,728			1,948			1,755			1,531			87.2
Foreign time deposits		462			434			442			465			476			(14	)		(2.9	)

Total deposits		22,216			21,910			21,463			20,311			19,627			2,589			13.2
Short-term borrowings		1,559			1,301			1,179			1,302			1,342			217			16.2
Federal Home Loan Bank advances		935			1,136			1,196			1,270			1,270			(335	)		(26.4	)
Subordinated notes and other long-term debt		3,960			4,100			4,517			5,099			5,244			(1,284	)		(24.5	)

Total interest bearing liabilities		25,264			25,095			25,041			24,581			24,207			1,057			4.4

All other liabilities		1,458			1,554			1,699			1,598			1,564			(106	)		(6.8	)
Shareholders’ equity		2,611			2,619			2,527			2,481			2,412			199			8.3

Total liabilities and shareholders’ equity	$	32,739		$	32,620		$	32,581		$	32,061		$	31,459		$	1,280			4.1	%


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

Table 5 — Consolidated Quarterly Net Interest Margin Analysis


	Average Rates⁽²⁾
	2005									2004
Fully taxable equivalent basis ⁽¹⁾	Third			Second			First			Fourth			Third

Assets
Interest bearing deposits in banks		2.13	%		1.47	%		1.88	%		1.61	%		0.91	%
Trading account securities		3.95			3.94			4.14			4.15			4.44
Federal funds sold and securities purchased under resale agreements		3.41			2.76			2.36			1.99			1.53
Loans held for sale		5.43			6.04			5.55			5.69			5.25
Investment securities:
Taxable		4.37			4.13			3.87			3.77			3.83
Tax-exempt		6.62			6.76			6.73			6.89			7.06

Total investment securities		4.67			4.40			4.14			4.07			4.10
Loans and leases:⁽³⁾
Commercial:
Middle market commercial and industrial		5.87			5.65			5.02			4.80			4.46
Construction		6.16			5.70			5.13			4.65			4.13
Commercial		5.90			5.44			5.15			4.80			4.45

Middle market commercial real estate		6.02			5.56			5.14			4.73			4.31
Small business commercial and industrial and commercial real estate		6.17			5.99			5.81			5.67			5.45

Total commercial		5.98			5.69			5.23			4.96			4.62

Consumer:
Automobile loans		6.44			6.57			6.83			7.31			7.65
Automobile leases		4.94			4.91			4.92			5.00			5.02

Automobile loans and leases		5.63			5.67			5.78			6.02			6.21
Home equity		6.60			6.24			5.77			5.30			4.84
Residential mortgage		5.45			5.37			5.36			5.53			5.48
Other loans		5.92			6.22			6.42			6.87			6.54

Total consumer		5.91			5.79			5.67			5.66			5.54

Total loans and leases		5.94			5.75			5.48			5.34			5.12

Total earning assets		5.72	%		5.52	%		5.21	%		5.05	%		4.89	%


Liabilities and shareholders’ equity
Deposits:
Demand deposits — non-interest bearing		—	%		—	%		—	%		—	%		—	%
Demand deposits — Interest bearing		1.87			1.64			1.45			1.21			1.06
Savings and other domestic time deposits		1.39			1.34			1.27			1.26			1.24
Retail certificates of deposit		3.58			3.49			3.43			3.38			3.32

Total core deposits		2.15			1.94			1.76			1.62			1.52
Domestic time deposits of $100,000 or more		3.60			3.27			2.92			2.51			2.40
Brokered deposits and negotiable CDs		3.66			3.25			2.80			2.26			1.84
Foreign time deposits		2.28			1.95			1.41			0.98			0.83

Total deposits		2.52			2.26			1.99			1.73			1.58
Short-term borrowings		2.74			2.16			1.66			1.17			0.92
Federal Home Loan Bank advances		3.08			3.02			2.90			2.68			2.60
Subordinated notes and other long-term debt		4.20			3.91			3.39			2.67			2.62

Total interest bearing liabilities		2.82	%		2.56	%		2.27	%		1.94	%		1.82	%


Net interest rate spread		2.90	%		2.96	%		2.94	%		3.11	%		3.07	%
Impact of non-interest bearing funds on margin		0.41			0.40			0.37			0.27			0.23

Net interest margin		3.31	%		3.36	%		3.31	%		3.38	%		3.30	%


⁽¹⁾		Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.

⁽²⁾		Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees.

⁽³⁾		For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

2005 First Nine Months versus 2004 First Nine Months

Fully taxable equivalent net interest income increased $47.2 million, or 7%, from the comparable year-ago period, reflecting the favorable impact of a $1.8 billion, or 7%, increase in average earning assets, and a 2 basis point increase in the net interest margin. The fully taxable equivalent net interest margin increased to 3.33% from 3.31% in the year-ago period reflecting a shift from lower-yielding investments to higher-yielding loans as a result of decreasing the level of excess liquidity and redirecting part of the proceeds of securities sales to fund loan growth. The margin also benefited from an increase in non-interest bearing funds. These benefits were partially offset by the impact of a flattening yield curve.

Average total loans and leases increased $2.4 billion, or 11%, from the 2004 first nine-month period, reflecting growth in consumer loans, and to a lesser degree, growth in commercial loans. Total average consumer loans increased $1.6 billion, or 13%, from the year-ago period primarily due to a $1.0 billion, or 33%, increase in average residential mortgages as mortgage loan rates remained at attractive levels. Average home equity loans increased $0.5 billion, or 13%.

Average total automobile loans decreased $0.4 billion, or 15%, from the year-ago period primarily reflecting the sale of automobile loans. Partially offsetting the decline in automobile loans was a $0.3 billion, or 15% increase in direct financing leases due to the continued migration from operating lease assets, which have not been originated since April 2002.

Average total commercial loans increased $0.9 billion, or 9%, from the year-ago nine-month period. This reflected a $0.3 billion, or 10%, increase in CRE loans, a $0.3 billion, or 8%, increase in C&I loans, and a $0.2 billion, or 10%, increase in average small business C&I and CRE loans.

Average total investment securities declined $0.9 billion, or 18%, from the first nine months of 2004. This decline reflected a combination of factors including lowering the level of excess liquidity, a decision to sell selected lower yielding securities, and partially funding loan growth with the proceeds from the sale of securities.

Average total core deposits in the 2005 first nine-month period were $17.1 billion, up $1.0 billion, or 6%, from the comparable year-ago period, reflecting a $0.7 billion, or 9%, increase in average interest bearing demand deposit accounts, primarily money market accounts, a $0.4 billion, or 16%, increase in retail certificates of deposit, and a $0.2 billion, or 6%, increase in non-interest bearing deposits. These increases were partially offset by a $0.2 billion, or 7%, decline in savings and other domestic time deposits.

Table 6 — Condensed Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis


	YTD Average Balances												YTD Average Rates⁽²⁾
Fully taxable equivalent basis⁽¹⁾	Nine Months Ended Sept 30,						Change						Nine Months Ended September 30,
(in millions of dollars)	2005			2004			Amount			Percent			2005			2004

Assets
Interest bearing deposits in banks	$	53		$	67		$	(14	)		(20.9	)%		1.82	%		0.88	%
Trading account securities		237			64			173			N.M.			4.00			4.17
Federal funds sold and securities purchased under resale agreements		298			193			105			54.4			2.79			1.42
Loans held for sale		303			248			55			22.2			5.63			5.24
Investment securities:
Taxable		3,662			4,615			(953	)		(20.7	)		4.09			3.91
Tax-exempt		453			415			38			9.2			6.69			7.00

Total investment securities		4,115			5,030			(915	)		(18.2	)		4.37			4.17
Loans and leases:⁽³⁾
Commercial:
Middle market commercial and industrial		4,773			4,431			342			7.7			5.52			4.28
Construction		1,680			1,355			325			24.0			5.67			3.86
Commercial		1,903			1,902			1			0.1			5.50			4.32

Middle market commercial real estate		3,583			3,257			326			10.0			5.58			4.13
Small business commercial and industrial and commercial real estate		2,222			2,024			198			9.8			5.99			5.41

Total commercial		10,578			9,712			866			8.9			5.64			4.46

Consumer:
Automobile loans		2,052			2,410			(358	)		(14.9	)		6.61			7.20
Automobile leases		2,451			2,126			325			15.3			4.92			5.00

Automobile loans and leases		4,503			4,536			(33	)		(0.7	)		5.69			6.17
Home equity		4,630			4,086			544			13.3			6.21			4.84
Residential mortgage		4,053			3,049			1,004			32.9			5.39			5.36
Other loans		492			440			52			11.8			6.18			6.21

Total consumer		13,678			12,111			1,567			12.9			5.79			5.52

Total loans and leases		24,256			21,823			2,433			11.1			5.73			5.03
Allowance for loan and lease losses		(269	)		(303	)		34			(11.2	)

Net loans and leases		23,987			21,520			2,467			11.5

Total earning assets		29,262			27,425			1,837			6.7			5.49	%		4.84	%

Operating lease assets		415			980			(565	)		(57.7	)
Cash and due from banks		880			814			66			8.1
Intangible assets		218			216			2			0.9
All other assets		2,141			2,074			67			3.2

Total assets	$	32,647		$	31,206		$	1,441			4.6	%


Liabilities and shareholders’ equity
Deposits:
Demand deposits — non-interest bearing	$	3,358		$	3,172		$	186			5.9	%		—	%		—	%
Demand deposits — interest bearing		7,712			7,055			657			9.3			1.65			0.96
Savings and other domestic time deposits		3,213			3,444			(231	)		(6.7	)		1.33			1.29
Retail certificates of deposit		2,793			2,404			389			16.2			3.50			3.35

Total core deposits		17,076			16,075			1,001			6.2			1.95			1.50
Domestic time deposits of $100,000 or more		1,256			823			433			52.6			3.27			2.31
Brokered deposits and negotiable CDs		3,088			1,800			1,288			71.6			3.27			1.64
Deposits in foreign offices		446			522			(76	)		(14.6	)		1.89			0.77

Total deposits		21,866			19,220			2,646			13.8			2.26			1.53
Short-term borrowings		1,347			1,447			(100	)		(6.9	)		2.23			0.85
Federal Home Loan Bank advances		1,088			1,271			(183	)		(14.4	)		2.99			2.54
Subordinated notes and other long-term debt		4,190			5,474			(1,284	)		(23.5	)		3.82			2.39

Total interest bearing liabilities		25,133			24,240			893			3.7			2.55			1.74

All other liabilities		1,570			1,456			114			7.8
Shareholders’ equity		2,586			2,338			248			10.6

Total liabilities and shareholders’ equity	$	32,647		$	31,206		$	1,441			4.6	%

Net interest rate spread														2.94			3.10
Impact of non-interest bearing funds on margin														0.39			0.21

Net interest margin														3.33	%		3.31	%


⁽¹⁾		Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.

⁽²⁾		Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees.

⁽³⁾		For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.

Provision for Credit Losses

(This section should be read in conjunction with Significant Factors 1, 3 and 4, and the Credit Risk section.)

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

The provision for credit losses in the 2005 third quarter was $17.7 million, a $5.9 million increase from the year-ago quarter and a $4.8 million increase from the 2005 second quarter. The increase in provision expense from the year-ago quarter and the prior quarter primarily reflected the relatively stable credit quality in the current quarter compared with improving trends in the prior periods. The provision for credit losses in the first nine months of 2005 was $50.5 million, an $8.1 million, or 19%, increase from the year-age nine-month period, reflecting the benefit of a $9.7 million commercial loan recovery in the prior year nine-month period.

Non-Interest Income

(This section should be read in conjunction with Significant Factor 1, 2, 3, and 6.)

Table 7 reflects non-interest income detail for each of the past five quarters and for the first nine months of 2005 and 2004.

Table 7 — Non-Interest Income


	2005							2004				3Q05 vs 3Q04
(in thousands of dollars)	Third		Second			First		Fourth		Third		Amount			Percent

Service charges on deposit accounts	$	44,817	$	41,516		$	39,418	$	41,747	$	43,935	$	882			2.0	%
Trust services		19,671		19,113			18,196		17,315		17,064		2,607			15.3
Brokerage and insurance income		13,948		13,544			13,026		12,879		13,200		748			5.7
Bank owned life insurance income		10,104		10,139			10,104		10,484		10,019		85			0.8
Other service charges and fees		11,449		11,252			10,159		10,617		10,799		650			6.0
Mortgage banking income (loss)		21,116		(2,376	)		12,061		8,822		4,448		16,668			N.M.
Securities gains (losses)		101		(343	)		957		2,100		7,803		(7,702	)		(98.7	)
Gain on sales of automobile loans		502		254			—		—		312		190			60.9
Other income		9,770		24,974			17,397		23,870		17,899		(8,129	)		(45.4	)

Sub-total before operating lease income		131,478		118,073			121,318		127,834		125,479		5,999			4.8
Operating lease income		29,262		38,097			46,732		55,106		64,412		(35,150	)		(54.6	)

Total non-interest income	$	160,740	$	156,170		$	168,050	$	182,940	$	189,891	$	(29,151	)		(15.4)	%


	Nine Months Ended Sep 30,				YTD 2005 vs 2004
(in thousands of dollars)	2005		2004		Amount			Percent

Service charges on deposit accounts	$	125,751	$	129,368	$	(3,617	)		(2.8	)%
Trust services		56,980		50,095		6,885			13.7
Brokerage and insurance income		40,518		41,920		(1,402	)		(3.3	)
Bank owned life insurance income		30,347		31,813		(1,466	)		(4.6	)
Other service charges and fees		32,860		30,957		1,903			6.1
Mortgage banking income		30,801		23,474		7,327			31.2
Securities gains		715		13,663		(12,948	)		(94.8	)
Gain on sales of automobile loans		756		14,206		(13,450	)		(94.7	)
Other income		52,141		68,177		(16,036	)		(23.5	)

Sub-total before operating lease income		370,869		403,673		(32,804	)		(8.1	)
Operating lease income		114,091		231,985		(117,894	)		(50.8	)

Total non-interest income	$	484,960	$	635,658	$	(150,698	)		(23.7	)%

N.M., not a meaningful value.

Table 8 reflects mortgage banking income detail for each of the past five quarters and for the first nine months of 2005 and 2004

Table 8 — Mortgage Banking Income and Net Impact of MSR Hedging


	2005									2004						3Q05 vs 3Q04
(in thousands of dollars)	Third			Second			First			Fourth			Third			Amount			Percent

Mortgage Banking Income
Origination fees	$	3,037		$	3,066		$	2,699		$	3,264		$	3,219		$	(182	)		(5.7	)%
Secondary marketing		3,409			1,749			2,482			1,623			(14	)		3,423			N.M.
Servicing fees		5,532			5,464			5,394			5,730			5,353			179			3.3
Amortization of capitalized servicing		(4,626	)		(5,187	)		(4,761	)		(5,153	)		(4,468	)		(158	)		3.5
Other mortgage banking income		3,307			2,763			2,487			2,620			4,477			(1,170	)		(26.1	)

Sub-total		10,659			7,855			8,301			8,084			8,567			2,092			24.4
MSR recovery / (impairment)		10,457			(10,231	)		3,760			738			(4,119	)		14,576			N.M.

Total mortgage banking income (loss)	$	21,116		$	(2,376	)	$	12,061		$	8,822		$	4,448		$	16,668			N.M.	%


Capitalized mortgage servicing rights⁽¹⁾	$	85,940		$	71,150		$	80,972		$	77,107		$	76,540		$	9,400			12.3	%
Total mortgages serviced for others⁽¹⁾		7,081,000			6,951,000			6,896,000			6,861,000			6,780,000			301,000			4.4

Net Impact of MSR Hedging
MSR recovery / (impairment)	$	10,457		$	(10,231	)	$	3,760		$	738		$	(4,119	)	$	14,576			N.M.	%
Net trading gains (losses) related to MSR hedging ⁽²⁾		(12,831	)		5,727			(4,182	)		(3,345	)		(2,340	)		(10,491	)		N.M.
Net interest income related to MSR hedging		233			512			834			1,451			—			233			—
Other MSR hedge activity⁽⁴⁾		—			—			—			—			—			—			—

Net impact of MSR hedging ⁽³⁾	$	(2,141	)	$	(3,992	)	$	412		$	(1,156	)	$	(6,459	)	$	4,318			(66.9	)%


	Nine Months Ended Sep 30,						YTD 2005 vs 2004
(in thousands of dollars)	2005			2004			Amount			Percent

Mortgage Banking Income
Origination fees	$	8,802		$	9,112		$	(310	)		(3.4	)%
Secondary marketing		7,640			6,717			923			13.7
Servicing fees		16,390			15,967			423			2.6
Amortization of capitalized servicing		(14,574	)		(13,866	)		(708	)		5.1
Other mortgage banking income		8,557			4,904			3,653			74.5

Sub-total		26,815			22,834			3,981			17.4
MSR recovery / (impairment)		3,986			640			3,346			N.M.

Total mortgage banking income	$	30,801		$	23,474		$	7,327			31.2	%


Capitalized mortgage servicing rights⁽¹⁾	$	85,940		$	76,540		$	9,400			12.3	%
Total mortgages serviced for others⁽¹⁾		7,081,000			6,780,000			301,000			4.4

Net Impact of MSR Hedging
MSR recovery / (impairment)	$	3,986		$	640		$	3,346			N.M.	%
Net trading losses related to MSR hedging ⁽²⁾		(11,286	)		(2,340	)		(8,946	)		N.M.
Net interest income related to MSR hedging		1,579			—			1,579			—
Other MSR hedge activity ⁽⁴⁾		—			(4,492	)		4,492			N.M.

Net impact of MSR hedging ⁽³⁾	$	(5,721	)	$	(6,192	)	$	471			(7.6	)%


N.M., not a meaningful value.

⁽¹⁾		At period end.

⁽²⁾		Included in other non-interest income.

⁽³⁾		The tables above exclude securities gains or losses related to the investment securities portfolio.

⁽⁴⁾		Included in other mortgage banking income.

2005 Third Quarter versus 2004 Third Quarter

Non-interest income decreased $29.2 million, or 15%, from the year-ago quarter with the decline primarily attributed to the $35.2 million decline in operating lease income reflecting the continued run-off of the operating lease portfolio. The remaining fee income categories increased a total of $6.0 million with the primary drivers being:

	•		$16.7 million increase in mortgage banking income, reflecting a $10.5 million MSR temporary impairment recovery in the current quarter compared with a $4.1 million MSR temporary impairment in the year-ago quarter. Higher secondary marketing income was the primary contributor to the remainder of the increase.

	•		$2.6 million, or 15%, increase in trust services income, due primarily to higher personal trust, mutual fund, and institutional trust assets under management.

	•		$0.9 million, or 2%, increase in service charges on deposit accounts, reflecting higher activity-related personal service charges, partially offset by lower maintenance personal service charges.

	•		$0.7 million, or 6%, increase in brokerage and insurance income, reflecting higher credit insurance revenue and higher life and title insurance sales.

	•		$0.7 million, or 6%, increase in other service charges and fees, due to higher check card fees, partially offset by lower bill pay fees as a result of a decision to eliminate fees for this service beginning in the 2004 fourth quarter.

Partially offset by:

	•		$7.7 million decline in securities gains.

	•		$8.1 million, or 45%, decline in other non-interest income, primarily reflecting the negative impact of $12.8 million of MSR hedge-related trading losses in the current quarter compared with $2.3 million of MSR hedge-related trading losses in the year-ago quarter.

2005 Third Quarter versus 2005 Second Quarter

Compared with the 2005 second quarter, non-interest income increased $4.6 million, or 3%. This was despite an $8.8 million decline in operating lease income, reflecting the run-off of the operating lease portfolio, as the remaining fee income categories contributed a net $13.4 million increase with the primary drivers being:

	•		$23.5 million increase in mortgage banking income, reflecting a $10.5 million MSR temporary impairment recovery in the current quarter compared with a $10.2 million MSR temporary impairment in the prior quarter. Higher secondary marketing income was the primary contributor to the balance of the increase.

	•		$3.3 million, or 8%, increase in service charges on deposit accounts, primarily due to higher personal NSF and overdraft charges and higher maintenance fees on deposit accounts.

	•		$0.6 million, or 3%, increase in trust services income, due to higher personal trust and mutual fund assets under management, as well as higher institutional trust servicing fees.

	•		$0.4 million, or 3%, increase in brokerage and insurance income, primarily reflecting higher annuity sales and higher credit insurance revenue.

Partially offset by:

	•		$15.2 million decrease in other income, reflecting the negative impact of $12.8 million of MSR hedge-related trading losses in the current quarter compared with $5.7 million of MSR hedge-related trading gains in the prior quarter, partially offset by higher safe deposit fees and securitization fee income.

	•		No equity investment write-offs in the current quarter compared with $2.1 million of such write-offs in the 2005 second quarter.

2005 First Nine Months versus 2004 First Nine Months

Non-interest income decreased $150.7 million, or 24%, from the year-ago nine-month period with $117.9 million of the decline reflecting the decrease in operating lease income. Of the remaining $32.8 million decline from the year-ago period, the primary drivers were:

	•		$16.0 million, or 24%, decline in other income reflecting a combination of factors including $11.3 million MSR hedge-related trading losses in the current period compared with $2.3 million of hedge-related trading losses in the year-ago period, lower income from automobile lease terminations, the $2.1 million write-off of an equity investment in the 2005 second quarter, lower investment banking income, and lower equity investment gains.

	•		$13.5 million decline in gains on sale of automobile loans as the year-ago period included $14.2 million of such gains.

	•		$12.9 million decline in securities gains, reflecting $13.7 million of gains in the year-ago period taken to mitigate the net impact of the MSR impairment.

	•		$3.6 million, or 3%, decline in service charges on deposit accounts with a decline in commercial service charges contributing more than half of the decrease. Lower commercial service charges reflected a combination of lower activity and a preference by commercial customers to pay for services with higher compensating balances rather than fees as interest rates increase. The decline in consumer service charges primarily reflected lower maintenance fees on deposit accounts, as well as lower personal NSF and overdraft service charges, partially offset by higher activity-related personal service charges.

	•		$1.5 million, or 5%, decline in bank owned life insurance income.

	•		$1.4 million, or 3%, decline in brokerage and insurance income, reflecting lower annuity sales.

Partially offset by:

	•		$7.3 million, or 31%, increase in mortgage banking income, reflecting a $4.0 million MSR temporary impairment recovery in the current nine-month period compared with a $0.6 million recovery in the year-ago period, as well as $4.5 million of MSR hedge-related losses in the prior period.

	•		$6.9 million, or 14%, increase in trust services income due to higher personal trust and mutual fund fees, reflecting a combination of higher market value of assets, as well as increased activity.

	•		$1.9 million, or 6%, increase in other service charges and fees, due to higher check card fees, partially offset by lower bill pay fees as a result of a decision to eliminate fees for this service beginning in the 2004 fourth quarter.

Non-Interest Expense

(This section should be read in conjunction with Significant Factor 1, 5, and 6.)

Table 9 reflects non-interest expense detail for each of the last five quarters and for the first nine months of 2005 and 2004.

Table 9 — Non-Interest Expense


	2005						2004					3Q05 vs 3Q04
(in thousands of dollars)	Third		Second		First		Fourth		Third			Amount			Percent

Salaries	$	93,209	$	98,283	$	96,239	$	94,658	$	96,456		$	(3,247	)		(3.4	)%
Benefits		24,267		25,807		27,742		28,080		25,273			(1,006	)		(4.0	)

Personnel costs		117,476		124,090		123,981		122,738		121,729			(4,253	)		(3.5	)
Net occupancy		16,653		17,257		19,242		26,082		16,838			(185	)		(1.1	)
Outside data processing and other services		18,062		18,113		18,770		18,563		17,527			535			3.1
Equipment		15,531		15,637		15,863		15,733		15,295			236			1.5
Professional services		8,323		9,347		9,459		9,522		12,219			(3,896	)		(31.9	)
Marketing		6,779		7,441		6,454		5,581		5,000			1,779			35.6
Telecommunications		4,512		4,801		4,882		4,596		5,359			(847	)		(15.8	)
Printing and supplies		3,102		3,293		3,094		3,148		3,201			(99	)		(3.1	)
Amortization of intangibles		203		204		204		205		204			(1	)		(0.5	)
Restructuring reserve releases		—		—		—		—		(1,151	)		1,151			N.M.
Other expense		19,588		19,074		18,380		26,526		22,317			(2,729	)		(12.2	)

Sub-total before operating lease expense		210,229		219,257		220,329		232,694		218,538			(8,309	)		(3.8	)
Operating lease expense		22,823		28,879		37,948		48,320		54,885			(32,062	)		(58.4	)

Total non-interest expense	$	233,052	$	248,136	$	258,277	$	281,014	$	273,423		$	(40,371	)		(14.8	)%


	Nine Months Ended Sep 30,					YTD 2005 vs 2004
(in thousands of dollars)	2005		2004			Amount			Percent

Salaries	$	287,731	$	281,610		$	6,121			2.2	%
Benefits		77,816		81,458			(3,642	)		(4.5	)

Personnel costs		365,547		363,068			2,479			0.7
Net occupancy		53,152		49,859			3,293			6.6
Outside data processing and other services		54,945		53,552			1,393			2.6
Equipment		47,031		47,609			(578	)		(1.2	)
Professional services		27,129		27,354			(225	)		(0.8	)
Marketing		20,674		20,908			(234	)		(1.1	)
Telecommunications		14,195		15,191			(996	)		(6.6	)
Printing and supplies		9,489		9,315			174			1.9
Amortization of intangibles		611		612			(1	)		(0.2	)
Restructuring reserve releases		—		(1,151	)		1,151			N.M.
Other expense		57,042		66,755			(9,713	)		(14.6	)

Sub-total before operating lease expense		649,815		653,072			(3,257	)		(0.5	)
Operating lease expense		89,650		188,158			(98,508	)		(52.4	)

Total non-interest expense	$	739,465	$	841,230		$	(101,765	)		(12.1	)%

N.M., not a meaningful value.

2005 Third Quarter versus 2004 Third Quarter

Non-interest expense decreased $40.4 million, or 15%, from the year-ago quarter with $32.1 million of the decline reflecting the run-off of the operating lease portfolio. Of the remaining $8.3 million decline from the year-ago quarter, the primary drivers were:

	•		$4.3 million, or 3%, decline in personnel expense, primarily reflecting lower incentive compensation and benefits expense.

	•		$3.9 million, or 32%, decline in professional services, due primarily to lower SEC-related expenses.

	•		$2.7 million, or 12%, decline in other expense, primarily reflecting SEC-related accruals in the year-ago quarter.

Partially offset by:

	•		$1.8 million, or 36%, increase in marketing expense related to increased advertising expenditures.

	•		$1.2 million increase in the restructuring reserve charges line item, reflecting a restructuring reserve release in the year-ago quarter with no release in the current quarter.

2005 Third Quarter versus 2005 Second Quarter

Compared with the 2005 second quarter, non-interest expense decreased $15.1 million, or 6%, with $6.1 million reflecting the run-off of the operating lease portfolio. Of the remaining $9.0 million decrease from the prior quarter, the primary drivers were:

	•		$6.6 million, or 5%, decline in personnel costs, primarily reflecting lower incentive compensation, and benefits expense.

	•		$1.0 million, or 11%, decline in professional services, due to a decline in SEC-related expenses.

	•		$0.7 million, or 9%, decline in marketing expense, primarily reflecting a reduction in advertising.

2005 First Nine Months versus 2004 First Nine Months

Non-interest expense decreased $101.8 million, or 12%, from the year-ago nine-month period with $98.5 million of the decline reflecting the decrease in operating lease expense. Of the remaining $3.3 million decline from the year-ago period, the primary drivers were:

	•		$9.7 million, or 15%, decrease in other expense, reflecting $5.8 million of costs related to investments in partnerships generating tax benefits in the year-ago period, and lower SEC penalty expense accruals and insurance costs in the current period.

	•		$1.0 million, or 7%, decrease in telecommunications expense.

Partially offset by:

	•		$3.3 million, or 7%, increase in net occupancy expense, primarily reflecting an equity loss from a real estate partnership minority interest caused by a refinancing penalty, as well as lower rental income and higher depreciation expense.

	•		$2.5 million, or 1%, increase in personnel costs reflecting an increase in salaries, partially offset by lower sales commissions and benefits expense.

	•		$1.4 million, or 3%, increase in outside data processing and other services.

	•		$1.2 million increase in the restructuring reserve charges line item, reflecting a restructuring reserve release in the year-ago quarter with no release in the current quarter.

Operating Lease Assets

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

Table 10 reflects operating lease assets performance detail for each of the last five quarters and for the first nine months of 2005 and 2004.

Table 10 — Operating Lease Performance


	2005									2004						3Q05 vs 3Q04
(in thousands of dollars)	Third			Second			First			Fourth			Third			Amount			Percent

Balance Sheet:

Average operating lease assets outstanding	$	308,952		$	408,798		$	529,245		$	647,970		$	800,145		$	(491,193	)		(61.4	)%


Income Statement:

Net rental income	$	26,729		$	34,562		$	43,554		$	51,016		$	60,267		$	(33,538	)		(55.6	)%
Fees		1,419			1,773			1,857			2,111			2,965			(1,546	)		(52.1	)
Recoveries — early terminations		1,114			1,762			1,321			1,979			1,180			(66	)		(5.6	)

Total operating lease income		29,262			38,097			46,732			55,106			64,412			(35,150	)		(54.6	)


Depreciation and residual losses at termination		20,856			26,560			34,703			45,293			49,917			(29,061	)		(58.2	)
Losses — early terminations		1,967			2,319			3,245			3,027			4,968			(3,001	)		(60.4	)

Total operating lease expense		22,823			28,879			37,948			48,320			54,885			(32,062	)		(58.4	)

Net earnings contribution	$	6,439		$	9,218		$	8,784		$	6,786		$	9,527		$	(3,088	)		(32.4	)%

Earnings ratios ⁽¹⁾
Net rental income		34.6	%		33.8	%		32.9	%		31.5	%		30.1	%		4.5	%		15.0	%
Depreciation and residual losses at termination		27.0			26.0			26.2			28.0			25.0			2.0			8.0


	Nine Months Ended Sep 30,						YTD 2005 vs. 2004
(in thousands of dollars)	2005			2004			Amount			Percent

Balance Sheet:

Average operating lease assets outstanding	$	414,858		$	980,312		$	(565,454	)		(57.7	)%


Income Statement:
Net rental income	$	104,845		$	216,186		$	(111,341	)		(51.5	)
Fees		5,049			11,346			(6,297	)		(55.5	)
Recoveries — early terminations		4,197			4,453			(256	)		(5.7	)

Total operating lease income		114,091			231,985			(117,894	)		(50.8	)

Depreciation and residual losses at termination		82,119			171,152			(89,033	)		(52.0	)
Losses — early terminations		7,531			17,006			(9,475	)		(55.7	)

Total operating lease expense		89,650			188,158			(98,508	)		(52.4	)

Net earnings contribution	$	24,441		$	43,827		$	(19,386	)		(44.2	)%


Earnings ratios ⁽¹⁾
Net rental income		33.7	%		29.4	%		4.3	%		14.6	%
Depreciation and residual losses at termination		26.4			23.3			3.1			13.3	%


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

2005 Third Quarter versus 2004 Third Quarter and 2005 Second Quarter

Average operating lease assets in the 2005 third quarter were $0.3 billion, down $0.5 billion, or 61%, from the year-ago quarter and 24% from the 2005 second quarter. (For a discussion of operating lease accounting, residual value loss determination, and related residual value insurance, see the Operating Lease Assets section of the Company’s 2004 Form 10-K.)

Operating lease income, which totaled $29.3 million in the 2005 third quarter, represented 18% of total non-interest income in the quarter. Operating lease income was down $35.2 million, or 55%, from the year-ago quarter and $8.8 million, or 23%, from the 2005 second quarter, reflecting the declines in average operating leases. As no new operating leases have been originated after April 2002, the operating lease asset balances will continue to decline through both depreciation and lease terminations. Net rental income was down 56% and 23%, respectively, from the year-ago and 2005 second quarter. Fees declined 52% from the year-ago quarter, and 20% from the second quarter. Recoveries from early terminations decreased 6% from the year-ago quarter and 37% from the second quarter.

Operating lease expense totaled $22.8 million, down $32.1 million, or 58%, from the year-ago quarter and down $6.1 million, or 21%, from the 2005 second quarter. These declines also reflected the fact that this portfolio is decreasing over time. Losses on early terminations, which are included in total operating lease expense, declined 60% from the year-ago quarter and 15% from the first quarter.

2005 First Nine Months versus 2004 First Nine Months

Average operating lease assets in the first nine-month period of 2005 were $0.4 billion, down $0.6 billion, or 58% from the comparable year-ago period.

Operating lease income, which totaled $114.1 million for the first nine months of 2005, represented 24% of total non-interest income, and was down $117.9 million, or 51%, from the comparable year-ago period. Net rental income was down $111.3 million, or 52%. Fees declined $6.3 million, or 55%, from the comparable year-ago period. Recoveries from early terminations were down 6% from the year-ago period. Operating lease expense totaled $89.7 million, down $98.5 million, or 52%, from the comparable year-ago period. The declines in operating lease income and operating lease expense reflected the fact that this portfolio is decreasing over time.

Provision for Income Taxes

(This section should be read in conjunction with Significant Factor 7.)

The provision for income taxes in the third quarter of 2005 was $43.1 million and represented an effective tax rate on income before taxes of 28.4%. The provision for income taxes increased $4.8 million from the year-ago quarter, primarily due to an increase in pre-tax earnings and the repatriation of foreign earnings, offset by the recognition of the effect of federal tax refunds on income tax expense. These federal tax refunds resulted from the ability to carry back federal tax losses to prior-years. The effective tax rates in the year-ago quarter and second quarter of 2005 were 29.0% and 22.3%, respectively. For the first nine months of 2005, provision for income taxes was $102.2 million and represented an effective tax rate on income before taxes of 24.7%. The provision for income taxes decreased $14.3 million from the same period in 2004, in which the effective tax rate was 27.5%, reflecting higher pre-tax income in the first nine months of 2004, and the recognition of the effect of federal tax refunds on income tax expense in the first nine months of 2005, partially offset by the repatriation of foreign earnings.

As noted in Huntington’s 2004 Form 10-K, the American Jobs Creation Act of 2004 introduced a special one-time dividends received deduction of 85% on the repatriation of certain foreign earnings to a U.S. taxpayer. During the third quarter of 2005, Huntington had approximately $110.0 million of foreign earnings eligible for repatriation. In September 2005, Huntington received approximately $110.0 million of cash dividends of previously undistributed foreign earnings. During the third quarter of 2005, the board of directors of Huntington resolved to adopt a Domestic Reinvestment Plan signed by the Chairman, President and Chief Executive Officer of Huntington. In the third quarter of 2005, income tax expense of $5.7 million, associated with the repatriation, was recorded. Huntington will reinvest the cash dividend received through expenditures on infrastructure and capital investments with respect to the opening of new branches, qualified pension and 401(k) contributions and funding of worker hiring, training and other compensation.

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

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

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

The 2005 first, second, and third quarter effective tax rate included the after-tax positive impact on net income due to a federal tax loss carry back. In addition, through-out 2005, the after-tax rate also included the positive impact of tax exempt income, bank owned life insurance, asset securitization activities, and general business credits from investments in low income housing and historic property partnerships. The lower effective tax rate is expected to impact the fourth quarter of 2005. In addition, the 2005 third quarter and nine-month effective tax rates were negatively impacted by a $5.0 million after-tax net impact, primarily reflected in increased income tax expense, resulting from a decision to repatriate foreign earnings. As previously disclosed, the earnings repatriation was under consideration in 2005. In 2006, the effective tax rate is anticipated to increase to a more typical rate slightly below 30%.

CREDIT RISK

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

Credit Exposure Composition

(This section should be read in conjunction with Significant Factor 3.)

Compared with the year-ago period, the composition of the loan and lease portfolio at September 30, 2005, had changed such that lower credit risk home equity loans and residential mortgages combined represented 36% of total credit exposure, up from 34% a year earlier. Conversely, relatively higher risk automobile exposure, which consists of automobile loans and leases, as well as operating lease assets, declined from 21% at September 30, 2004 to 19% at September 30, 2005.

Table 11 reflects period-end loan and lease portfolio mix by type of loan or lease, as well as by business segment:

Table 11 — Credit Exposure Composition


	2005												2004
(in millions of dollars)	September 30,				June 30,				March 31,				December 31,				September 30,

By Type
Commercial:
Middle market commercial and industrial	$	4,791	19.3	%	$	4,883	19.6	%	$	4,824	19.6	%	$	4,660	19.3	%	$	4,353	18.7	%
Construction		1,762	7.1			1,684	6.8			1,648	6.7			1,592	6.6			1,538	6.6
Commercial		1,885	7.6			1,900	7.6			1,914	7.8			1,882	7.8			1,898	8.1

Middle market commercial real estate		3,647	14.7			3,584	14.4			3,562	14.5			3,474	14.4			3,436	14.7

Small business commercial and industrial and commercial real estate		2,235	9.1			2,258	9.1			2,205	8.9			2,170	8.9			2,124	9.2

Total commercial		10,673	43.1			10,725	43.1			10,591	43.0			10,304	42.6			9,913	42.6

Consumer:
Automobile loans		2,063	8.3			2,046	8.2			2,066	8.4			1,949	8.1			1,885	8.1
Automobile leases		2,381	9.6			2,458	9.9			2,476	10.0			2,443	10.1			2,317	9.9
Home equity		4,685	18.9			4,684	18.8			4,595	18.6			4,555	18.9			4,430	19.0
Residential mortgage		4,180	16.9			4,152	16.7			3,996	16.2			3,829	15.9			3,566	15.3
Other loans		514	2.1			502	1.9			483	1.9			481	2.0			477	2.0

Total consumer		13,823	55.8			13,842	55.5			13,616	55.1			13,257	55.0			12,675	54.3

Total loans and direct financing leases	$	24,496	98.9		$	24,567	98.6		$	24,207	98.1		$	23,561	97.6		$	22,588	96.9


Operating lease assets		274	1.1			354	1.4			466	1.9			587	2.4			717	3.1

Total credit exposure	$	24,770	100.0	%	$	24,921	100.0	%	$	24,673	100.0	%	$	24,148	100.0	%	$	23,305	100.0	%



Total automobile exposure ⁽¹⁾	$	4,718	19.0	%	$	4,858	19.5	%	$	5,008	20.3	%	$	4,979	20.6	%	$	4,919	21.1	%


By Business Segment ⁽²⁾
Regional Banking:
Central Ohio	$	3,224	13.0	%	$	3,146	12.6	%	$	3,112	12.6	%	$	3,097	12.8	%	$	3,029	13.0	%
Northern Ohio		2,952	11.9			2,916	11.7			2,910	11.8			2,858	11.8			2,810	12.1
Southern Ohio / Kentucky		2,065	8.3			2,105	8.4			2,023	8.2			1,895	7.8			1,826	7.8
West Michigan		2,370	9.6			2,386	9.6			2,336	9.5			2,272	9.4			2,236	9.6
East Michigan		1,531	6.2			1,496	6.0			1,476	6.0			1,430	5.9			1,388	6.0
West Virginia		949	3.8			919	3.7			887	3.6			882	3.7			867	3.7
Indiana		967	3.9			1,046	4.2			997	4.0			962	4.0			863	3.7
Mortgage and equipment leasing groups		3,505	14.1			3,449	13.8			3,331	13.5			3,197	13.3			2,979	12.8

Regional Banking		17,563	70.8			17,463	70.0			17,072	69.2			16,593	68.7			15,998	68.7
Dealer Sales⁽³⁾		5,492	22.2			5,761	23.1			5,956	24.1			5,920	24.5			5,765	24.7
Private Financial and Capital Markets Group		1,715	7.0			1,697	6.9			1,645	6.7			1,635	6.8			1,542	6.6
Treasury / Other		—	—			—	—			—	—			—	—			—	—

Total credit exposure	$	24,770	100.0	%	$	24,921	100.0	%	$	24,673	100.0	%	$	24,148	100.0	%	$	23,305	100.0	%


⁽¹⁾		Sum of automobile loans and leases and automotive operating lease assets.

⁽²⁾		Prior period amounts have been reclassified to conform to the current period business segment structure.

⁽³⁾		Includes operating lease inventory.

Non-Performing Assets (NPAs) and Past Due Loans and Leases

(This section should be read in conjunction with Significant Factor 4.)

Table 12 reflects period-end NPAs and past due loans and leases detail for each of the last five quarters.

Table 12 — Non-Performing Assets and Past Due Loans and Leases


	2005									2004
(in thousands of dollars)	September 30,			June 30,			March 31,			December 31,			September 30,

Non-accrual loans and leases:
Middle market commercial and industrial	$	25,431		$	26,856		$	16,993		$	24,179		$	20,098
Middle market commercial real estate		13,073			15,331			6,682			4,582			14,717
Small business commercial and industrial and commercial real estate		26,098			19,788			16,387			14,601			12,087
Residential mortgage		16,402			14,137			12,498			13,545			13,197
Home equity		8,705			7,748			7,333			7,055			7,685

Total non-performing loans and leases		89,709			83,860			59,893			63,962			67,784

Other real estate, net:
Residential		11,182			10,758			10,571			8,762			8,840
Commercial⁽¹⁾		909			2,800			2,839			35,844			3,852

Total other real estate, net		12,091			13,558			13,410			44,606			12,692

Total non-performing assets	$	101,800		$	97,418		$	73,303		$	108,568		$	80,476


Non-performing loans and leases as a % of total loans and leases		0.37	%		0.34	%		0.25	%		0.27	%		0.30	%
Non-performing assets as a % of total loans and leases and other real estate		0.42			0.40			0.30			0.46			0.36

Allowance for loan and lease losses (ALLL) as % of:
Non-performing loans and leases (NPLs)		283			304			441			424			417
Non-performing assets (NPAs)		249			262			361			250			351

Total allowances for credit losses (ACL) as % of:
Non-performing loans and leases		326			349			494			476			461
Non-performing assets		287			300			404			280			389

Accruing loans and leases past due 90 days or more	$	50,780		$	53,371		$	50,086		$	54,283		$	53,456
Accruing loans and leases past due 90 days or more as a percent of total loans and leases		0.21	%		0.22	%		0.21	%		0.23	%		0.24	%


⁽¹⁾		At December 31, 2004, other real estate owned included $35.7 million of properties that related to the work-out of $5.9 million of mezzanine loans. These properties were subject to $29.8 million of non-recourse debt to another financial institution. Both properties were sold in first quarter of 2005.

NPAs were $101.8 million at September 30, 2005, and represented only 0.42% of related assets, up $21.3 million from $80.5 million, or 0.36%, at the end of the year-ago quarter and up $4.4 million from $97.4 million, or 0.40%, at June 30, 2005. Non-performing loans and leases (NPLs), which exclude OREO, were $89.7 million at September 30, 2005, up $21.9 million from the year-earlier period and $5.8 million from the end of the second quarter. Expressed as a percent of total loans and leases, NPLs remained at low levels and were 0.37% of total loans and leases at September 30, 2005, up from 0.30% a year earlier and from 0.34% at June 30, 2005.

The over 90-day delinquent, but still accruing, ratio was 0.21% at September 30, 2005, down from 0.24% at the end of the year-ago quarter, and little changed from 0.22% at June 30, 2005.

Non-Performing Assets Activity

Table 13 — Non-Performing Asset Activity


	2005									2004
(in thousands of dollars)	Third			Second			First			Fourth			Third

Non-performing assets, beginning of period	$	97,418		$	73,303		$	108,568		$	80,476		$	74,696
New non-performing assets ⁽¹⁾		37,570			47,420			33,607			61,684			22,740
Returns to accruing status		(231	)		(250	)		(3,838	)		(2,248	)		—
Loan and lease losses		(5,897	)		(6,578	)		(17,281	)		(8,578	)		(5,424	)
Payments		(21,203	)		(11,925	)		(10,404	)		(8,829	)		(10,202	)
Sales⁽¹⁾		(5,857	)		(4,552	)		(37,349	)		(13,937	)		(1,334	)

Non-performing assets, end of period	$	101,800		$	97,418		$	73,303		$	108,568		$	80,476


⁽¹⁾		At December 31, 2004, other real estate owned included $35.7 million of properties that related to the work-out of $5.9 million of mezzanine loans. These properties were subject to $29.8 million of non-recourse debt to another financial institution. Both properties were sold in the first quarter of 2005.

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

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

Since the 2004 first quarter, the Company has maintained two reserves, both of which are available to absorb possible credit losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments (AULC). When summed together, these reserves constitute the total allowances for credit losses (ACL).

The September 30, 2005, ALLL was $253.9 million, down from $282.7 million a year earlier and $254.8 million at June 30, 2005. Expressed as a percent of period-end loans and leases, the ALLL ratio at September 30, 2005, was 1.04%, down from 1.25% a year ago reflecting the improvement in economic indicators, the change in the mix of the loan portfolio to lower-risk residential mortgages, and the reduction of specific reserves related to improved or resolved individual problem commercial credits. Although the ALLL ratio was unchanged from the 2005 second quarter, the component mix changed with a 2 basis point decline in both the economic and specific reserves, offset by a 4 basis point increase in the transaction reserve.

The ALLL as a percent of NPAs was 249% at September 30, 2005, down from 351% a year ago, and 262% at June 30, 2005.

At September 30, 2005, the AULC was $38.1 million, up from $30.0 million at the end of the year-ago quarter and from $37.5 million at June 30, 2005. At June 30, 2005, $6.3 million of the economic reserve was reclassified to the AULC.

On a combined basis, the ACL as a percent of total loans and leases was 1.19% at September 30, 2005, down from 1.38% a year earlier and unchanged from the end of last quarter. The ACL as a percent of NPAs was 287% at September 30, 2005, down from 389% a year earlier and 300% at June 30, 2005.

Tables 14 and 15 reflect activity in the ALLL and AULC for each of the last five quarters and for the nine months ended September 30, 2005 and 2004.

Table 14 — Quarterly Credit Reserves Analysis


	2005									2004
(in thousands of dollars)	Third			Second			First			Fourth			Third

Allowance for loan and lease losses, beginning of period	$	254,784		$	264,390		$	271,211		$	282,650		$	286,935

Loan and lease losses		(25,830	)		(25,733	)		(37,213	)		(31,737	)		(26,366	)
Recoveries of loans previously charged off		7,877			9,469			8,941			10,824			9,886

Net loan and lease losses		(17,953	)		(16,264	)		(28,272	)		(20,913	)		(16,480	)

Provision for loan and lease losses		17,112			13,247			21,451			9,474			12,971

Economic reserve transfer		—			(6,253	)		—			—			—
Allowance of assets sold and securitized		—			(336	)		—			—			(776	)

Allowance for loan and lease losses, end of period	$	253,943		$	254,784		$	264,390		$	271,211		$	282,650


Allowance for unfunded loan commitments and letters of credit, beginning of period	$	37,511		$	31,610		$	33,187		$	30,007		$	31,193

Provision for unfunded loan commitments and letters of credit losses		587			(352	)		(1,577	)		3,180			(1,186	)
Economic reserve transfer		—			6,253			—			—			—

Allowance for unfunded loan commitments and letters of credit, end of period	$	38,098		$	37,511		$	31,610		$	33,187		$	30,007

Total allowances for credit losses	$	292,041		$	292,295		$	296,000		$	304,398		$	312,657


Allowance for loan and lease losses (ALLL) as % of:
Transaction reserve		0.81	%		0.77	%		0.81	%		0.78	%		0.84	%
Economic reserve		0.20			0.22			0.27			0.32			0.33
Specific reserve		0.03			0.05			0.01			0.05			0.08

Total loans and leases		1.04	%		1.04	%		1.09	%		1.15	%		1.25	%

Total allowances for credit losses (ACL) as % of total loans and leases		1.19	%		1.19	%		1.22	%		1.29	%		1.38	%

Table 15 — Year to Date Credit Reserves Analysis


	Nine Months Ended September 30,
(in thousands of dollars)	2005			2004

Allowance for loan and lease losses, beginning of period	$	271,211		$	299,732

Loan and lease losses		(88,776	)		(94,378	)

Recoveries of loans previously charged off		26,287			36,756


Net loan and lease losses		(62,489	)		(57,622	)

Provision for loan and lease losses		51,810			47,923
Economic reserve transfer		(6,253	)		—
Allowance of assets sold and securitized		(336	)		(7,383	)

Allowance for loan and lease losses, end of period	$	253,943		$	282,650


Allowance for unfunded loan commitments and letters of credit, beginning of period	$	33,187		$	35,522

Provision for unfunded loan commitments and letters of credit losses		(1,342	)		(5,515	)
Economic reserve transfer		6,253			—

Allowance for unfunded loan commitments and letters of credit, end of period	$	38,098		$	30,007

Total allowances for credit losses	$	292,041		$	312,657

Net Loan and Lease Charge-Offs

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

Tables 16 and 17 reflect net loan and lease charge-off detail for each of the last five quarters and for the nine months ended September 30, 2005 and 2004:

Table 16 — Quarterly Net Charge-Off Analysis


	2005									2004
(in thousands of dollars)	Third			Second			First			Fourth			Third

Net charge-offs by loan and lease type:
Commercial:
Middle market commercial and industrial	$	(1,082	)	$	1,312		$	14,092		$	1,239		$	(102	)
Construction		495			(134	)		(51	)		704			(19	)
Commercial		1,779			2,269			(152	)		1,834			1,490

Middle market commercial real estate		2,274			2,135			(203	)		2,538			1,471

Small business commercial and industrial and commercial real estate		3,062			2,141			2,283			1,386			1,195

Total commercial		4,254			5,588			16,172			5,163			2,564

Consumer:
Automobile loans		3,895			1,664			3,216			4,406			5,142
Automobile leases		3,105			2,123			3,014			3,104			2,415

Automobile loans and leases		7,000			3,787			6,230			7,510			7,557
Home equity		4,093			5,065			3,963			5,346			4,259
Residential mortgage		522			430			439			608			534
Other loans		2,084			1,394			1,468			2,286			1,566

Total consumer		13,699			10,676			12,100			15,750			13,916

Total net charge-offs	$	17,953		$	16,264		$	28,272		$	20,913		$	16,480


Net charge-offs — annualized percentages:
Commercial:
Middle market commercial and industrial		(0.09	)%		0.11	%		1.20	%		0.11	%		(0.01)	%
Construction		0.12			(0.03	)		(0.01	)		0.18			(0.01	)
Commercial		0.37			0.48			(0.03	)		0.40			0.31

Middle market commercial real estate		0.25			0.24			(0.02	)		0.30			0.17

Small business commercial and industrial and commercial real estate		0.54			0.38			0.42			0.26			0.23

Total commercial		0.16			0.21			0.62			0.21			0.10

Consumer:
Automobile loans		0.75			0.32			0.64			0.92			1.11
Automobile leases		0.51			0.34			0.49			0.52			0.43

Automobile loans and leases		0.62			0.33			0.56			0.70			0.74
Home equity		0.35			0.44			0.35			0.48			0.39
Residential mortgage		0.05			0.04			0.04			0.07			0.06
Other loans		1.64			1.14			1.22			1.91			1.36

Total consumer		0.40			0.31			0.36			0.49			0.45

Net charge-offs as a % of average loans		0.29	%		0.27	%		0.47	%		0.36	%		0.30	%

Table 17 — Year to Date Net Charge-Off Analysis


	Nine Months Ended September 30,
(in thousands of dollars)	2005			2004

Net charge-offs by loan and lease type:
Commercial:
Middle market commercial and industrial	$	14,322		$	681
Construction		310			1,761
Commercial		3,896			3,672

Middle market commercial real estate		4,206			5,433

Small business commercial and industrial and commercial real estate		7,486			4,180

Total commercial		26,014			10,294

Consumer:
Automobile loans		8,775			24,168
Automobile leases		8,242			7,733

Automobile loans and leases		17,017			31,901
Home equity		13,121			9,728
Residential mortgage		1,391			1,152
Other loans		4,946			4,547

Total consumer		36,475			47,328

Total net charge-offs	$	62,489		$	57,622


Net charge-offs — annualized percentages:
Commercial:
Middle market commercial and industrial		0.40	%		0.02	%
Construction		0.02			0.17
Commercial		0.27			0.26

Middle market commercial real estate		0.16			0.22

Small business commercial and industrial and commercial real estate		0.45			0.28

Total commercial		0.33			0.14

Consumer:
Automobile loans		0.57			1.34
Automobile leases		0.45			0.48

Automobile loans and leases		0.50			0.94
Home equity		0.38			0.32
Residential mortgage		0.05			0.05
Other loans		1.34			1.38

Total consumer		0.36			0.52

Net charge-offs as a % of average loans		0.34	%		0.35	%

2005 Third Quarter versus 2004 Third Quarter and 2005 Second Quarter

Total net charge-offs for the 2005 third quarter were $18.0 million, or an annualized 0.29% of average total loans and leases. This was up from $16.5 million, or 0.30%, in the year-ago quarter and up from $16.3 million, or an annualized 0.27%, of average total loans and leases in the 2005 second quarter.

Total commercial net charge-offs in the third quarter were $4.3 million, or an annualized 0.16%, up from $2.6 million, or an annualized 0.10%, in the year-ago quarter, driven primarily by higher small business C&I and CRE net charge-offs. Total small business net charge-offs in the 2005 third quarter were $3.1 million, or an annualized 0.54% of related loans, up from $1.2 million, or an annualized 0.23% in the year-ago quarter. Current period total commercial net charge-offs were down from $5.6 million, or an annualized 0.21%, in the prior quarter.

Total consumer net charge-offs in the current quarter were $13.7 million, or an annualized 0.40% of related loans. This compared with $13.9 million, or 0.45%, in the year-ago quarter. The decline from the year-ago quarter reflected both lower automobile loan and lease net charge-offs and lower home equity net charge-offs. Total automobile loan and lease net charge-offs in the 2005 third quarter were $7.0 million, or an annualized 0.62% of related loans and leases, down from $7.6 million, or an annualized 0.74%, in the year-ago quarter. Home equity net charge-offs in the current quarter were $4.1 million, or an annualized 0.35% of related loans, down slightly from $4.3 million, or 0.39%, in the year-ago quarter. Compared with the 2005 second quarter, total consumer net charge-offs increased $3.0 million, primarily reflecting a $3.2 million increase in automobile loan and lease net charge-offs from the second quarter’s low levels, partially offset by a $1.0 million decrease in home equity loan net charge-offs.

2005 First Nine Months versus 2004 First Nine Months

Total net charge-offs for the first nine months of 2005 were $62.5 million, or an annualized 0.34% of average total loans and leases. While the dollar amount of net charge-offs increased 8% from the comparable year-ago period, on a relative basis, net charge-offs declined slightly from the annualized 0.35% ratio a year ago.

Total commercial net charge-offs in the first nine-month period of 2005 were $26.0 million, or an annualized 0.33%, up from $10.3 million, or 0.14%, in the year-ago period, which included a $9.7 million one-time recovery on a previously charged-off loan.

Total consumer net charge-offs in the current nine-month period were $36.5 million, or an annualized 0.36% of related loans, down from $47.3 million, or 0.52%, in the comparable year-ago period. The decline from the year-ago period primarily reflected lower automobile loan and lease net charge-offs due to the sales of automobile loans in the first half of 2004, partially offset by higher home equity net charge-offs. Total automobile loan and lease net charge-offs in the 2005 nine-month period were $17.0 million, or an annualized 0.50% of related loans and leases, down 47% from $31.9 million, or 0.94%, in the year-ago nine-month period. Home equity net charge-offs in the current nine-month period were $13.1 million, or an annualized 0.38% of related loans, up from $9.7 million, or 0.32%, in the year-ago period.

MARKET RISK

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

Interest Rate Risk

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

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

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

Interest rate risk modeling is performed monthly. Two broad approaches to modeling interest rate risk are employed: income simulation and economic value analysis. An income simulation analysis is used to measure the sensitivity of forecasted net interest income to changes in market rates over a one-year horizon. Although bank owned life insurance and automobile operating lease assets are classified as non-interest earning assets, and the income from these assets is in non-interest income, these portfolios are included in the interest rate sensitivity analysis because both have attributes similar to fixed-rate interest earning assets. The economic value analysis (Economic Value of Equity or EVE) is calculated by subjecting the period-end balance sheet to changes in interest rates and measuring the impact of the changes in the value of the assets and liabilities.

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

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

The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual 100 and 200 basis point increasing and decreasing parallel shifts in interest rates over the next 12-month period beyond the interest rate change implied by the current yield curve. The table below shows the results of the scenarios as of September 30, 2005, June 30, 2005, and December 31, 2004. All of the positions were well within the board of directors’ policy limits .

Table 18 — Net Interest Income at Risk


	Net Interest Income at Risk (%)

Basis point change scenario		-200		-100		+100		+200

Board policy limits		-4.0	%	-2.0	%	-2.0	%	-4.0	%

September 30, 2005		-1.7	%	-0.6	%	+0.4	%	+0.7	%
June 30, 2005		-2.4	%	-0.8	%	+0.4	%	+0.7	%
December 31, 2004		-1.2	%	-0.5	%	+0.2	%	+0.2	%

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

Table 19 — Economic Value of Equity at Risk


	Economic Value of Equity at Risk (%)

Basis point change scenario		-200		-100		+100		+200

Board policy limits		-12.0	%	-5.0	%	-5.0	%	-12.0	%

September 30, 2005		-1.3	%	+0.4	%	-2.0	%	-4.9	%
June 30, 2005		-3.0	%	-0.5	%	-1.6	%	-4.0	%
December 31, 2004		-3.0	%	-0.5	%	-1.5	%	-4.0	%

Lease Residual Risk

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

Lease residual risk associated with retail automobile and commercial equipment leases is the potential for declines in the fair market value of the vehicle or equipment below the maturity value estimated at origination. Most of Huntington’s lease residual risk is in its automobile leases. Used car values are the primary factor in determining the magnitude of the risk exposure. Since used car values are subject to many factors, lease residual risk has been extremely volatile throughout the history of automobile leasing. Management mitigates lease residual risk by purchasing residual value insurance. Residual value insurance provides for the recovery of a decline in the vehicle residual value as specified by the Automotive Lease Guide (ALG), an authoritative industry source, at the inception of the lease. As a result, the risk associated with market driven declines in used car values is mitigated.

As of September 30, 2005, three distinct residual value insurance policies were in place to address the residual risk in the portfolio. One residual value insurance policy covered all vehicles leased between October 1, 2000 and April 30, 2002 and had a total payment cap of $50 million. Any losses above the cap result in additional operating lease depreciation expense. It is Management’s assessment that the $50 million cap remains sufficient to cover any expected losses. A second residual insurance policy covers all originations from May 2002 through June 2005, and does not have a cap. A third policy, similar in structure to the referenced second policy, went into effect July 1, 2005, and covers all originations for a period of one year.

Price Risk

Price risk is risk to earnings or capital arising from changes in the value of financial instruments subject to mark-to-market adjustments. This risk arises from market-making, dealing, and position taking in interest-rate, foreign exchange, and equity markets as well as loans held for sale and loan servicing assets. To manage price risk, Management establishes limits as to the amount of trading securities that can be purchased, the foreign exchange exposure that can be maintained, and the maximum loss positions within a quarter.

LIQUIDITY RISK

Liquidity risk is the current and prospective risk to earnings or capital arising from a bank’s inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. The objective of effective liquidity management is to ensure that cash flow needs can be met on a timely basis at a reasonable cost under both normal operating conditions and unforeseen circumstances. The liquidity of the Bank is used to originate loans and leases and to repay deposit and other liabilities as they become due or are demanded by customers. (See Liquidity section in the Company’s 2004 Form 10-K for additional discussion.)

The primary source of funding for the Bank is core deposits from retail and commercial customers (see Table 20). As of September 30, 2005, core deposits totaled $17.3 billion, and represented 77% of total deposits. This compared with $16.7 billion, or 83%, of total deposits a year earlier. Most of the growth in core deposits was attributable to growth in non-interest bearing demand deposits and retail certificates of deposit.

Table 20 — Deposit Composition


	2005												2004
(in millions of dollars)	September 30,				June 30,				March 31,				December 31,				September 30,

By Type
Demand deposits — non-interest bearing	$	3,362	15.0	%	$	3,221	14.4	%	$	3,186	14.6	%	$	3,392	16.3	%	$	3,264	16.2	%
Demand deposits — interest bearing		7,481	33.5			7,675	34.4			7,849	36.1			7,786	37.5			7,472	37.2
Savings and other domestic time deposits		3,186	14.2			3,341	15.0			3,468	15.9			3,503	16.9			3,571	17.8
Retail certificates of deposit		3,281	14.7			3,033	13.5			2,555	11.7			2,467	11.9			2,441	12.1

Total core deposits		17,310	77.4			17,270	77.3			17,058	78.3			17,148	82.6			16,748	83.3
Domestic time deposits of $100,000 or more		1,357	6.1			1,177	5.3			1,311	6.0			1,082	5.2			998	5.0
Brokered deposits and negotiable CDs		3,228	14.5			3,452	15.5			3,000	13.8			2,097	10.1			1,896	9.4
Foreign time deposits		454	2.0			432	1.9			402	1.9			441	2.1			467	2.3

Total deposits	$	22,349	100.0	%	$	22,331	100.0	%	$	21,771	100.0	%	$	20,768	100.0	%	$	20,109	100.0	%


Total core deposits:
Commercial	$	5,425	31.3	%	$	5,399	31.3	%	$	5,218	30.6	%	$	5,294	30.9	%	$	5,228	31.2	%
Personal		11,885	68.7			11,871	68.7			11,840	69.4			11,854	69.1			11,520	68.8

Total core deposits	$	17,310	100.0	%	$	17,270	100.0	%	$	17,058	100.0	%	$	17,148	100.0	%	$	16,748	100.0	%


By Business Segment ⁽¹⁾
Regional Banking:
Central Ohio	$	4,434	19.8	%	$	4,646	20.8	%	$	4,610	21.2	%	$	4,501	21.7	%	$	4,227	21.0	%
Northern Ohio		4,036	18.1			3,964	17.8			3,930	18.1			4,068	19.6			4,012	20.0
Southern Ohio / Kentucky		1,915	8.6			1,824	8.2			1,774	8.1			1,742	8.4			1,600	8.0
West Michigan		2,784	12.5			2,600	11.6			2,685	12.3			2,644	12.7			2,699	13.4
East Michigan		2,311	10.3			2,241	10.0			2,299	10.6			2,222	10.7			2,166	10.8
West Virginia		1,428	6.4			1,412	6.3			1,369	6.3			1,375	6.6			1,381	6.9
Indiana		771	3.4			772	3.5			718	3.3			664	3.2			665	3.3
Mortgage and equipment leasing groups		177	0.8			184	0.8			170	0.8			195	0.9			200	1.0

Regional Banking		17,856	79.9			17,643	79.0			17,555	80.7			17,411	83.8			16,950	84.4
Dealer Sales		72	0.3			68	0.3			69	0.3			75	0.4			69	0.3
Private Financial and Capital Markets Group		1,186	5.3			1,159	5.2			1,139	5.2			1,176	5.7			1,127	5.6
Treasury / Other⁽²⁾		3,235	14.5			3,461	15.5			3,008	13.8			2,106	10.1			1,963	9.7

Total deposits	$	22,349	100.0	%	$	22,331	100.0	%	$	21,771	100.0	%	$	20,768	100.0	%	$	20,109	100.0	%


⁽¹⁾		Prior period amounts have been reclassified to conform to the current period business segment structure.

⁽²⁾		Comprised largely of brokered deposits and negotiable CDs.


Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at September 30, 2005, December 31, 2004, and September 30, 2004			3

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004			4

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2005 and 2004			5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004			6

Notes to Unaudited Condensed Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23

Item 3. Quantitative and Qualitative Disclosures about Market Risk			83

Item 4. Controls and Procedures			83

Part II. Other Information

Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities			84

Item 6. Exhibits			84

Signatures			85
EX-31.1
EX-31.2
EX-32.1
EX-32.2