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 March 31, 2004

Commission File Number 0-2525

Huntington Bancshares Incorporated

Maryland

31-0724920

(State or other jurisdiction of

incorporation or organization)

(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 x No ¨

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

Yes x No ¨

There were 229,410,244 shares of Registrant’s without par value common stock outstanding on April 30, 2004.

Huntington Bancshares Incorporated

INDEX


Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, 2004, December 31, 2003, and March 31, 2003	3

	Consolidated Statements of Income For the three months ended March 31, 2004 and 2003	4

	Consolidated Statements of Changes in Shareholders’ Equity For the three months ended March 31, 2004 and 2003	5

	Consolidated Statements of Cash Flows For the three months ended March 31, 2004 and 2003	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59

Item 4.	Controls and Procedures	59

Part II.	Other Information

Item 2.	Changes in Securities and Use of Proceeds	60

Item 6.	Exhibits and Reports on Form 8-K	60-61

Signatures		62

Part 1. Financial Information

Item 1.

Financial Statements

Huntington Bancshares Incorporated

Consolidated Balance Sheets


*(in thousands, except number of shares)*	March 31, 2004			December 31, 2003			March 31, 2003
	*(Unaudited)*						(Unaudited)
Assets
Cash and due from banks	$	766,432		$	899,689		$	863,782
Federal funds sold and securities purchased under resale agreements		224,841			96,814			46,456
Interest bearing deposits in banks		54,027			33,627			36,117
Trading account securities		16,410			7,589			22,715
Mortgage loans held for sale		230,417			226,729			513,638
Securities available for sale - at fair value		5,455,138			4,925,232			3,680,260
Investment securities - fair value $3,294; $3,937 and $7,075, respectively		3,209			3,828			6,908
Loans and leases		21,193,627			21,075,118			18,896,499
Allowance for loan and lease losses		(295,377	)		(299,732	)		(303,636	)

Net loans and leases		20,898,250			20,775,386			18,592,863

Operating lease assets		1,070,958			1,260,440			1,951,316
Bank owned life insurance		938,156			927,671			895,780
Premises and equipment		351,073			349,712			340,223
Goodwill and other intangible assets		216,805			217,009			218,363
Customers’ acceptance liability		7,909			9,553			10,004
Accrued income and other assets		805,455			786,047			726,209

Total Assets	$	31,039,080		$	30,519,326		$	27,904,634

Liabilities
Deposits	$	18,988,846		$	18,487,395		$	17,688,984
Short-term borrowings		1,076,302			1,452,304			1,749,128
Bank acceptances outstanding		7,909			9,553			10,004
Federal Home Loan Bank advances		1,273,000			1,273,000			1,253,000
Subordinated notes		1,066,705			990,470			583,897
Other long-term debt		4,478,599			4,544,509			2,923,005
Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the parent company		—			—			300,000
Allowance for unfunded loan commitments and letters of credit		32,089			35,522			33,381
Accrued expenses and other liabilities		1,751,451			1,451,571			1,207,189

Total Liabilities		28,674,901			28,244,324			25,748,588

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 229,410,043; 229,008,088 and 228,641,557 shares, respectively		2,482,342			2,483,542			2,483,258
Less 28,456,212; 28,858,167 and 29,224,698 treasury shares, respectively		(541,048	)		(548,576	)		(555,042	)
Accumulated other comprehensive income		21,490			2,678			54,630
Retained earnings		401,395			337,358			173,200

Total Shareholders’ Equity		2,364,179			2,275,002			2,156,046

Total Liabilities and Shareholders’ Equity	$	31,039,080		$	30,519,326		$	27,904,634

See notes to unaudited consolidated financial statements.

Huntington Bancshares Incorporated

Consolidated Statements of Income

(Unaudited)


	For the Three Months Ended March 31,
*(in thousands, except per share amounts)*	2004			2003
Interest and fee income
Loans and leases	$	270,868		$	270,979
Securities		51,659			42,078
Other		3,404			6,957

Total Interest and Fee Income		325,931			320,014

Interest expense
Deposits		59,626			79,710
Short-term borrowings		3,313			5,559
Federal Home Loan Bank advances		8,041			5,585
Subordinated notes and other long-term debt including preferred capital securities		32,266			27,401

Total Interest Expense		103,246			118,255

Net Interest Income		222,685			201,759
Provision for credit losses		25,596			36,844

Net Interest Income After Provision for Credit Losses		197,089			164,915

Operating lease income		88,867			138,193
Service charges on deposit accounts		41,837			39,869
Trust services		16,323			14,911
Brokerage and insurance income		15,197			15,497
Mortgage banking		(4,296	)		11,125
Bank owned life insurance income		10,485			11,137
Other service charges and fees		9,513			10,338
Gain on sales of automobile loans		9,004			10,255
Securities gains		15,090			1,198
Other		25,619			20,401

Total Non-Interest Income		227,639			272,924

Personnel costs		121,624			113,089
Operating lease expense		70,710			111,588
Outside data processing and other services		18,462			16,579
Equipment		16,086			16,412
Net occupancy		16,763			16,609
Professional services		7,299			9,285
Marketing		7,839			6,626
Telecommunications		5,194			5,701
Printing and supplies		3,016			3,681
Amortization of intangibles		204			204
Restructuring reserve releases		—			(1,000	)
Other		18,457			16,705

Total Non-Interest Expense		285,654			315,479

Income Before Provision for Income Taxes		139,074			122,360
Provision for income taxes		34,901			30,630

Net Income	$	104,173		$	91,730

Average common shares:
Basic		229,227			231,355
Diluted		232,915			232,805
Per Common Share:
Net Income - Basic	$	0.45		$	0.39
Net Income - Diluted		0.45			0.39
Cash Dividends Declared		0.175			0.16

See notes to unaudited consolidated financial statements.

Huntington Bancshares Incorporated

Consolidated Statements of Changes in Shareholders’ Equity


	Common Stock				Treasury Shares					Accumulated Other Comprehensive Income			Retained Earnings			Total
*(in thousands)*	Shares	Amount			Shares		Amount			Accumulated Other Comprehensive Income			Retained Earnings			Total
Three Months Ended March 31, 2003:
Balance, beginning of period	257,866	$	2,484,421		(24,987	)	$	(475,399	)	$	62,300		$	118,471		$	2,189,793
Comprehensive Income:
Net income														91,730			91,730
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income											(5,798	)					(5,798	)
Unrealized losses on derivative instruments used in cash flow hedging relationships											(1,872	)					(1,872	)

Total comprehensive income																	84,060

Cash dividends declared ($0.16 per share)														(37,001	)		(37,001	)
Stock options exercised			(1,163	)	71			1,308									145
Treasury shares purchased					(4,300	)		(81,061	)								(81,061	)
Other					(9	)		110									110

Balance, end of period (Unaudited)	257,866	$	2,483,258		(29,225	)	$	(555,042	)	$	54,630		$	173,200		$	2,156,046

Three Months Ended March 31, 2004:
Balance, beginning of period	257,866	$	2,483,542		(28,858	)	$	(548,576	)	$	2,678		$	337,358		$	2,275,002
Comprehensive Income:
Net income														104,173			104,173
Unrealized net holding gains on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income											30,534						30,534
Unrealized losses on derivative instruments used in cash flow hedging relationships											(11,722	)					(11,722	)

Total comprehensive income																	122,985

Cash dividends declared ($0.175 per share)														(40,136	)		(40,136	)
Stock options exercised			(832	)	378			7,274									6,442
Other			(368	)	24			254									(114	)

Balance, end of period (Unaudited)	257,866	$	2,482,342		(28,456	)	$	(541,048	)	$	21,490		$	401,395		$	2,364,179

See notes to unaudited consolidated financial statements.

Huntington Bancshares Incorporated

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March 31,
*(in thousands)*	2004			2003
Operating Activities
Net Income	$	104,173		$	91,730
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		25,596			36,844
Depreciation on operating lease assets		63,823			98,101
Other depreciation and amortization		35,580			21,671
Deferred income tax expense		28,818			27,038
Increase in trading account securities		(8,821	)		(22,474	)
(Increase) decrease in mortgages held for sale		(3,688	)		14,741
Gains on sales of securities available for sale		(15,090	)		(1,198	)
Gains on sales/securitizations of loans		(9,004	)		(12,819	)
Restructuring reserve releases		—			(1,000	)
Other, net		(27,521	)		(102,958	)

Net Cash Provided by Operating Activities		193,866			149,676

Investing Activities
(Increase) decrease in interest bearing deposits in banks		(20,400	)		1,183
Proceeds from:
Maturities and calls of investment securities		628			640
Maturities and calls of securities available for sale		242,654			608,832
Sales of securities available for sale		450,890			218,001
Purchases of securities available for sale		(783,854	)		(995,909	)
Proceeds from sales/securitizations of loans		876,686			680,564
Net loan and lease originations, excluding sales		(1,138,911	)		(1,142,863	)
Net decrease in operating lease assets		126,801			151,108
Proceeds from sale of premises and equipment		260			3,669
Purchases of premises and equipment		(13,432	)		(10,198	)
Proceeds from sales of other real estate		1,562			1,924

Net Cash Used for Investing Activities		(257,116	)		(483,049	)

Financing Activities
Increase in deposits		494,019			205,694
Decrease in short-term borrowings		(376,002	)		(391,888	)
Proceeds from issuance of subordinated notes		148,830			—
Maturity of subordinated notes		(100,000	)		—
Proceeds from Federal Home Loan Bank advances		—			250,000
Maturity of Federal Home Loan Bank advances		—			(10,000	)
Proceeds from issuance of long-term debt		175,000			635,000
Maturity of long-term debt		(250,000	)		(355,000	)
Dividends paid on common stock		(40,269	)		(28,042	)
Repurchases of common stock		—			(81,061	)
Net proceeds from issuance of common stock		6,442			145

Net Cash Provided by Financing Activities		58,020			224,848

Change in Cash and Cash Equivalents		(5,230	)		(108,525	)
Cash and Cash Equivalents at Beginning of Period		996,503			1,018,763

Cash and Cash Equivalents at End of Period	$	991,273		$	910,238

Supplemental disclosures:
Income taxes paid	$	849		$	42,897
Interest paid		98,694			122,174
Non-cash activities
Residential mortgage loans securitized and retained in securities available for sale		115,929			108,917
Common stock dividends accrued not paid		31,180			37,001

See notes to unaudited consolidated financial statements.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Huntington Bancshares Incorporated (Huntington) 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 consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) 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 2003 Annual Report on Form 10-K (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 2004 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

SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105): On March 9, 2004, the SEC issued SAB 105. This bulletin was issued to inform registrants of the SEC’s view that the fair value of loan commitments that are required to follow derivative accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. The SEC believes that incorporating expected future cash flows related to the associated servicing of the loan essentially results in the immediate recognition of a servicing asset, which is only appropriate once the servicing asset has been contractually separated from the underlying loan by sale or by securitization of the loan with servicing retained. Furthermore, no other internally-developed intangible assets, such as customer relationship intangibles, should be recorded as part of the loan commitment derivative. The SEC believes that recognition of such assets is only appropriate in the event of a third-party transaction, such as the purchase of a loan commitment either individually, in a portfolio, or in a business combination.

In addition, SAB 105 requires registrants to disclose their accounting policy for loan commitments pursuant to APB Opinion No. 22, Disclosure of Accounting Policies, including methods and assumptions used to estimate fair value and any associated hedging strategies, as required by FAS 107, Disclosure of Fair Value of Financial Instruments, FAS 133, Accounting for Derivative Instruments and Hedging Activities, and Item 305 of Regulation S-K (Qualitative and Quantitative Disclosures about Market Risk). The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. Huntington enters into such commitments with customers in connection with residential loan applications and at March 31, 2004, had approximately $295 million in notional amount of these commitments outstanding. 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. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1): In December 2003, President Bush signed into law a bill 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 that provide prescription drug coverage. FSP 106-1 was issued in January 2004 and permits deferring the recognition of the new Medicare provisions’ impact due to the lack of specific authoritative guidance on accounting for the federal subsidy. Huntington has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is issued. Accordingly, the postretirement benefit obligations and net periodic costs reported in the accompanying financial statements and notes do not reflect the impact of this legislation. The accounting guidance, when issued, could require changes to previously reported financial information. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.

AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3): In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt

securities acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for credit losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.

FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (FAS 148): FAS 148 was issued in December 2002, as an amendment of Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to FAS 123’s fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 and Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting (APB 28), to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While FAS 148 does not require companies to account for employee stock options using the fair value method, the disclosure provisions of FAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of FAS 123 or the intrinsic value method of APB 25, which is the method currently used by Huntington. See note 10 for the anticipated effect of this pronouncement.

Note 3 – 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, with $2.7 billion of assets at December 31, 2003. Under the terms of the agreement, Unizan shareholders will receive 1.1424 shares of Huntington common stock, on a tax-free basis, for each share of Unizan. Based on the $23.10 closing price of Huntington’s common stock on January 26, 2004, this represented a price of $26.39 per Unizan share, and valued the transaction at approximately $587 million. The merger was unanimously approved by both boards and is expected to close early in the third quarter, pending customary regulatory approvals, as well as Unizan shareholder approval. Huntington also announced its intention to repurchase approximately 2.5 million common shares (approximately 10% of the number of shares issued to Unizan shareholders) after the Unizan shareholders’ meeting.

Note 4 – Securities Available for Sale

Securities available for sale at March 31, 2004, December 31, 2003, and March 31, 2003 were as follows:


	March 31, 2004				December 31, 2003				March 31, 2003
*(in thousands)*	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasury
Under 1 year	$	2,491	$	2,493	$	1,374	$	1,376	$	325	$	333
1-5 years		24,478		25,410		31,356		31,454		12,584		13,150
6-10 years		51,239		51,352		271,271		275,540		44,304		45,494
Over 10 years		—		—		—		—		412		477

Total U.S. Treasury		78,208		79,255		304,001		308,370		57,625		59,454

Federal agencies
Mortgage backed securities
1-5 years		17,487		17,939		19,899		20,434		30,431		31,646
6-10 years		183,551		187,976		198,755		201,995		371,063		378,645
Over 10 years		1,553,297		1,574,920		1,593,139		1,595,594		1,715,212		1,739,662

Total mortgage-backed		1,754,335		1,780,835		1,811,793		1,818,023		2,116,706		2,149,953

Other agencies
Under 1 year		106,087		107,195		173,181		175,505		102,118		105,140
1-5 years		779,563		798,034		585,561		593,662		426,449		447,026
6-10 years		403,006		403,441		403,953		390,164		3,929		4,470
Over 10 years		73,625		73,625		201		192		—		—

Total other		1,362,281		1,382,295		1,162,896		1,159,523		532,496		556,636

Total U.S Treasury and Federal Agencies		3,194,824		3,242,385		3,278,690		3,285,916		2,706,827		2,766,043

Municipal Securities
Under 1 year		6,941		6,964		6,594		6,663		5,668		5,679
1-5 years		19,535		19,941		20,015		20,569		25,069		25,766
6-10 years		79,236		81,027		69,511		71,013		53,876		54,803
Over 10 years		312,325		316,026		332,181		334,188		169,013		170,189

Total Municipal Securities		418,037		423,958		428,301		432,433		253,626		256,437

Private Label CMO
Under 1 year		—		—		1,973		1,973		—		—
1-5 years		—		—		—		—		—		—
6-10 years		—		—		—		—		—		—
Over 10 years		569,776		574,002		388,933		388,684		226,386		227,868

Total Private Label CMO		569,776		574,002		390,906		390,657		226,386		227,868

Asset Backed Securities
Under 1 year		—		—		—		—		—		—
1-5 years		30,000		30,075		30,000		29,944		30,000		29,850
6-10 years		11,780		11,783		20,000		19,984		—		—
Over 10 years		949,747		950,286		590,826		589,788		55,000		54,897

Total Asset Backed Securities		991,527		992,144		640,826		639,716		85,000		84,747

Other
Under 1 year		500		742		500		502		1,000		1,027
1-5 years		9,317		9,724		7,169		7,346		6,863		7,129
6-10 years		3,259		3,391		5,047		5,510		4,595		5,119
Over 10 years		193,280		193,997		145,103		146,685		143,264		141,519
Retained interest in securitizations		5,365		6,050		5,593		6,356		129,137		144,626
Marketable equity securities		7,479		8,745		8,547		10,111		44,679		45,745

Total Other		219,200		222,649		171,959		176,510		329,538		345,165

Total Securities Available for Sale	$	5,393,364	$	5,455,138	$	4,910,682	$	4,925,232	$	3,601,377	$	3,680,260

Note 5 – Allowances for Credit Losses (ACL)

The ACL is comprised of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). The following table reflects activity in the ACL for the three-month periods ended March 31, 2004, December 31, 2003, and March 31, 2003:


*(in thousands)*	March 31, 2004			December 31, 2003			March 31, 2003
Allowance for Loan and Leases Losses, Beginning of Period	$	299,732		$	336,398		$	324,827
Loan and lease losses		(37,167	)		(68,023	)		(40,265	)
Recoveries of loans previously charged off		8,540			12,880			7,429

Net loan and lease losses		(28,627	)		(55,143	)		(32,836	)

Provision for credit losses		25,596			26,341			36,844
Net change in allowance for unfunded loan commitments and letters of credit		3,433			(1,785	)		(21,560	)
Allowance of assets sold and securitized		(4,757	)		(6,079	)		(3,639	)

Allowance for Loan and Lease Losses, End of Period	$	295,377		$	299,732		$	303,636


Allowance for Unfunded Loan Commitments and Letters of Credit, Beginning of Period	$	35,522		$	33,737		$	11,821
Net change		(3,433	)		1,785			21,560

Allowance for Unfunded Loan Commitments and Letters of Credit, End of Period	$	32,089		$	35,522		$	33,381

Note 6 – Operating Lease Assets

Operating lease assets at March 31, 2004, December 31, 2003, and March 31, 2003, were as follows:


*(in thousands)*	March 31, 2004			December 31, 2003			March 31, 2003
Cost of assets under operating leases	$	1,894,687		$	2,136,502		$	3,007,188
Deferred lease origination fees and costs		(2,485	)		(2,117	)		(48,208	)
Accumulated depreciation		(821,244	)		(873,945	)		(1,007,664	)

Operating Lease Assets, Net	$	1,070,958		$	1,260,440		$	1,951,316

Depreciation expense related to operating lease assets was $63.8 million and $98.1 million for the three months ended March 31, 2004 and 2003, respectively.

Note 7 – Segment Reporting

Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial Group (PFG). A fourth segment includes Huntington’s Treasury functions and capital markets activities and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon Huntington’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.

Management relies on “operating earnings” for review of performance and for critical decision making purposes. Operating earnings exclude the impact of the significant items listed in the reconciliation table below. See Note 12 to the consolidated financial statements for further discussions regarding Restructuring Reserves. The financial information that follows is inclusive of the above adjustments on an after-tax basis to reflect the reconciliation to reported net income.

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

Regional Banking: This segment provides products and services to retail, business banking, and commercial customers. This segment’s products and services are offered in seven operating regions within the five states of Ohio, Michigan, West

Virginia, Indiana, and Kentucky through Huntington’s traditional banking network. 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, business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail products and services comprise 55% and 82%, of total Regional Banking loans and deposits, respectively. These products and services are delivered to customers through banking offices, ATMs, Direct Bank—Huntington’s customer service center, and Web Bank at huntington.com. Commercial banking products include middle-market and large commercial banking relationships which use a variety of banking products and services including, commercial and industrial loans, international trade, and cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.

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

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

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

A funds transfer pricing system is used to attribute funding costs and credits to other business segments. The Treasury/Other segment includes the net impact of interest rate risk management, including derivative activities. Furthermore, this segment’s results include the investment securities portfolios and capital markets activities. Additionally, income or expense and provision for income taxes, not allocated to other business segments, are also included.

Listed below is certain reported financial information reconciled to Huntington’s first quarter 2004 and 2003 operating results by line of business.

Income Statements


*(in thousands)*	Regional Banking			Dealer Sales			PFG			Treasury/ Other			Huntington Consolidated
2004
Net interest income	$	151,062		$	30,305		$	11,129		$	30,189		$	222,685
Provision for credit losses		(2,105	)		(21,655	)		557			(2,393	)		(25,596	)
Non-Interest income		72,051			110,555			28,627			16,406			227,639
Non-Interest expense		(147,092	)		(91,369	)		(29,461	)		(17,732	)		(285,654	)
Provision for income taxes		(25,871	)		(9,743	)		(3,798	)		4,510			(34,901	)

Net income, as reported		48,045			18,093			7,054			30,980			104,173
Gain on sale of automobile loans, net of tax		—			(6,146	)		—			294			(5,853	)

Operating Earnings	$	48,045		$	11,947		$	7,054		$	31,274		$	98,320

2003
Net interest income	$	146,414		$	15,647		$	9,495		$	30,203		$	201,759
Provision for credit losses		(23,553	)		(11,385	)		(1,900	)		(6	)		(36,844	)
Non-Interest income		71,599			158,516			27,213			15,596			272,924
Non-Interest expense		(140,304	)		(134,169	)		(26,635	)		(14,371	)		(315,479	)
Provision for income taxes		(18,955	)		(10,013	)		(2,861	)		1,198			(30,630	)

Net income, as reported		35,201			18,596			5,312			32,620			91,730
Gain on sale of automobile loans, net of tax		—			(2,592	)		—			(4,074	)		(6,666	)
Restructuring releases, net of taxes		—			—			—			(650	)		(650	)

Operating Earnings	$	35,201		$	16,004		$	5,312		$	27,897		$	84,414


	Total Assets at						Total Deposits at
Period-end Balance Sheet Data *(in millions)*	March 31, 2004		December 31, 2003		March 31, 2003		March 31, 2004		December 31, 2003		March 31, 2003
Regional Banking	$	15,635	$	14,971	$	14,297	$	15,938	$	15,539	$	15,412
Dealer Sales		6,609		7,335		6,854		78		77		70
PFG		1,491		1,461		1,265		1,057		1,164		960
Treasury / Other		7,304		6,756		5,489		1,916		1,707		1,247

Total	$	31,039	$	30,523	$	27,905	$	18,989	$	18,487	$	17,689

Note 8 – Comprehensive Income

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


	Three Months Ended March 31,
*(in thousands)*	2004			2003
Unrealized holding gains (losses) on securities available for sale arising during the period:
Unrealized net gain (loss)	$	62,066		$	(7,247	)
Related tax benefit (expense)		(21,723	)		2,228

Net		40,343			(5,019	)

Unrealized losses on derivatives used in cash flow hedging relationships arising
during the period:
Unrealized net losses		(18,034	)		(2,880	)
Related tax benefit		6,312			1,008

Net		(11,722	)		(1,872	)

Less: Reclassification adjustment for net gains from sales of securities available for sale
realized during the period:
Realized net gains		15,090			1,198
Related tax expense		(5,281	)		(419	)

Net		9,809			779

Total Other Comprehensive Income (Loss)	$	18,812		$	(7,670	)

Activity in Accumulated Other Comprehensive Income for the three months ended March 31, 2004 and 2003 was as follows:


*(in thousands)*	Minimum pension liability			Unrealized gains (losses) on securities available for sale			Unrealized gains (losses) on derivative instruments used in cash flow hedging relationships			Total
Balance, December 31, 2002	$	(195	)	$	56,856		$	5,639		$	62,300
Period change		—			(5,798	)		(1,872	)		(7,670	)

Balance, March 31, 2003	$	(195	)	$	51,058		$	3,767		$	54,630

Balance, December 31, 2003	$	(1,309	)	$	9,429		$	(5,442	)	$	2,678
Period change		—			30,534			(11,722	)		18,812

Balance, March 31, 2004	$	(1,309	)	$	39,963		$	(17,164	)	$	21,490

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-month periods ended March 31 is as follows:


	Three Months Ended March 31,
*(in thousands, except per share amount)*	2004		2003
Net Income	$	104,173	$	91,730

Average common shares outstanding		229,227		231,355
Dilutive effect of common stock equivalents		3,688		1,450

Diluted Average Common Shares Outstanding		232,915		232,805

Earnings Per Share
Basic	$	0.45	$	0.39
Diluted		0.45		0.39

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.

Approximately 6.5 million and 7.6 million stock options were vested and outstanding at March 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period and, therefore, the effect would be antidilutive. The weighted average exercise price for these options was $22.53 per share and $22.21 per share at the end of the same respective periods.

At March 31, 2004, a total of 552,966 common shares associated with a 2002 acquisition were held in escrow, subject to future issuance contingent upon meeting certain contractual performance criteria. These shares, which were included in treasury stock, will be included in the computation of basic and diluted earnings per share at the beginning of the period when all conditions necessary for their issuance have been met. Dividends paid on these shares are reinvested in common stock and are also held in escrow.

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


	Three Months Ended March 31,
	2004			2003
Stock Options Outstanding at period end (in thousands)		19,421			17,637
Assumptions
Risk-free interest rate		3.71	%		4.15	%
Expected dividend yield		3.20	%		3.34	%
Expected volatility of Huntington’s common stock		30.9	%		33.8	%
Pro Forma Results (in millions of dollars)
Net income, as reported	$	104.2		$	91.7
Less pro forma expense, net of tax, related to options granted		3.3			3.0

Pro Forma Net Income	$	100.9		$	88.7

Net Income Per Common Share:
Basic, as reported	$	0.45		$	0.39
Basic, pro forma		0.44			0.38
Diluted, as reported		0.45			0.39
Diluted, pro forma		0.43			0.38

Note 11 – Stock Repurchase Plan

On February 18, 2002, the board of directors authorized Huntington to repurchase from time to time up to 22,000,000 shares of its common stock by means of various methods including, but not limited to, open market purchases and privately negotiated transactions (the 2002 Repurchase Program). As of January 14, 2003, Huntington had purchased 19,358,665 of such shares authorized under the 2002 Repurchase Program.

Effective January 14, 2003, the board of directors authorized a new share repurchase program (the 2003 Repurchase Program) which cancelled the 2002 Repurchase Program and authorized officers of Huntington to repurchase not more than 8,000,000 shares of Huntington common stock. At April 27, 2004, Huntington had purchased 4,100,000 of such shares authorized under the 2003 Repurchase Program.

Effective April 27, 2004, the board of directors authorized a new share repurchase program (the 2004 Repurchase Program) which cancelled the 2003 Repurchase Program and authorized officers of Huntington to repurchase not more than 7,500,000 shares of Huntington common stock. The share repurchases described in Note 3 will be made under this authorization. Purchases will be made from time-to-time in the open market or through privately negotiated transactions depending on market conditions.


	2004		2003									2002
*(number of shares in thousands)*	First		Fourth		Third		Second		First			Fourth			Third			Second			First
Authorized under 2002 repurchase program																						22,000
Number of shares repurchased		—		—		—		—		(200	)		(4,110	)		(6,262	)		(7,329	)		(1,458	)
Cancellation of program		—		—		—		—		(2,641	)		—			—			—			—

Remaining shares authorized to repurchase		—		—		—		—		—			2,841			6,951			13,213			20,542

Authorized under 2003 repurchase program										8,000
Number of shares repurchased		—		—		—		—		(4,100	)

Remaining shares authorized to repurchase		3,900		3,900		3,900		3,900		3,900

Average price paid per share	$	—	$	—	$	—	$	—	$	18.85		$	18.43		$	19.02		$	20.07		$	19.25

Note 12 – Restructuring Reserves

On a quarterly basis, Huntington assesses its remaining restructuring reserves and makes adjustments to those reserves as necessary. As of March 31, 2004, Huntington had remaining reserves for restructuring of $13.6 million. Huntington expects that the reserves will be adequate to fund the estimated future cash outlays.

Note 13 – 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 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.

Huntington also sponsors other retirement plans. One of those plans is an unfunded Supplemental Executive Retirement Plan. This plan is a nonqualified plan that provides certain former officers of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. Other plans, including plans assumed in various past acquisitions, are unfunded, nonqualified plans that provide certain active and former officers of Huntington and its subsidiaries nominated by Huntington’s compensation committee with deferred compensation, post-employment, and/or defined pension benefits in excess of the qualified plan limits imposed by federal tax law.

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


	Pension Benefits Three Months Ended March 31,						Post Retirement Benefits Three Months Ended March 31,
*(in thousands)*	2004			2003			2004		2003
Service cost	$	3,038		$	2,455		$	324	$	281
Interest cost		4,368			4,161			802		869
Expected return on plan assets		(5,381	)		(6,283	)		—		—
Amortization of transistion asset		—			(63	)		276		275
Amortization of prior service cost		—			—			145		152
Settlements		1,000			1,087			—		—
Recognized net actuarial loss (gain)		1,984			442			—		—

Benefit Expense	$	5,009		$	1,799		$	1,547	$	1,577

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 $2.2 million for the three months ended March 31, 2004 and 2003, respectively.

Note 14 – Commitments and Contingent Liabilities

In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial statements. The contract amount of these financial agreements at March 31, 2004, December 31, 2003, and March 31, 2003, were as follows:


*(in millions)*	March 31, 2004		December 31, 2003		March 31, 2003
Contract amount represents credit risk
Commitments to extend credit
Commercial	$	5,091	$	5,712	$	4,882
Consumer		3,731		3,652		3,743
Commercial real estate		668		952		651
Standby letters of credit		965		983		968
Commercial letters of credit		168		166		199

Commitments to extend 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 $3.4 million, $3.8 million, and $2.0 million at March 31, 2004, December 31, 2003, and March 31, 2003, 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.

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 15 – Securities and Exchange Commission Investigation

On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff is conducting a formal investigation. The SEC investigation began following Huntington’s announcement on April 16, 2003, that it intended to restate its financial statements in order to reclassify its accounting for automobile leases from the direct financing lease method to the operating lease method and following allegations by a former Huntington employee regarding certain aspects of Huntington’s accounting and financial reporting practices, including the recognition of automobile loan and lease origination fees and costs, as well as certain year-end reserves. The investigation is ongoing and Huntington continues to cooperate fully with the SEC. To the best of its knowledge, management believes that the actions it has taken to date have addressed all known accounting issues.

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 underwriting 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, New Jersey, Pennsylvania, and Tennessee. Huntington has a foreign office in the Cayman Islands and a foreign office in Hong Kong. The Huntington National Bank (the Bank), organized in 1866, is Huntington’s only bank subsidiary.

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

Forward-Looking Statements

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

By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth below and under the heading “Business Risks” included in Item 1 of Huntington’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2003, 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, though Management strives to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk, which is the risk that loan and lease customers or other counter parties will be unable to perform their contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely affect Huntington’s financial condition or results of operation, (3) liquidity risk, which is the risk that Huntington and / or the Bank will have insufficient cash or access to cash to meet 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 Form 10-K for the year ended December 31, 2003, while not all inclusive, discusses a number of business risks that, in addition to the other information in this report, readers should carefully consider.

Securities and Exchange Commission Investigation

On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff is conducting a formal investigation. The SEC investigation began following Huntington’s announcement on April 16, 2003, that it intended to restate its financial statements in order to reclassify its accounting for automobile leases from the direct financing lease method to the operating lease method, and following allegations by a former Huntington employee regarding certain aspects of Huntington’s accounting and financial reporting practices, including the recognition of automobile loan and lease origination fees and costs, as well as certain year-end reserves. The investigation is ongoing and Huntington continues to cooperate fully with the SEC. To the best of its knowledge, Management believes that the actions it has taken to date have addressed all known accounting issues.

Critical Accounting Policies and Use of Significant Estimates

Note 1 to the consolidated financial statements included in Huntington’s Form 10-K lists significant accounting policies used in the development and presentation of its financial statements. These significant accounting policies, as well as the following discussion and analysis and other financial statement disclosures, identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of Huntington, its financial position, results of operations, and cash flows.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires Huntington’s management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements of Huntington if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this interim report should understand that estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. Huntington’s management has identified the most significant accounting estimates and their related application in Huntington’s Form 10-K.

SUMMARY DISCUSSION OF RESULTS

2004 First Quarter versus 2003 First Quarter

Huntington’s 2004 first quarter earnings were $104.2 million, or $0.45 per common share, up 14% and 15%, respectively, from $91.7 million and $0.39 per common share in the year-ago quarter. This reflected the benefit of a 11% increase in fully taxable equivalent net interest income, a 31% decrease in provision for credit losses, and a 9% decline in non-interest expenses, partially offset by a 17% decline in non-interest income. The return on average assets (ROA) and return on average equity (ROE), were 1.36% and 18.4%, respectively, compared with 1.36% and 17.2% in the year-ago quarter (see Table 1).

The 11% increase in fully taxable equivalent net interest income reflected a $4.2 billion, or 18%, increase in average earnings assets, partially offset by a 27 basis point, or an effective 7%, decline in the net interest margin. Contributing to growth in average earning assets was a $2.6 billion, or 14%, increase in average loans and leases, as well as a $1.8 billion, or 54%, increase in average investment securities. The increase in average loans and leases reflected very strong growth in residential mortgage, home equity, and commercial real estate loans and automobile leases.

The significant increase in average automobile leases reflected the fact that automobile lease originations since April 2002 are recorded as direct financing leases. Previously they were recorded as operating leases. As a result, operating leases are in a run-off mode. Operating lease income is reflected in non-interest income, compared with direct financing leases where the income is reflected in net interest income.

Average automobile loans declined slightly from the year-ago quarter. In the 2003 third quarter, a $1.0 billion automobile loan securitization trust was consolidated reflecting the implementation of FIN 46. However, this positive impact was more than offset by sales of automobile loans as part of a strategy to lower the overall credit exposure to this sector. Over the last five quarters, a total of $3.0 billion of automobile loans have been sold. Management has established an automobile loan and lease exposure target of 20%. These sales have reduced the company’s overall credit exposure to this sector from 33% at the end of 2002 to 24% at March 31, 2004. It is expected that automobile loans will continue to be originated and sold in order to manage this exposure target.

Average core deposits increased $0.5 billion, or 3%, from the year-ago quarter, despite a $0.6 billion, or 19%, decline in retail CDs.

The decline in provision for credit losses reflected improved credit quality trends including a decrease in net charge-offs and lower levels of non-performing assets (NPAs). The $29.8 million decline in non-interest expense was driven by a $40.9 million reduction in operating lease expense, partially offset by an $8.5 million increase in personnel costs.

Contributing to the $45.3 million decline in non-interest income were a $49.3 million decrease in operating lease income; a $15.4 million decline in mortgage banking income, mostly due to a $10.1 million mortgage servicing right (MSR) temporary impairment recognized in the 2004 first quarter compared with none in the year-ago quarter; partially offset by a $13.9 million increase in investment securities gains, which totaled $15.1 million in the 2004 first quarter, compared with $1.2 million in the year-ago quarter (see Significant Items Influencing Financial Performance Comparisons).

Table 1 - Selected Quarterly Income Statement Data


	2004			2003												1Q04 vs. 1Q03
*(in thousands, except per share amounts)*	First			Fourth			Third			Second			First			Amount			%
Total interest income	$	325,931		$	335,097		$	333,320		$	317,325		$	320,014		$	5,917		1.8	%
Total interest expense		103,246			110,782			112,849			114,884			118,255			(15,009	)	(12.7	%)

Net interest income		222,685			224,315			220,471			202,441			201,759			20,926		10.4	%
Provision for credit losses		25,596			26,341			51,615			49,193			36,844			(11,248	)	(30.5	%)

Net interest income after provision for credit losses		197,089			197,974			168,856			153,248			164,915			32,174		19.5	%

Operating lease income		88,867			105,307			117,624			128,574			138,193			(49,326	)	(35.7	%)
Service charges on deposit accounts		41,837			44,763			42,294			40,914			39,869			1,968		4.9	%
Trust services		16,323			15,793			15,365			15,580			14,911			1,412		9.5	%
Brokerage and insurance		15,197			14,344			13,807			14,196			15,497			(300	)	(1.9	%)
Mortgage banking		(4,296	)		9,677			30,193			7,185			11,125			(15,421	)	N.M.
Bank owned life insurance		10,485			10,410			10,438			11,043			11,137			(652	)	(5.9	%)
Other service charges and fees		9,513			9,237			10,499			11,372			10,338			(825	)	(8.0	%)
Gain on sale of automobile loans		9,004			16,288			—			13,496			10,255			(1,251	)	(12.2	%)
Gain on sale of branch office		—			—			13,112			—			—			—		—
Securities gains (losses)		15,090			1,280			(4,107	)		6,887			1,198			13,892		N.M.
Other		25,619			19,411			23,543			27,704			20,401			5,218		25.6	%

Total non-interest income		227,639			246,510			272,768			276,951			272,924			(45,285	)	(16.6	%)

Personnel costs		121,624			115,762			113,170			105,242			113,089			8,535		7.5	%
Operating lease expense		70,710			85,609			93,134			102,939			111,588			(40,878	)	(36.6	%)
Outside data processing and other services		18,462			15,957			17,478			16,104			16,579			1,883		11.4	%
Equipment		16,086			16,840			16,328			16,341			16,412			(326	)	(2.0	%)
Net occupancy		16,763			14,925			15,570			15,377			16,609			154		0.9	%
Professional services		7,299			12,175			11,116			9,872			9,285			(1,986	)	(21.4	%)
Marketing		7,839			6,895			5,515			8,454			6,626			1,213		18.3	%
Telcommunications		5,194			5,272			5,612			5,394			5,701			(507	)	(8.9	%)
Loss on early extinguishment of debt		—			15,250			—			—			—			—		—
Printing and supplies		3,016			3,417			3,658			2,253			3,681			(665	)	(18.1	%)
Amortization of intangibles		204			204			204			204			204			—		—
Restructuring reserve releases charges		—			(351	)		—			(5,315	)		(1,000	)		1,000		(100.0	%)
Other		18,457			25,510			18,397			20,168			16,705			1,752		10.5	%

Total non-interest expense		285,654			317,465			300,182			297,033			315,479			(29,825	)	(9.5	%)

Income before provision for income taxes		139,074			127,019			141,442			133,166			122,360			16,714		13.7	%
Provision for income taxes		34,901			33,758			37,230			36,676			30,630			4,271		13.9	%

Income before cummulative effect of change in accounting principle		104,173			93,261			104,212			96,490			91,730			12,443		13.6	%
Cummulative effect of change in accounting principle, net of tax ⁽¹⁾		—			—			(13,330	)		—			—			—		—

Net Income	$	104,173		$	93,261		$	90,882		$	96,490		$	91,730		$	12,443		13.6	%

Per Common Share
Income before cummulative effect of change in accounting principle - Diluted	$	0.45		$	0.40		$	0.45		$	0.42		$	0.39		$	0.06		15.4	%
Net income - Diluted		0.45			0.40			0.39			0.42			0.39			0.06		15.4
Cash dividends declared		0.175			0.175			0.175			0.160			0.160			0.015		9.4
Return on:
Average total assets ⁽²⁾		1.36	%		1.22	%		1.38	%		1.38	%		1.36	%		—		—
Average total shareholders’ equity ⁽²⁾		18.4	%		16.6	%		18.5	%		18.0	%		17.2	%		1.2	%	7.0	%
Net interest margin ⁽³⁾		3.36	%		3.42	%		3.46	%		3.47	%		3.63	%		(0.27	%)	(7.4	%)
Efficiency ratio ⁽⁴⁾		65.1	%		67.1	%		60.0	%		62.5	%		66.3	%		(1.2	%)	(1.8	%)
Effective tax rate		25.1	%		26.6	%		26.3	%		27.5	%		25.0	%		0.1	%	0.4	%
Revenue - Fully Taxable Equivalent (FTE)
Net interest income	$	222,685		$	224,315		$	220,471		$	202,441		$	201,759		$	20,926		10.4	%
Tax equivalent adjustment		3,023			2,954			2,558			2,076			2,096			927		44.2	%

Net Interest Income ⁽³⁾		225,708			227,269			223,029			204,517			203,855			21,853		10.7	%
Non-Interest Income		227,639			246,510			272,768			276,951			272,924			(45,285	)	(16.6	%)

Total Revenue	$	453,347		$	473,779		$	495,797		$	481,468		$	476,779		$	(23,432	)	(4.9	%)

Total Revenue Excluding Securities Gains (Losses)	$	438,257		$	472,499		$	499,904		$	474,581		$	475,581		$	(37,324	)	(7.8	%)

⁽¹⁾	Due to the adoption of FASB Interpretation No. 46 for variable interest entities.

⁽²⁾	Based on income before cummulative effect change in accounting principle, net of tax.

⁽³⁾	On a fully taxable equivalent basis assuming a 35% tax rate

⁽⁴⁾	Non-interest expense less amortization of intangible assets divided by the sum of fully taxable equivalent net interest income and non-interest income excluding securities gains (losses)

N.M. - Not Meaningful

2004 First Quarter versus 2003 Fourth Quarter

Compared with 2003 fourth quarter net income of $93.3 million, or $0.40 per common share, 2004 first quarter earnings were up 12% and 13%, respectively. This primarily reflected the benefit of a 10% decrease in non-interest expense and 3% decline in provision for credit losses, partially offset by an 8% decline in non-interest income. The ROA and ROE were 1.36% and 18.4%, respectively, in the current quarter, compared with 1.22% and 16.6% in the 2003 fourth quarter (see Table 1).

The 10%, or $31.8 million, decrease in non-interest expense reflected a $14.9 million decline in operating lease expense, as well as a comparative benefit versus 2003 fourth quarter expenses as the fourth quarter included $15.3 million of expense associated with the loss on early extinguishment of long-term debt (see Significant Items Influencing Financial Performance Comparisons). The lower provision for credit losses reflected improved credit quality trends. The 8%, or $18.9 million, decline in non-interest income reflected a $16.4 million decline in operating lease income; a $14.0 million decline in mortgage banking income, primarily reflecting the current quarter’s $10.1 million of MSR temporary impairment compared with a $3.5 million MSR temporary impairment recovery in the fourth quarter; and a $13.8 million increase in investment securities gains as the current quarter included $15.1 million of such gains, compared with $1.3 million of such gains in the fourth quarter (see Significant Items Influencing Financial Performance Comparisons).

Net interest income declined $1.6 million from the fourth quarter, reflecting a 6 basis point, or an effective 2%, decline in the net interest margin, partially offset by a 2% increase in average earnings assets. Average loans and leases increased only slightly despite strong growth in residential mortgage, home equity, and commercial real estate loans, as automobile loans declined 14% from the fourth quarter reflecting the impact of $1.0 billion of automobile loans sold late in the fourth quarter and $0.9 billion sold late in the 2004 first quarter. These sales represented a continuation of a strategy to lower automobile credit exposure. Some of the proceeds from these loan sales were reinvested in investment securities, contributing to the 13% increase in investment securities from the fourth quarter.

Average core deposits excluding retail CDs increased slightly from the fourth quarter and represented a reversal of fourth quarter net outflows.

Significant Items Influencing Financial Performance Comparisons

The following table highlights significant items influencing financial performance comparisons among periods in the results of operations discussion that follows:


*(in millions, except per share amounts)*	Pre-tax			Impact After-tax ⁽¹⁾			EPS
2004 First Quarter - GAAP earnings	$	139.1		$	104.2		$	0.45
Gain on sale of $868 million of automobile loans		9.0			5.9			0.03
Mortgage servicing right (MSR) temporary impairment		(10.1	)		(6.6	)		(0.03	)
Investment securities gain on sale		15.1			9.8			0.04

2003 Fourth Quarter - GAAP earnings	$	127.0		$	93.3		$	0.40
Gain on sale of $1.02 billion of automobile loans		16.3			10.6			0.05
Mortgage servicing right (MSR) temporary impairment recovery		3.5			2.3			0.01
Long-term debt extinguishment		(15.3	)		(9.9	)		(0.04	)

2003 First Quarter - GAAP earnings	$	122.4		$	91.7		$	0.39
Gain on sale of $556 million of automobile loans		10.3			6.7			0.03
Restructuring reserve releases		1.0			0.7			—

⁽¹⁾	Increase (decrease) to GAAP earnings.

Gains from sales of automobile loans are the result of the company’s strategy to reduce the overall credit exposure to this sector.

Since the second quarter of 2002, Huntington has generally retained the servicing on mortgage loans it originates and sells into the secondary market. The servicing right represents the present value of expected future net servicing income for the loan. Expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly affected by prepayments. Prepayments usually increase when interest rates decline and

decrease when interest rates rise. Thus, as interest rates decline, less future income is expected and the value of the servicing rights decline. The asset becomes impaired when the valuation declines below recorded book value. Huntington 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 mortgage servicing rights for other-than-temporary declines in valuation. Investment securities represent a balance sheet hedge to help mitigate the net income impact of mortgage servicing rights temporary valuation changes.

The 2003 fourth quarter long-term debt extinguishment reflected a decision to pay-off longer-term, higher interest rate debt. While this resulted in a negative impact to that quarter’s results, it benefits future period results by reducing funding costs. The 2003 first quarter restructuring reserve release reflected the release of previously established reserves that were no longer required.

RESULTS OF OPERATIONS

Net Interest Income

2004 First Quarter versus 2003 First Quarter

Fully taxable equivalent net interest income increased $21.9 million, or 11%, from the year-ago quarter, reflecting the favorable impact of an 18% increase in average earning assets, partially offset by a 27 basis point, or an effective 7%, decline in the net interest margin. The fully taxable equivalent net interest margin decreased to 3.36% from 3.63% primarily reflecting the strategic repositioning of portfolios away from automobile loans and toward lower rate, and lower risk, residential real estate-related loans and investment securities.

Average loans and leases increased $2.6 billion, or 14%, from the 2003 first quarter almost entirely due to a 25% increase in average consumer loans. Contributing to the consumer loan growth was a $0.9 billion, or 23%, increase in average total automobile loans and leases reflecting the impact of the consolidation of a securitization trust and the migration of leases from operating lease assets to direct financing leases, partially offset by loan sales; a $0.8 billion, or 46%, increase in average residential mortgages; and a $0.6 billion, or 20%, increase in average home equity loans.

Average total commercial (C&I) and commercial real estate (CRE) loans increased $0.2 billion, or 2%, reflecting a 12% increase in small business C&I and CRE loans and 10% increase in middle-market CRE loans. Average middle-market C&I loans were down 6% from the year-ago period and reflected, in part, weak demand, but also the impact from continued strategies to specifically lower exposure to large, individual commercial credits, including shared national credits.

Average investment securities increased $1.8 billion, or 54%, from the year-ago quarter, and were up $0.6 billion, or 13%, from the fourth quarter primarily reflecting the investment of a portion of the proceeds from the automobile loan sales. Average mortgages held for sale decreased $0.3 billion, or 55%, from the year-ago quarter.

Average total core deposits in the first quarter were $15.5 billion, including $2.4 billion of retail CDs. This compared with $15.0 billion in average total core deposits, including $3.0 billion in average retail CDs in the year-ago quarter, and $15.5 billion in average total core deposits, including $2.5 billion of retail CDs, in the 2003 fourth quarter. Average total core deposits excluding retail CDs were up $1.1 billion, or 9%, from the year-ago quarter.

Table 2 reflects quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

Table 2 - Consolidated Quarterly Average Balance Sheets


	Average Balances										Change March ’04 vs. ’03
*(in millions)*	2004		2003								Change March ’04 vs. ’03
Fully Tax Equivalent Basis	First		Fourth		Third		Second		First		Amount			Percent
Assets
Interest bearing deposits in banks	$	79	$	83	$	90	$	45	$	37	$	42		N.M.	%
Trading account securities		16		11		11		23		12		4		33.3
Federal funds sold and securities purchased under resale agreements		92		117		103		69		57		35		61.4
Mortgages held for sale		207		295		898		602		459		(252	)	(54.9	)
Securities:
Taxable		4,646		4,093		3,646		3,385		3,016		1,630		54.0
Tax exempt		437		424		358		291		289		148		51.2

Total Securities		5,083		4,517		4,004		3,676		3,305		1,778		53.8

Loans and Leases:
Commercial and industrial		5,365		5,382		5,380		5,626		5,623		(258	)	(4.6	)
Real Estate
Construction		1,322		1,297		1,258		1,239		1,187		135		11.4
Commercial		2,876		2,830		2,744		2,621		2,565		311		12.1
Consumer
Automobile loans		3,041		3,529		3,594		2,830		3,079		(38	)	(1.2	)
Automobile leases		1,988		1,802		1,590		1,306		1,006		982		97.6

Automobile loans and leases		5,029		5,331		5,184		4,136		4,085		944		23.1

Home equity		3,880		3,678		3,503		3,359		3,238		642		19.8
Residential mortgage		2,674		2,501		2,075		1,887		1,832		842		46.0
Other loans		356		387		367		379		389		(33	)	(8.5	)

Total Consumer		11,939		11,897		11,129		9,761		9,544		2,395		25.1

Total Loans and Leases		21,502		21,406		20,511		19,247		18,919		2,583		13.7

Allowance for loan and lease losses		313		350		330		304		337		(24	)	(7.1	)

Net loans and leases		21,189		21,056		20,181		18,943		18,582		2,607		14.0

Total earning assets		26,979		26,429		25,617		23,662		22,789		4,190		18.4

Operating lease assets		1,166		1,355		1,565		1,802		2,076		(910	)	(43.8	)
Cash and due from banks		740		766		747		735		740		0		—
Intangible assets		217		217		218		218		218		(1	)	(0.5	)
All other assets		2,046		2,005		2,067		1,985		1,950		96		4.9

Total Assets	$	30,835	$	30,422	$	29,884	$	28,098	$	27,436	$	3,399		12.4	%

Liabilities and Shareholders’ Equity
Core deposits
Non-interest bearing deposits	$	3,017	$	3,131	$	3,218	$	3,046	$	2,958	$	59		2.0	%
Interest bearing demand deposits		6,609		6,466		6,558		6,100		5,597		1,012		18.1
Savings deposits		2,819		2,824		2,808		2,804		2,771		48		1.7
Retail certificates of deposit		2,399		2,492		2,561		2,798		2,963		(564	)	(19.0	)
Other domestic time deposits		637		631		656		673		682		(45	)	(6.6	)

Total core deposits		15,481		15,544		15,801		15,421		14,971		510		3.4

Domestic time deposits of $100,000 or more		788		828		803		808		769		19		2.5
Brokered time deposits and negotiable CDs		1,907		1,851		1,421		1,241		1,155		752		65.1
Foreign time deposits		549		522		536		426		514		35		6.8

Total deposits		18,725		18,745		18,561		17,896		17,409		1,316		7.6

Short-term borrowings		1,603		1,433		1,393		1,635		1,947		(344	)	(17.7	)
Federal Home Loan Bank advances		1,273		1,273		1,273		1,267		1,216		57		4.7
Subordinated notes and other long-term debt, including preferred capital securities		5,557		5,432		5,197		4,010		3,570		1,987		55.7

Total interest bearing liabilities		24,141		23,752		23,206		21,762		21,184		2,957		14.0

All other liabilities		1,399		1,311		1,221		1,139		1,128		271		24.0
Shareholders’ equity		2,278		2,228		2,239		2,151		2,166		112		5.2

Total Liabilities and Shareholders’ Equity	$	30,835	$	30,422	$	29,884	$	28,098	$	27,436	$	3,399		12.4	%

Table 3 - Consolidated Quarterly Net Interest Margin Analysis


	Average Rates ⁽³⁾
*(in millions)*	2004		2003
Fully Tax Equivalent Basis ⁽¹⁾	First		Fourth		Third		Second		First
Assets
Interest bearing deposits in banks	0.71	%	0.60	%	0.51	%	1.58	%	1.61	%
Trading account securities	3.98		2.39		4.70		4.15		4.63
Federal funds sold and securities purchased under resale agreements	1.41		1.30		1.92		2.19		2.14
Mortgages held for sale	5.33		5.31		5.16		5.42		5.56
Securities:
Taxable	4.06		4.24		4.23		4.58		5.15
Tax exempt	6.88		6.91		6.93		6.91		6.86

Total Securities	4.30		4.49		4.47		4.77		5.30

Loans and Leases:⁽²⁾
Commercial and industrial	4.49		4.82		4.84		5.26		5.40
Real Estate
Construction	3.68		4.24		4.17		4.07		4.06
Commercial	4.70		4.99		5.22		5.28		5.60
Consumer
Automobile loans	6.93		6.90		7.19		7.74		7.85
Automobile leases	4.94		4.98		4.99		4.69		6.04

Automobile loans and leases	6.14		6.25		6.51		6.78		7.40

Home equity	4.82		4.87		5.09		5.02		5.17
Residential mortgage	5.44		5.20		5.32		5.76		5.95
Other loans	7.24		7.19		7.38		7.22		6.60

Total Consumer	5.52		5.64		5.87		5.99		6.33

Total Loans and Leases	5.04		5.26		5.41		5.56		5.82

Total earning assets	4.89	%	5.11	%	5.23	%	5.42	%	5.72	%

Liabilities and Shareholders’ Equity
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits	0.88	%	0.91	%	1.04	%	1.39	%	1.43	%
Savings deposits	0.94		1.22		1.35		1.55		1.85
Retail certificates of deposit	3.47		3.54		3.51		3.75		3.87
Other domestic time deposits	3.48		3.69		3.89		3.85		4.00

Total core deposits	1.53		1.65		1.76		2.09		2.27

Domestic time deposits of $100,000 or more	2.14		2.37		2.32		2.55		2.76
Brokered time deposits and negotiable CDs	1.51		1.52		1.63		1.79		1.98
Foreign time deposits	0.72		0.75		0.85		1.03		1.06

Total deposits	1.53		1.64		1.75		2.06		2.23

Short-term borrowings	0.83		0.78		0.85		1.06		1.16
Federal Home Loan Bank advances	2.50		2.24		1.81		1.76		1.84
Subordinated notes and other long-term debt, including preferred capital securities	2.33		2.63		2.78		2.85		3.12

Total interest bearing liabilities	1.71	%	1.85	%	1.93	%	2.11	%	2.26	%

Net interest rate spread	3.18	%	3.26	%	3.30	%	3.31	%	3.46	%
Impact of non-interest bearing funds on margin	0.18		0.16		0.16		0.16		0.17

Net Interest Margin	3.36	%	3.42	%	3.46	%	3.47	%	3.63	%

⁽¹⁾	Fully tax equivalent yields are calculated assuming a 35% tax rate. See page 19 for the fully taxable equivalent adjustment.

⁽²⁾	Individual loan and lease components include applicable non-deferrable fees.

⁽³⁾	Loan and lease and deposit average rates include impact of applicable derivatives.

2004 First Quarter versus 2003 Fourth Quarter

Compared with the 2003 fourth quarter, fully taxable equivalent net interest income decreased $1.6 million, reflecting the adverse impact of automobile loan sales. Average earnings assets, despite the negative impact from the sale of automobile loans, increased $0.5 billion, or 2%. The fully taxable equivalent net interest margin declined 6 basis points, or an effective 2%, to 3.36% from 3.42%. The decline in the net interest margin from the fourth quarter reflected the same factors as those impacting the decrease from the 2003 first quarter.

Average total loans and leases in the first quarter increased only slightly from the 2003 fourth quarter, as the growth rate was mitigated by a $0.9 billion reduction in average automobile loans related to 2003 fourth quarter and 2004 first quarter loan sales. These automobile loan sales also were reflected in a $0.3 billion, or 6%, decline in average automobile loans and leases from the fourth quarter. Growth in mortgage-related consumer loans remained strong with average residential mortgages up $0.2 billion, or 7%, and average home equity loans up $0.2 billion, or 5%. Total average C&I and CRE loans were up slightly from the fourth quarter reflecting a 1% increase in small business C&I and CRE loans and a 2% increase in middle-market CRE loans. Average middle-market C&I loans declined slightly.

Compared with the fourth quarter’s 1% net outflow, average total core deposits excluding retail CDs increased slightly in the 2004 first quarter, primarily due to a $0.1 billion, or 2%, increase in interest bearing demand deposits.

Provision for Credit Losses

The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels adequate to absorb Management’s estimate of inherent losses in the total loan and lease portfolio and unfunded loan commitments and letters of credit. Taken into consideration are such factors as current period net charge-offs that are charged against these allowances, current period loan and lease growth and any related estimate of likely losses associated with that growth based on historical experience, the current economic outlook, and the anticipated impact on credit quality of existing loans and leases and unfunded commitments and letters of credit (see Allowances for Credit Losses for additional discussion).

The provision for credit losses in the 2004 first quarter was $25.6 million, down $11.2 million, or 31%, from the year-ago quarter, and down $0.7 million, or 3%, from the 2003 fourth quarter, reflecting improved credit quality (see Credit Risk for additional discussion).

Non-Interest Income

The following table reflects non-interest income detail for each of the last five quarters.

Table 4 - Non-Interest Income


	2004			2003									1Q04 vs. 1Q03
*(in thousands)*	First			Fourth		Third			Second		First		Amount			%
Service charges on deposit accounts	$	41,837		$	44,763	$	42,294		$	40,914	$	39,869	$	1,968		4.9	%
Trust services		16,323			15,793		15,365			15,580		14,911		1,412		9.5
Brokerage and insurance		15,197			14,344		13,807			14,196		15,497		(300	)	(1.9	)
Mortgage banking		(4,296	)		9,677		30,193			7,185		11,125		(15,421	)	N.M.
Bank owned life insurance		10,485			10,410		10,438			11,043		11,137		(652	)	(5.9	)
Gain on sale of automobile loans		9,004			16,288		—			13,496		10,255		(1,251	)	(12.2	)
Gain on sale of branch offices		—			—		13,112			—		—		—		—
Other service charges and fees		9,513			9,237		10,499			11,372		10,338		(825	)	(8.0	)
Securities gains (losses)		15,090			1,280		(4,107	)		6,887		1,198		13,892		N.M.
Other		25,619			19,411		23,543			27,704		20,401		5,218		25.6

Sub-total before operating lease income		138,772			141,203		155,144			148,377		134,731		4,041		3.0
Operating lease income		88,867			105,307		117,624			128,574		138,193		(49,326	)	(35.7	)

Total Non-Interest Income	$	227,639		$	246,510	$	272,768		$	276,951	$	272,924	$	(45,285	)	(16.6	)%

N.M. - Not Meaningful.

2004 First Quarter versus 2003 First Quarter

Non-interest income decreased $45.3 million, or 17%, from the year-ago quarter. Comparisons with prior-period results are heavily influenced by the decline in operating leases and the related decline in operating lease income. These trends are expected to continue as automobile leases originated since April 2002 are recorded as direct financing leases where the income is reflected in net interest income, not non-interest income. As a result of the run-off of the operating lease portfolio, operating lease income declined $49.3 million, or 36%, from the 2003 first quarter. Excluding operating lease income, non-interest income increased $4.0 million, or 3%, from the year-ago quarter with the primary drivers being:

•

$13.9 million increase in investment securities gains as the current quarter included $15.1 million of securities gains, a balance sheet hedge against MSR temporary impairment.

•

$5.2 million, or 26%, increase in other income primarily a result of higher investment banking income, standby letter of credit fees, and fees on terminated leases.

•

$2.0 million increase in service charges on deposit accounts.

•

$1.4 million increase in trust services income.

Partially offset by:

•

$15.4 million decline in mortgage banking income. Contributing to this decline was a $10.1 million MSR temporary impairment in the current quarter compared with no MSR temporary impairment recognized in the year-ago quarter. MSR valuations are very sensitive to movements in interest rates. The decline in the level of interest rates during the 2004 first quarter resulted in higher mortgage prepayments that, in turn, resulted in MSR temporary impairment. Also contributing to the decline was lower origination volume.

•

$1.3 million decline in the gain on sale of automobile loans as the current quarter reflected a $9.0 million gain on the sale of $0.9 billion of automobile loans compared with a $10.3 million gain on the sale of $0.6 billion of automobile loans in the year-ago quarter. The higher gain on the year-ago sale reflected the higher average interest rate on that pool of sold loans relative to market rates at the time of sale.

2004 First Quarter versus 2003 Fourth Quarter

Compared with the 2003 fourth quarter, non-interest income declined $18.9 million, or 8%. This comparison is also heavily influenced by the decline in operating lease income for the reasons noted above. As a result of the run-off of the operating lease portfolio, operating lease income declined $16.4 million, or 16%, from the 2003 fourth quarter. Excluding operating lease income, non-interest income decreased $2.4 million, or 2%, from the 2003 fourth quarter with the primary drivers being:

•

$14.0 million decrease in mortgage banking income as the current quarter included $10.1 million of MSR temporary impairment charges compared with $3.5 million of MSR temporary impairment recovery in the fourth quarter. This reversal in MSR temporary impairment valuations between quarters reflected an upward movement in mortgage interest rates near the end of the fourth quarter 2003 followed by lower interest rates in the 2004 first quarter. The MSR temporary impairment valuation reserve at March 31, 2004 was $16.3 million. Excluding the MSR temporary impairment valuation change between quarters, mortgage banking income decreased $0.3 million reflecting lower origination volumes. Reflecting the decline in interest rates during the quarter, the value of MSRs as a percent of mortgages serviced for others were 0.93%, down from 1.11% at December 31, 2003.

•

$7.3 million decrease in gains on the sale of automobile loans as the current quarter reflected a $9.0 million gain, compared with a $16.3 million gain on the sale of $1.0 billion of automobile loans in the 2003 fourth quarter.

•

$2.9 million, or 7%, decline in service charges on deposit accounts due to lower consumer NSF and overdraft fees.

Partially offset by:

•

$13.8 million increase in investment securities gains, which are viewed as a balance sheet hedge against MSR temporary impairment valuation adjustments.

•

$6.2 million increase in other income primarily reflecting higher investment banking income.

Non-Interest Expense

The following table reflects non-interest expense detail each of the last five quarters.

Table 5 - Non-Interest Expense


	2004		2003											1Q04 vs. 1Q03
*(in thousands)*	First		Fourth			Third		Second			First			Amount			%
Personnel costs	$	121,624	$	115,762		$	113,170	$	105,242		$	113,089		$	8,535		7.5	%
Outside data processing and other services		18,462		15,957			17,478		16,104			16,579			1,883		11.4
Equipment		16,086		16,840			16,328		16,341			16,412			(326	)	(2.0	)
Net occupancy		16,763		14,925			15,570		15,377			16,609			154		0.9
Professional services		7,299		12,175			11,116		9,872			9,285			(1,986	)	(21.4	)
Marketing		7,839		6,895			5,515		8,454			6,626			1,213		18.3
Telecommunications		5,194		5,272			5,612		5,394			5,701			(507	)	(8.9	)
Printing and supplies		3,016		3,417			3,658		2,253			3,681			(665	)	(18.1	)
Amortization of intangible assets		204		204			204		204			204			—		—
Loss on early extinguishment of debt		—		15,250			—		—			—			—		—
Restructuring reserve releases		—		(351	)		—		(5,315	)		(1,000	)		1,000		(100.0	)
Other		18,457		25,510			18,397		20,168			16,705			1,752		10.5

Sub-total before operating lease expense		214,944		231,856			207,048		194,094			203,891			11,053		5.4
Operating lease expense		70,710		85,609			93,134		102,939			111,588			(40,878	)	(36.6	)

Total Non-Interest Expense	$	285,654	$	317,465		$	300,182	$	297,033		$	315,479		$	(29,825	)	(9.5	)%

2004 First Quarter versus 2003 First Quarter

Non-interest expense decreased $29.8 million, or 9%, from the year-ago quarter. Comparisons with prior-period results are influenced by the decline in operating lease expense as the operating lease portfolio continues to run-off (see above operating lease income discussion). Operating lease expense declined $40.9 million, or 37%, from the 2003 first quarter. Excluding operating lease expense, non-interest expense increased $11.1 million, or 5%, from the year-ago quarter with the primary drivers being:

•

$8.5 million, or 8%, increase in personnel costs reflecting higher pension and salary expense.

•

$1.9 million increase in outside data processing and other services expense.

•

$1.8 million increase in other expense reflecting higher insurance costs.

•

$1.2 million increase in marketing expense.

•

$1.0 million expense reduction benefit in the year-ago quarter due to a restructuring reserve release.

Partially offset by:

•

$2.0 million decline in professional services reflecting lower consulting expense.

2004 First Quarter versus 2003 Fourth Quarter

Compared with the 2003 fourth quarter, non-interest expense declined $31.8 million, or 10%. Comparisons with prior-period results are also heavily influenced by the decline in operating lease expense. Operating lease expense declined $14.9 million, or 17%, from the 2003 fourth quarter. Excluding operating lease expense, non-interest expense decreased $16.9 million, or 7%, from the fourth quarter with the primary drivers being:

•

$15.3 million of 2003 fourth quarter expense associated with extinguishing the high cost long-term repurchase agreement debt.

•

$7.1 million, or 28%, decrease in other expense as the fourth quarter included higher insurance costs.

•

$4.9 million, or 40%, decline in professional services expenses. This reflected a $1.1 million decline in SEC investigation-related costs ($0.7 million in the current quarter compared with $1.8 million in the 2003 fourth quarter), as well as lower consulting expense.

Partially offset by:

•

$5.9 million, or 5%, increase in personnel costs primarily reflecting higher benefit expense and the annual FICA reset.

•

$2.5 million increase in outside data processing and other services expense reflecting seasonal contract payouts and higher charge card processing expense.

•

$1.8 million increase in net occupancy expense due mostly to seasonal factors including higher snow removal and utility costs, as well as lower rental income.

Operating Lease Assets

The following table reflects operating lease asset performance detail for each of the last five quarters.

Table 6 - Operating Lease Assets Performance

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