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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One)  For the fiscal year ended December 31, 2003 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file Number 000-33243 Huntington Preferred Capital, Inc.  Ohio
    
    31-1356967(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 Huntington Center, 41 S. High Street, Columbus, OH
    
    43287(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (614) 480-8300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Noncumulative Exchangeable Preferred Securities, Class C (Liquidation Amount $25.00 each)   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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Yes [   ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [   ] Yes [X] No All common stock is held by affiliates of the registrant as of December
31, 2003. As of March 30, 2004, 14,000,000 shares of common stock without par
value were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant as of the close of business on June 30, 2003:
$0.00 Documents Incorporated By Reference Part III of this Form 10-K incorporates by reference certain information
from the registrants definitive Information Statement for the 2004 Annual
Shareholders Meeting. 1




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HUNTINGTON PREFERRED CAPITAL, INC.  
 INDEX Part I.Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16Part II.Item 5.
    
    Market for
Registrants Common Equity and Related Shareholder Matters
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    17Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    46Item 9A.
    
    Controls and Procedures
    
    
    46Part III.Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    46Item 11.
    
    Executive Compensation
    
    
    46Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    46Item 13.
    
    Certain Relationships and Related Transactions
    
    
    46Item 14.
    
    Principal Accounting Fees and Services
    
    
    46Part IV.Item 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    47Signatures
    
    
    
    
    48ExhibitsExhibit 10(A)Exhibit 10(B)Exhibit 10(C)Exhibit 10(D)Exhibit 10(E)Exhibit 16Exhibit 21Exhibit 24Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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Huntington Preferred Capital, Inc. 
 Part I 
 Item 1: Business General Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in
1992 and designated as a real estate investment trust (REIT) in 1998. HPCIs
common stock is owned by three related parties, HPC Holdings-III, Inc.
(HPCH-III); Huntington Preferred Capital II, Inc. (HPCII); and Huntington
Bancshares Incorporated (Huntington). HPCI and HPCII are subsidiaries of
HPCH-III, which is a subsidiary of Huntington Preferred Capital Holdings, Inc.
(Holdings). Holdings is a subsidiary of The Huntington National Bank (the
Bank), a national bank association organized under the laws of the United
States and headquartered in Columbus, Ohio. The Bank is a wholly owned
subsidiary of Huntington, also headquartered in Columbus, Ohio. HPCI has one
subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001
for the purpose of holding certain assets (primarily leasehold improvements).
The following chart outlines the relationship among affiliated entities at
December 31, 2003. (HUNTINGTON BANCSHARES INCORPORATED (HUNTINGTON)) (1) HPC Holdings-III, Inc. may sell HPCIs Class D Preferred Securities to
third party investors at some future date. (2)All of HPCIs Class C preferred securities were sold to Holdings, and were
subsequently sold by Holdings to the public in an underwritten public offering
that closed on November 7, 2001. 3




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General Description of Assets The Internal Revenue Code requires a REIT to invest at least 75% of the
total value of its assets in real estate assets, which includes residential
real estate loans and commercial real estate loans, including participation
interests in residential or commercial real estate loans, mortgage-backed
securities eligible to be held by REITs, cash, cash equivalents which includes
receivables, government securities, and other real estate assets (REIT
Qualified Assets). REITs may invest up to 25% of the value of its total assets
in non-mortgage-related securities as defined in the Investment Company Act. As
of December 31, 2003, 94.1% of HPCIs assets were invested in REIT Qualified
Assets and 5.9% were invested in commercial and consumer loans and other assets
that were not REIT Qualified Assets. Additional information regarding the
asset and income tests required by the Internal Revenue Code and Investment
Company Act exemption is set forth in the REIT Qualification Tests section of
Managements Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 of this report. Commercial and Commercial Real Estate Loans HPCI owns participation interests in unsecured commercial loans and
commercial loans secured by non-real property such as industrial equipment,
livestock, furniture and fixtures, and inventory. Participation interests
acquired in commercial real estate loans are secured by real property such as
office buildings, multi-family properties of five units or more, industrial,
warehouse, and self-storage properties, office and industrial condominiums,
retail space, strip shopping centers, mixed use commercial properties, mobile
home parks, nursing homes, hotels and motels, churches, and farms. Commercial
and commercial real estate loans may not be fully amortizing. This means that
the loans may have a significant principal balance or balloon payment due on
maturity. Additionally, there is no requirement regarding the percentage of any
commercial or commercial real estate property that must be leased at the time
HPCI acquires a participation interest in a commercial or commercial real
estate loan secured by such property nor are commercial loans required to have
third party guarantees. The credit quality of a commercial or commercial real estate loan may
depend on, among other factors, the existence and structure of underlying
leases; the physical condition of the property, including whether any
maintenance has been deferred; the creditworthiness of tenants; the historical
and anticipated level of vacancies; rents on the property and on other
comparable properties located in the same region; potential or existing
environmental risks; the availability of credit to refinance the loan at or
prior to maturity; and the local and regional economic climate in general.
Foreclosures of defaulted commercial or commercial real estate loans generally
are subject to a number of complicating factors, including environmental
considerations, which are not generally present in foreclosures of residential
real estate loans. At December 31, 2003, $3.7 billion, or 84.8%, of the commercial and
commercial real estate loans underlying HPCIs participation interests in such
loans were secured by a first mortgage or first lien and most bear variable or
floating interest rates. At this same date, HPCIs participation interests in
commercial loans that are unsecured was $23.8 million, or 0.5% of the total
commercial and commercial real estate loan participations. Consumer Loans HPCI owns participation interests in consumer loans secured by
automobiles, trucks, equipment, or a first or junior mortgage on the borrowers
primary residence. Many of these mortgage loans were made for reasons such as
home improvements, acquisition of furniture and fixtures, and debt
consolidation. These loans are predominately repaid on an installment basis and
income is accrued based on the outstanding balance of the loan over terms that
range from 6 to 360 months. Of the loans underlying the consumer loan
participations, most bear interest at fixed rates. Residential Real Estate Loans HPCI owns participation interests in adjustable rate, fixed rate,
conforming, and nonconforming residential real estate loans. Conforming
residential real estate loans comply with the requirements for inclusion in a
loan guarantee or purchase program sponsored by either the FHLMC or FNMA. For
2004, the maximum principal balance allowed on conforming residential real
estate loans ranges from $333,700 for one-unit residential loans to $641,650
for four-unit residential loans. Nonconforming residential real estate loans
are residential real estate loans that do not qualify in one or more respects
for purchase by FNMA or FHLMC under their standard programs. A majority of the
nonconforming residential real estate loans underlying the participation
interests acquired by HPCI to date are nonconforming because they have original
principal balances which exceeded the requirements for FHLMC or FNMA programs,
the original terms are shorter than the minimum requirements for FHLMC or FNMA
programs at the time of origination, or generally because they vary in certain
other respects from the requirements of such programs other than the
requirements relating to creditworthiness of the mortgagors. 4




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Each residential real estate loan is evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first or second lien on single-family residential properties.
Residential real estate properties underlying residential real estate loans
consist of individual dwelling units, individual condominium units, two- to
four-family dwelling units, and townhouses. Geographic Distribution The following table shows the geographic location of the properties
securing the loans underlying HPCIs loan participations at December 31, 2003: Table 1 - Total Loan Participation Interests by Geographic Location Percentage byAggregate
    
    Aggregate(in thousands of dollars)
    
    Number
    
    Principal
    
    PrincipalState
    
    of Loans
    
    Balance
    
    BalanceOhio
    
    
    21,231
    
    
    $
    2,756,114
    
    
    
    52.0
    %Michigan
    
    
    9,819
    
    
    
    1,636,405
    
    
    
    30.9Indiana
    
    
    2,609
    
    
    
    335,398
    
    
    
    6.3Kentucky
    
    
    1,849
    
    
    
    301,970
    
    
    
    5.735,508
    
    
    
    5,029,887
    
    
    
    94.8All other locations
    
    
    878
    
    
    
    273,181
    
    
    
    5.2Total loan participation interests
    
    
    36,386
    
    
    $
    5,303,068
    
    
    
    100.0
    %
 Principal Balances The following table shows data with respect to the principal balance of
the loans underlying HPCIs loan participations at December 31, 2003: Number
    
    Principal
    
    PrincipalSize
    
    of Loans
    
    Balance
    
    BalanceLess than $50,000
    
    
    25,450
    
    
    $
    446,166
    
    
    
    8.5
    %Greater than $50,000 to $100,000
    
    
    4,053
    
    
    
    283,970
    
    
    
    5.4Greater than $100,000 to $250,000
    
    
    3,136
    
    
    
    496,517
    
    
    
    9.4Greater than $250,000 to $500,000
    
    
    1,718
    
    
    
    616,346
    
    
    
    11.6Greater than $500,000 to $1,000,000
    
    
    1,046
    
    
    
    733,405
    
    
    
    13.8Greater than $1,000,000 to $3,000,000
    
    
    732
    
    
    
    1,216,890
    
    
    
    22.9Greater than $3,000,000 to $5,000,000
    
    
    142
    
    
    
    548,616
    
    
    
    10.3Greater than $5,000,000 to $10,000,000
    
    
    79
    
    
    
    540,800
    
    
    
    10.2Greater than $10,000,000
    
    
    30
    
    
    
    420,358
    
    
    
    7.9Total loan participation interests
    
    
    36,386
    
    
    $
    5,303,068
    
    
    
    100.0
    %
 Dividend Policy and Restrictions HPCI expects to pay an aggregate amount of dividends with respect to the
outstanding shares of its capital stock equal to substantially all of its REIT
taxable income, which excludes capital gains. In order to remain qualified as
a REIT, HPCI must distribute annually at least 90% of its REIT taxable income
to shareholders. Dividends are declared at the discretion of the board of
directors after considering its distributable funds, financial condition, and
capital needs, the impact of current and pending legislation and regulations,
economic conditions, tax considerations, its continued qualification as a REIT,
and other factors. Although there can be no assurances, HPCI expects that both
its cash available for distribution and its REIT taxable income will be in
excess of amounts needed to pay dividends on the preferred securities in the
foreseeable future because substantially all of HPCIs real estate assets and
other authorized investments are interest-bearing; all outstanding preferred
securities represent in the aggregate only approximately 15% of HPCIs
capitalization; HPCI does not anticipate incurring any indebtedness other than
permitted indebtedness, which includes acting as a co-borrower or guarantor of
certain obligations of the Bank. In additional, HPCI expects its interest-earning
assets will continue to exceed the liquidation preference of its preferred
securities. For further discussion regarding co-borrower and
guarantor obligations, see "Commitments and Contingencies" in the Notes to Financial
Statements included in Part II, Item 8 of this report. 5




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Payment of dividends on the preferred securities could also be subject to
regulatory limitations if the Bank fails to be adequately capitalized for
purposes of regulations issued by The Office of the Comptroller of the Currency
(OCC). The Bank currently intends to maintain its capital ratios in excess of
the well-capitalized levels under these regulations. However, there can be no
assurance that the Bank will be able to maintain its capital in excess of the
well-capitalized levels. The exercise of the OCCs power to restrict
dividends on preferred securities would, however, also have the effect of
restricting the payment of dividends on common shares. The inability to pay
dividends on common shares would prevent HPCI from meeting the statutory
requirement for a REIT to distribute 90% of its taxable income and, therefore,
would cause HPCI to fail to qualify for the favorable tax treatment accorded to
REITs. Capital ratios for the Bank as of December 31, 2003 and 2002 are as
follows: Table 3 - Capital Ratios for the Bank Well-
    
    Adequately-
    
    December 31,Capitalized
    
    CapitalizedMinimums
    
    Minimums
    
    2003
    
    2002Tier 1 Risk-Based Capital
    
    
    6.00
    %
    
    
    4.00
    %
    
    
    6.36
    %
    
    
    5.67
    %Total Risk-Based Capital
    
    
    10.00
    
    
    
    8.00
    
    
    
    10.65
    
    
    
    9.65Tier 1 Leverage Ratio
    
    
    5.00
    
    
    
    4.00
    
    
    
    6.01
    
    
    
    5.88
 Conflict of Interests and Related Policies The Bank continues to control 98.6% of the voting power of HPCIs
outstanding securities. Accordingly, the Bank will continue to have the right
to elect all of HPCIs directors, including its independent directors, unless
HPCI fails to pay dividends on its Class C and Class D preferred securities.
In addition, all of HPCIs officers and six of its nine directors are also
officers of Huntington or the Bank. Because of the nature of HPCIs
relationship with Holdings, HPCII, HPCH-III, and the Bank, conflicts of
interest have arisen and may arise in the future with respect to certain
transactions, including without limitation, HPCIs acquisition of assets from
the Bank, HPCIs disposition of assets to the Bank, servicing of the loans
underlying HPCIs participation interests, particularly with respect to loans
placed on nonaccrual status, as well as the modification of the participation
agreement between the Bank and Holdings and the subparticipation agreement
between Holdings and HPCI. Any future modification of these agreements will
require the approval of a majority of HPCIs independent directors. HPCIs
board of directors also has broad discretion to revise its investment and
operating strategy without shareholder approval. It is the intention of HPCI and the Bank that any agreements and
transactions between them be fair to all parties and consistent with market
terms for such types of transactions. The requirement in HPCIs articles of
incorporation that certain actions be approved by a majority of HPCIs
independent directors also is intended to ensure fair dealings among HPCI,
Holdings, and the Bank. HPCIs independent directors serve on its audit
committee and review material agreements and significant transactions among
HPCI, Holdings, the Bank, and their respective affiliates. There are no provisions in HPCIs articles of incorporation limiting any
of its officers, directors, shareholders, or affiliates from having any direct
or indirect financial interest in any asset to be acquired or disposed of by
HPCI or in any transaction in which it has an interest or from engaging in
acquiring, holding, and managing its assets. It is expected that the Bank will
have direct interests in transactions with HPCI including, without limitation,
the sale of assets to HPCI; however, it is not anticipated that any of HPCIs
officers or directors will have any interests in such assets, other than as
borrowers or guarantors of loans underlying HPCIs participation interests, in
which case such loans would be on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the time for
comparable transaction with others and would not involve more than the normal
risk of collectibility or present other unfavorable features. At December 31,
2003, there were no direct or indirect financial interests in any asset of HPCI
by any of its officers or directors. Other Management Policies and Programs General In administering HPCIs participation interests and other authorized
investments, the Bank has a high degree of autonomy. HPCI, however, has
policies to guide its administration with respect to the Banks underwriting 6




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standards, the acquisition and disposition of assets, credit risk
management, and certain other activities. These policies, which are discussed
below, may be amended or revised from time to time at the discretion of HPCIs
board of directors, subject in certain circumstances, to the approval of a
majority of HPCIs independent directors, but without a vote of its
shareholders. Underwriting Standards The Bank has represented to Holdings, and Holdings has represented to
HPCI, that the loans underlying HPCIs participation interests were
originated in accordance with underwriting policies customarily employed by the
Bank during the period in which the loans were originated. The Bank emphasizes
in-market lending, which means lending to borrowers that are located where
the Bank or its affiliates have branches or loan origination offices. The Bank
avoids transactions perceived to have unacceptably high risk, as well as
excessive industry and other concentrations. Some of the loans, however, were acquired by the Bank in connection with
the acquisition of other financial institutions. Prior to acquiring any
financial institution, the Bank performed a number of due diligence procedures
to assess the overall quality of the target institutions loan portfolio. These
procedures included the examination of underwriting standards used in the
origination of loan products by the target institution, the review of loan
documents and the contents of selected loan files, and the verification of the
past due status and payment histories of selected borrowers. Through its due
diligence procedures, the Bank obtained a sufficient level of comfort
pertaining to the underwriting standards used by the target institution and
their influence on the quality of the portfolio. Even though the Bank did not
and does not warrant those standards, the Bank found them acceptable in
comparison to HPCIs underwriting standards in cases where the Bank had made a
favorable decision to acquire the institution as a whole. Asset Acquisition and Disposition Policies It is HPCIs policy to purchase from the Bank participation interests
generally in loans that:  
    
    are performing, meaning they have no more than two payments past due,
    
    are in accruing status,
    
    are not made to related parties of HPCI, Huntington, or the Bank,
    
    are secured by real property such that they are REIT qualifying, and
    
    have not been previously sold, securitized, or charged-off either in whole or in part. HPCIs policy also allows for investment in assets that are not
REIT-Qualified Assets up to but not exceeding the statutory limitations imposed
on organizations that qualify as REITs. In the past, Holdings has purchased
from the Bank and sold to HPCI participation interests in loans not secured by
real property because of available proceeds from loan repayments and pay-offs.
Management, under this policy, also has the discretion to purchase other assets
to maximize its return to shareholders. It is anticipated that from time to time HPCI will receive participation
interests in additional real estate loans from the Bank on a basis consistent
with secondary market standards pursuant to the loan participation and
subparticipation agreements, out of proceeds received in connection with the
repayment or disposition of loan participation interests in HPCIs portfolio.
Although HPCI is permitted to do so, it has no present plans or intentions to
purchase loans or loan participation interests from unaffiliated third parties.
It is currently anticipated that participation interests in additional loans
acquired by HPCI will be of the types described above under the heading
General Description of Assets, although HPCI is not precluded from purchasing
additional types of loans or loan participation interests. HPCI may continue to acquire from time to time limited amounts of
participation interests in loans that are not commercial or residential loans,
such as automobile loans and equipment loans, or other authorized investments.
Although currently there is no intention to acquire any mortgage-backed
securities representing interests in or obligations backed by pools of mortgage
loans that will be secured by single-family residential, multi-family, or
commercial real estate properties located throughout the United States, HPCI is
not restricted from doing so. HPCI does not intend to acquire any interest-only
or principal-only mortgage-backed securities. HPCI also will not be precluded
from investing in mortgage-backed securities when the Bank is the sponsor or
issuer. At December 31, 2003, HPCI did not hold any mortgage-backed
securities. HPCI currently anticipates that it will not acquire the right to service
any loan underlying a participation interest that it acquires in the future and
that the Bank will act as servicer of any such additional loans. HPCI
anticipates that any servicing arrangement that it enters into in the future
with the Bank will contain fees and other terms that would 7




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be substantially equivalent to or more favorable to HPCI than those that
would be contained in servicing arrangements entered into with third parties
unaffiliated with HPCI. HPCIs policy is not to acquire any participation interest in any
commercial real estate loan that constitutes more than 5.0% of the total book
value of HPCIs real estate assets at the time of acquisition. In addition,
HPCIs policy prohibits the retention of any loan or any interest in a loan
other than an interest resulting from the acquisition of mortgage-backed
securities, which loan is collateralized by real estate located in West
Virginia or that is made to a municipality or other tax-exempt entity. HPCIs policy is to reinvest the proceeds of its assets in other
interest-earning assets such that its Funds from Operations (FFO), which
represents cash flows from operations, over any period of four fiscal quarters
will be anticipated to equal or exceed 150% of the amount that would be
required to pay full annual dividends on the Class A, Class C, and Class D
preferred securities, except as may be necessary to maintain its status as a
REIT. At December 31, 2003, 2002, and 2001, HPCIs FFO of $288.2 million, $636.9
million, and $465.7 million significantly exceeded the minimum amount that would
be required to pay full dividends on Class A, Class C and Class D
securities of $21.0 million,
$24.2 million, and $6.2
million, respectively. HPCIs articles of incorporation provide that it cannot
amend or change this policy with respect to the reinvestment of proceeds
without the consent or affirmative vote of the holders of at least two-thirds
of the Class C preferred securities and two thirds of the Class D preferred
securities, voting as separate classes. Credit Risk Management Policies It is expected that participation interests in each commercial or
residential real estate loan acquired in the future will represent a first lien
position and will be originated by the Bank, one of its affiliates, or an
unaffiliated third party in the ordinary course of its real estate lending
activities based on the underwriting standards generally applied by or
substantially similar to those applied by the Bank at the time of origination
for its own account. It is also expected that all loans will be serviced by or
through the Bank pursuant to the participation agreement and subparticipation
agreement, which require servicing in conformity with any loan servicing
guidelines promulgated by HPCI and, in the case of residential real estate
loans, with FNMA and FHLMC guidelines and procedures. Other Policies HPCI intends to operate in a manner that will not subject it to regulation
under the Investment Company Act. Unless otherwise approved by its board of
directors, HPCI does not intend to:  
    
    invest in the securities of other issuers for the purpose of exercising control over such issuers;
    
    underwrite securities of other issuers;
    
    actively trade in loans or other investments;
    
    offer securities in exchange for property; or
    
    make loans to third parties, including, its officers, directors, or other affiliates. The Investment Company Act exempts entities that, directly or through
majority-owned subsidiaries, are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate (Qualifying Interests). Under current interpretations by the
staff of the Securities and Exchange Commission, in order to qualify for this
exemption, HPCI must maintain at least 55% of its assets in Qualifying
Interests and also may be required to maintain an additional 25% in Qualifying
Interests or other real estate-related assets. The assets that HPCI may acquire
therefore may be limited by the provisions of the Investment Company Act. HPCI
has established a policy, which it monitors monthly, of limiting authorized
investments that are not Qualifying Interests to no more than 20% of the value
of its total assets. HPCI has no present intention of repurchasing any of its capital
securities, and any such action would be taken only in conformity with
applicable federal and state laws and regulations and the requirements for
qualifying as a REIT. HPCI intends to distribute to its shareholders, in accordance with the
Securities and Exchange Act of 1934, as amended, annual reports containing
financial statements prepared in accordance with generally accepted accounting
principles in the United States and certified by its independent auditors.
HPCIs articles of incorporation provide that it will maintain its status as a
reporting company under the Exchange Act for so long as any of the Class C
preferred securities are outstanding and held by unaffiliated shareholders. HPCI currently makes investments and operates its business in such a
manner consistent with the requirements of the Internal Revenue Code to qualify
as a REIT. However, future economic, market, legal, tax, or other
considerations may cause its board of directors, subject to approval by a
majority of its independent directors, to 8




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determine that it is in HPCIs best interest and the best interest of its
shareholders to revoke HPCIs REIT status. The Internal Revenue Code prohibits
HPCI from electing REIT status for the five taxable years following the year of
such revocation. Employees At December 31, 2003, HPCI has six executive officers and two additional
officers, but no employees. Day-to-day activities and the servicing of the
loans underlying HPCIs participation interests are administered by the Bank.
All of HPCIs officers are also officers or employees of Huntington, the Bank,
and/or Holdings. HPCI maintains corporate records and audited financial
statements that are separate from those of Huntington, the Bank, and Holdings. Although there are no restrictions or limitations contained in HPCIs
articles of incorporation or bylaws, HPCI does not anticipate that its officers
or directors will have any direct or indirect financial interest in any asset
to be acquired or disposed of by HPCI or in any transaction in which HPCI has
an interest or will engage in acquiring, holding, and managing assets, other
than as borrowers or guarantors of loans underlying HPCIs participation
interests, in which case such loans would be on substantially the same terms,
including interest rates and collateral on loans, as those prevailing at the
time for comparable transaction with others and would not involve more than the
normal risk of collectibility or present other unfavorable features. Servicing The loans underlying HPCIs participation interests are serviced by the
Bank pursuant to the terms of (i) the participation agreement between the Bank
and HPCI, (ii) the participation agreement between the Bank and Holdings and
the subparticipation agreement between Holdings and HPCI, or (iii) the
participation agreement between the Bank and Holdings and the subparticipation
agreements between Holdings and HPC Holdings III, Inc. and HPC Holdings-III,
Inc. and HPCI. The participation
 and subparticipation agreements require the Bank to
service the loans underlying HPCIs participation interests in a manner
substantially the same as for similar work performed by the Bank for
transactions on its own behalf. The Bank or its affiliates collect and remit
principal and interest payments, maintain perfected collateral positions, and
submit and pursue insurance claims. The Bank and its affiliates also provide
accounting and reporting services required by HPCI for its participation
interests. The Bank may, in accordance with HPCIs guidelines, dispose of any loans that become
classified, are placed in a non-performing status, or are renegotiated due to
the financial deterioration of the borrower. The Bank is required to pay all
expenses related to the performance of its duties under the participation and
subparticipation agreements, including any payment to its affiliates for
servicing the loans. The Bank or its affiliates may, in accordance
with HPCIs guidelines, institute foreclosure
proceedings, exercise any power of sale contained in
any mortgage or deed of trust, obtain a deed in lieu of foreclosure, or
otherwise acquire title to a mortgaged property underlying a real estate loan
by operation of law or otherwise in accordance with the terms of the
participation and subparticipation agreements. Under the participation and subparticipation agreements, the Bank has the
right, in the exercise of its reasonable discretion and in accordance with
prudent banking practices, to give consents, waivers, and modifications of the
loan documents to the same extent as if the loans were wholly owned by the
Bank; provided, however, that the Bank shall not grant or agree to any (i)
waiver of any payment default, (ii) extension of the maturity, (iii) reduction
of the rate or rates of interest with respect to the loans, (iv) forgiveness or
reduction of the principal sum of the loans, (v) increase the lending formula
or advance rates, (vi) waiver of any right to elect to foreclose on any loan in
default, or (vii) amendment or modification of the financial covenants
contained in the loan documents that would make such financial covenants less
restrictive with respect to any of the borrowers without the prior written
consent of Holdings or HPCI, except that the Bank shall be permitted to grant
or agree to any of such consents, waivers or modifications pursuant to and in
accordance with guidelines and limitations provided by Holdings or HPCI to the
Bank in writing from time to time. The Bank has the right to accept payment or prepayment of the whole
principal sum and accrued interest in accordance with the terms of the loans,
waive prepayment charges in accordance with the Banks policy for loans in
which no participation interest has been granted, and accept additional
security for the loans. No specific term is specified in the participation
agreement and subparticipation agreement; the agreements may be terminated by
mutual agreement of the parties at any time, without penalty. Due to the
relationship among HPCI, HPC Holdings-III, Inc., Holdings, and the Bank, it is
not anticipated that these agreements will be terminated by any party in the
foreseeable future. 9




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The Bank, in its role as servicer under the terms of the loan
participation agreement, receives a loan servicing fee designed as a
reimbursement for costs incurred to service the underlying loan. The amount and
terms of the fee are determined by mutual agreement of the Bank, Holdings, HPC
Holdings-III, Inc., and HPCI from time to time during the term of the
participation agreement and subparticipation agreement. Periodically, a review
and analysis of loan servicing operations is conducted by the Bank. As a
result, among other things, the cost to service an individual loan is
calculated and is used as a basis to determine fair compensation for services
rendered. Additional information regarding the servicing fee rates are set forth under
the caption Non-Interest Income and Non-Interest Expense of Managements
Discussion and Analysis of Financial Condition and Results of Operations in
Part II, Item 7 of this report. Competition Competition in the form of price and service from other banks and
financial companies such as savings and loans, credit unions, finance
companies, and brokerage firms is intense in most of the markets served by
Huntington and its subsidiaries. Mergers between and the expansion of financial
institutions both within and outside Ohio have provided significant competitive
pressure in major markets. Since 1995, when federal interstate banking
legislation became effective that made it permissible for bank holding
companies in any state to acquire banks in any other state, and for banks to
establish interstate branches (subject to certain limitations by individual
states), actual or potential competition in each of Huntingtons markets has
been intensified. Internet banking also competes with Huntingtons business.
This competition impacts Huntingtons ability to attract new business,
particularly in the form of loans secured by real estate, and, therefore, also
affects HPCIs availability to invest in participation interests in such loans. Regulatory Matters HPCI is an indirect subsidiary of the Bank and therefore, regulatory
authorities have the right to examine HPCI and its activities and, under
certain circumstances, to impose restrictions on the Bank or HPCI. The Bank is
subject to examination and supervision by the OCC. In addition to the impact of
federal and state regulation, the Bank is affected significantly by the actions
of the Federal Reserve Board as it attempts to control the money supply and
credit availability in order to influence the economy. Business Risks HPCI 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. In addition to the other information included in this report, readers should
carefully consider that the following important factors, among others, could
materially impact HPCIs business, future results of operations, and future
cash flows. HPCI relies on the Banks credit underwriting standards and on-going
process of credit assessment; there can be no assurance that the Banks
standards and assessments will protect HPCI from significant credit losses on
loans underlying its participation interests. To date, HPCI has purchased, and intends to continue to purchase, all of
its participation interests in loans originated by or through the Bank and its
affiliates. After HPCI purchases the participation interests, the Bank
continues to service the underlying loans. Accordingly, in managing its credit
risk, HPCI relies on the Banks credit underwriting standards and on-going
process of credit assessment. The Banks exposure to credit risk is managed
through the use of consistent underwriting standards that emphasize in-market
lending while avoiding highly leveraged transactions as well as excessive
industry and other concentrations. The Banks credit administration function
employs risk management techniques to ensure that underlying loans adhere to
corporate policy and problem loans underlying HPCIs participation interests
are promptly identified. There can be no assurance that the Banks credit
underwriting standards and its on-going process of credit assessment will
protect HPCI from significant credit losses on loans underlying its
participation interests. 10




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The loans underlying HPCIs participation interests are concentrated in
Ohio, Indiana, Kentucky and Michigan, and adverse conditions in those states,
in particular, could negatively impact result of operations and ability to pay
dividends. At December 31, 2003, 94.8% of the underlying loans in all participation
interests consisted of loans located in these four states. Consequently, the
portfolio may experience a higher default rate in the event of adverse
economic, political, or business developments or natural hazards in these
states and may affect the ability of borrowers to make payments of principal
and interest on the underlying loans. In the event of any adverse development
or natural disaster, HPCIs results of operations and ability to pay dividends
on preferred and common securities could be adversely affected. The loans underlying participation interests are subject to local economic
conditions that could negatively affect the value of the collateral securing
such loans and/or the results of HPCIs operations. The value of the collateral underlying HPCIs loans and/or the results of
its operations could be affected by various conditions in the economy, all of
which are beyond HPCIs control. These include local and other economic
conditions affecting real estate and other collateral values; the continued
financial stability of a borrower and the borrowers ability to make loan
principal and interest payments, which may be adversely affected by job loss,
recession, divorce, illness, or personal bankruptcy. These also include the
ability of tenants to make lease payments; the ability of a property to attract
and retain tenants, which may be affected by conditions such as an oversupply
of space or a reduction in demand for rental space in the area, the
attractiveness of properties to tenants, competition from other available
space, and the ability of the owner to pay leasing commissions, provide
adequate maintenance and insurance, pay tenant improvement costs, and make
other tenant concessions. Furthermore, interest rate levels and the
availability of credit to refinance loans at or prior to maturity and increased
operating costs, including energy costs, real estate taxes, and costs of
compliance with environmental controls and regulations are also various
conditions in the economy that effect the value of the underlying collateral
and the result of HPCIs operations. HPCIs concentration in participation interests in commercial real estate
loans are subject to certain risks inherent in the underlying commercial real
estate assets. At December 31, 2003, 78.5% of HPCIs assets, as measured by aggregate
outstanding principal amount, consisted of participation interests in
commercial real estate loans. Commercial real estate loans generally tend to
have shorter maturities than residential real estate loans and may not be fully
amortizing, meaning they may have a significant principal balance or balloon
payment due on maturity. Commercial real estate properties tend to be unique
and are more difficult to value than single-family residential real estate
properties. They are also subject to relatively greater environmental risks and
to the corresponding burdens and costs of compliance with environmental laws
and regulations. Due to these risks, HPCI may experience higher rates of
default on its participation interests in commercial real estate loans. A decline in the Banks capital levels may result in preferred securities
being subject to a conditional exchange into Bank preferred securities at a
time when the Banks financial condition is deteriorating. Consequently, the
likelihood of dividend payments, as well as the liquidation preference,
taxation, voting rights, and liquidity of securities would be negatively
impacted. A decline in the performance and capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could result in the
exchange, if so directed by the OCC, of HPCIs preferred securities for Bank
preferred securities, without shareholder approval or any shareholder action.
This would represent an investment in the Bank and not in HPCI. Under these
circumstances, there would likely be a significant loss associated with this
investment. Also, since preferred shareholders of HPCI would become preferred
shareholders of the Bank at a time when the Banks financial condition has
deteriorated, it is unlikely that the Bank would be in a financial position to
make any dividend payments on the Bank preferred securities. In the event of a liquidation of the Bank, the claims of depositors and
creditors of the Bank are entitled to priority in payment over the claims of
holders of equity interests such as the Bank preferred securities, and,
therefore, preferred shareholders likely would receive substantially less than
would have been received had the preferred securities not been exchanged for
Bank preferred securities. The exchange of the preferred securities for Bank preferred securities
would most likely be a taxable event to shareholders under the Internal Revenue
Code and, in that event, shareholders would incur a gain or loss, as the case 11




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may be, measured by the difference between the basis in the preferred
securities and the fair market value of the Bank preferred securities received
in the exchange. Although the terms of the Bank preferred securities are substantially
similar to the terms of HPCIs preferred securities, there are differences,
such as the Bank preferred securities do not have any voting rights or any
right to elect independent directors if dividends are missed. In addition, the
Bank preferred securities will not be listed on the NASDAQ Stock Market or any
exchange and a market for them may never develop. Bank regulators may limit HPCIs ability to implement its business plan
and may restrict its ability to pay dividends. Because HPCI is an indirect subsidiary of the Bank, regulatory authorities
have the right to examine HPCI and its activities and, under certain
circumstances, impose restrictions on the Bank or HPCI which could impact
HPCIs ability to conduct business pursuant to its business plan and which
could adversely affect its financial condition and results of operations. If the OCC determines that the Banks relationship with HPCI results in an
unsafe and unsound banking practice, the OCC and other regulators of the Bank
have the authority to restrict HPCIs ability to transfer assets, restrict its
ability to make distributions to shareholders or redeem preferred securities,
or to require the Bank to sever its relationship with HPCI or divest its
ownership in HPCI. Certain of these actions by the OCC would likely result in
HPCIs failure to qualify as a REIT. The payment of dividends on the preferred
securities could also be subject to regulatory limitations if the Bank becomes
under-capitalized for purpose of regulations issued by the OCC, as described
in this report under the heading Dividend Policy and Restrictions. Legal and regulatory limitations on the payment of dividends by the Bank
could also affect HPCIs ability to pay dividends to unaffiliated third
parties, including the preferred shareholders. Since HPCI, HPCII, HPCH-III, and
Holdings are members of the Banks consolidated group, payment of common and
preferred dividends by the Bank and/or any member of its consolidated group to
unaffiliated third parties, including payment of dividends to the shareholders
of preferred securities, would require regulatory approval if aggregate
dividends on a consolidated basis exceed certain limitations. Regulatory
approval is required prior to the Banks declaration of any dividends in excess
of available retained earnings. The amount of dividends that may be declared
without regulatory approval is further limited to the sum of net income for the
current year and retained net income for the preceding two years, less any
required transfers to surplus or common stock. Dividends are not cumulative; preferred shareholders are not entitled to
receive dividends unless declared by HPCIs board of directors. Dividends on the preferred securities are not cumulative. Consequently, if
the board of directors does not declare a dividend on the preferred securities
for any quarterly period, including if prevented by bank regulators, preferred
shareholders will not be entitled to receive that dividend whether or not funds
are or subsequently become available. The board of directors may determine that
it would be in HPCIs best interests to pay less than the full amount of the
stated dividends on the preferred securities or no dividends for any quarter
even though funds are available. Factors that would generally be considered by
the board of directors in making this determination are the amount of
distributable funds, HPCIs financial condition and capital needs, the impact
of current and pending legislation and regulations, economic conditions, tax
considerations, and HPCIs continued qualification as a REIT. If full dividends
on the Class A, Class C, and Class D preferred securities have not been paid
for six full dividend periods, the holders of the Class C and Class D preferred
securities, voting together as one class, will have the right to elect two
independent directors in addition to those already on the board. HPCI and the Bank maintain internal operational controls. If HPCIs and/or
the Banks systems of internal controls should fail to work as expected, if
their systems were to be used in an unauthorized manner, or if employees were
to subvert the systems of internal controls, significant losses to HPCI could
occur. HPCI, through the Bank, establishes and maintains systems of internal
operational controls that provide Management with timely and accurate
information about its level of operational risk. While not foolproof, these
systems have been designed to manage operational risk at appropriate, cost
effective levels. The Bank and HPCI have also established procedures that are
designed to ensure that policies relating to conduct, ethics, and business
practices are followed. From time to time, HPCI experiences losses from
operational risk, including the effects of operational errors. 12




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While Management continually monitors and improves their systems of
internal controls, data processing systems, and corporate-wide processes and
procedures, there can be no assurance that HPCI will not suffer such losses in
the future. HPCI is dependent, in virtually every phase of its operations, on the
diligence and skill of the officers and employees of the Bank, and its
relationship with the Bank may create potential conflicts of interest. The Bank is involved in virtually every aspect of HPCIs existence. As of
December 31, 2003, all of its officers and six of its nine directors are also
officers or directors of the Bank or its affiliates. Officers that are common
with the Bank devote less than a majority of their time to managing HPCIs
business. The Bank has the right to elect all of HPCIs directors, including
independent directors, except under limited circumstances if it fails to pay
future dividends. The Bank and its affiliates have interests that are not
identical to HPCIs and, therefore, conflicts of interest could arise in the
future with respect to transactions between or among the Bank, Holdings, HPCII,
HPCH-III, and HPCI. The Bank administers HPCIs day-to-day activities under the terms of
participation and subparticipation agreements. The parties to these agreements
are all affiliated and, accordingly, these agreements were not the result of
arms-length negotiations and may be modified at any time in the future.
Although the modification of the agreements requires the approval of a majority
of independent directors, the Bank, through its ownership of Holdings and
HPCH-IIIs common stock and Holdings and HPCH-IIIs ownership of HPCIs common
stock, controls the election of all of the directors, including independent
directors. Therefore, HPCI cannot assure shareholders modifications to the
participation and subparticipation agreements will be on terms as favorable to
it as those that could have been obtained from unaffiliated third parties. Huntington, the owner of all the Banks common shares, may have investment
goals and strategies that differ from those of the holders of HPCIs preferred
securities. In addition, neither Huntington nor the Bank has a policy
addressing the treatment of new business opportunities. Thus, new business
opportunities identified by Huntington or the Bank may be directed to
affiliates other than HPCI. HPCIs board of directors has broad discretion to
revise its investment and operating strategy without shareholder approval. The
Bank, through its direct and indirect ownership of HPCH-IIIs and HPCIIs
common stock and their ownership of HPCIs common stock, controls the election
of all of HPCIs directors, including independent directors. Consequently,
HPCIs investment and operating strategies will largely be directed by
Huntington and the Bank. HPCI is dependent on the diligence and skill of the officers and employees
of the Bank for the selection and structuring of the loans underlying its
participation interests and other authorized investments. The Bank selected
the amount, type, and price of loan participation interests and other assets
that were acquired from the Bank and its affiliates. HPCI anticipates that it
will continue to acquire all or substantially all of its assets from the Bank
or its affiliates for the foreseeable future. Although these acquisitions are
made within investment policies, neither HPCI nor the Bank obtained any
third-party valuations. HPCI does not intend to do so in the future. Although
HPCI has policies to guide the acquisition and disposition of assets, these
policies may be revised or exceptions may be approved from time to time at the
discretion of the board of directors without a vote of shareholders. Changes in
or exceptions made to these policies could permit the acquisition of lower
quality assets. HPCI is dependent on the Bank and others for monitoring and servicing the
loans underlying its participation interests. Conflicts could arise as part of
such servicing, particularly with respect to loans that are placed on
nonaccrual status. While HPCI believes that the Bank will diligently pursue
collection of any non-performing assets, HPCI cannot assure shareholders that
this will occur. HPCIs ability to make timely payments of dividends on the
preferred and common securities will depend in part upon the Banks prompt
collection efforts on its behalf. HPCI pays substantial servicing fees to the
Bank. HPCI paid servicing fees of $7.6 million in 2003, $6.7 million in 2002,
and $8.3 million in 2001. The Bank may seek to exercise its influence over HPCIs affairs so as to
cause the sale of its assets and their replacement by lesser quality assets
acquired from the Bank or elsewhere. This could adversely affect HPCIs
business and its ability to make timely payment of dividends on the preferred
and common securities. HPCIs assets may be used to guarantee certain of the Banks obligations
that will have a preference over the holders of HPCIs preferred securities. The Bank is eligible to obtain advances from various federal and
government-sponsored agencies, such as the Federal Home Loan Bank (FHLB). Any such agency that makes advances to the Bank where HPCI has acted
as a co-borrower or guarantor or has pledged its assets as collateral will have
a preference over the holders 13




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of HPCIs preferred securities. These holders would receive their
liquidation preference only to the extent there are assets available after
satisfaction of HPCIs indebtedness, if any. HPCI is not required to obtain the
consent of its shareholders in order to make such a pledge or act as
co-borrower or guarantor. The Bank has obtained a line of credit from the FHLB, which line was
capped at $1.4 billion as of December 31, 2003. As of that same date, the Bank
had borrowings of $1.3 billion under the facility. HPCI has entered into an
agreement with the Bank with respect to the pledge of HPCIs assets to
collateralize the Banks borrowings from the FHLB. The agreement provides that
the Bank will not place at risk HPCIs assets in excess of an aggregate amount
or percentage of such assets established from time to time by HPCIs board of
directors, including a majority of HPCIs independent directors. HPCIs board
has set this limit at $1 billion, which limit may be changed in the future by
the board of directors, including a majority of HPCIs independent directors.
As of December 31, 2003, HPCIs pledged collateral was limited to one-to-four
family residential mortgages and second mortgage loans, which aggregated $651
million as of that same date. A default by the Bank on its obligations to the
FHLB could adversely affect HPCIs business and its ability to make timely
dividend payments on preferred and common securities. New, or changes in existing, tax, accounting, and regulatory laws,
regulations, rules, standards, policies, and interpretations could
significantly impact strategic initiatives, results of operations, cash flows,
financial condition, and ability to pay dividends. Future governmental regulations could impose significant additional
limitations on HPCIs operations. These regulations, along with the currently
existing tax, accounting, securities, insurance, and monetary laws,
regulations, rules, standards, policies, and interpretations control the
methods by which companies conduct business, implement strategic initiatives
and tax compliance, and govern financial reporting and disclosures. These laws,
regulations, rules, standards, policies, and interpretations are constantly
evolving and may change significantly over time. Events that may not have a
direct impact on HPCI, such as the bankruptcy of major U.S. companies, have
resulted in legislators, regulators, and authoritative bodies, such as the
Financial Accounting Standards Board, the Securities and Exchange Commission,
Public Company Accounting Oversight Board and various taxing authorities to
respond by adopting and/or proposing substantive revisions to laws,
regulations, rules, standards, policies, and interpretations. The nature,
extent, and timing of the adoption of significant new laws, changes in existing
laws, or repeal of existing laws may have a material impact on HPCIs business,
results of operations, and ability to pay dividends; however, it is impossible
to predict at this time the extent to which any such adoption, change, or
repeal would impact HPCI. The extended disruption of Huntingtons vital infrastructure could
negatively impact HPCIs business, results of operations, financial condition,
and ability to pay dividends. HPCIs operations depend upon, among other things, Huntingtons and the
Banks infrastructure, including their equipment and facilities. Extended
disruption of vital infrastructure by fire, power loss, natural disaster,
telecommunications failure, computer hacking or viruses, terrorist activity or
the domestic and foreign response to such activity, or other events outside of
Huntingtons or the Banks control could have a material adverse impact on the
financial services industry as a whole and on HPCIs business, results of
operations, cash flows, financial condition, and ability to pay dividends in
particular. To mitigate this risk, Huntington has established a business
recovery plan. HPCI has no control over changes in interest rates and such changes could
negatively impact its financial condition, results of operations, and ability
to pay dividends. HPCIs income consists primarily of interest and fees on loans underlying
its participation interests. At December 31, 2003, 23% of the loans underlying
its participation interests, as measured by the aggregate outstanding principal
amount, bore interest at fixed rates and the remainder bore interest at
adjustable rates. Adjustable-rate loans decrease the risks associated with
changes in interest rates but involve other risks. As interest rates rise, the
payment by the borrower rises to the extent permitted by the terms of the loan,
and the increased payment increases the potential for default. At the same
time, the marketability of the underlying property may be adversely affected by
higher interest rates. In a declining interest rate environment, there may be
an increase in prepayments on the loans underlying HPCIs participation
interests as the borrowers refinance their mortgages at lower interest rates.
Under these circumstances, HPCI may find it more difficult to acquire
additional participation interests with rates sufficient to support the payment
of the dividends on the preferred securities. Because the rate at which
dividends are required to be paid on the Class A and C preferred securities is
fixed, there can be no assurance 14




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that a declining interest rate environment would not adversely affect
HPCIs ability to pay full, or even partial, dividends on its preferred
securities. HPCIs financial statements must conform to accounting principles
generally accepted in the United States (GAAP), which require Management to
make estimates and assumptions that affect amounts reported in the financial
statements. Actual results could differ from those estimates. The preparation of financial statements in conformity with GAAP requires
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
if a different amount within a range of estimates were used or if estimates
changed from period to period. HPCIs financial statements include estimates
related to the allowance for loan loss reserves and accruals of income and
expenses. These estimates are based on information available to Management at
the time the estimates are made. Factors involved in these estimates could
change in the future leading to a change of those estimates, which could be
material to HPCIs results of operations or financial condition. For further discussion, see Critical Accounting Policies and Use of
Significant Estimates section of Managements Discussion and Analysis of
Financial Condition and Results of Operations in Part II, Item 7 of this
report. HPCI could suffer adverse tax consequences if it failed to qualify as a
REIT. No assurance can be given that HPCI will be able to continue to operate in
such a manner so as to remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex tax law provisions for
which there are only limited judicial or administrative interpretations and
involves the determination of various factual matters and circumstances not
entirely within its control. No assurance can be given that new legislation or
new regulations, administrative interpretations, or court decisions will not
significantly change the tax laws in the future with respect to qualification
as a REIT or the federal income tax consequences of such qualification in a way
that would materially and adversely affect HPCIs ability to operate. Any such
new legislation, regulation, interpretation, or decision could be the basis of
a tax event that would permit HPCI to redeem all or any preferred securities.
If HPCI were to fail to qualify as a REIT, the dividends on preferred
securities, would not be deductible for federal income tax purposes. HPCI would
face a tax liability that could consequently result in a reduction in HPCIs
net earnings after taxes. A reduction in net earnings after taxes could
adversely affect its ability to add interest-earning assets to its portfolio
and pay dividends to its preferred security holders. If in any taxable year HPCI fails to qualify as a REIT, unless it is
entitled to relief under certain statutory provisions, it would also be
disqualified from treatment as a REIT for the five taxable years following the
year its qualification was lost. As a result, the amount of funds available for
distribution to shareholders would be reduced for the year or years involved. As a REIT, HPCI generally will be required each year to distribute as
dividends to its shareholders at least 90% of REIT taxable income, excluding
capital gains. Failure to comply with this requirement would result in earnings
being subject to tax at regular corporate rates. In addition, HPCI would be
subject to a 4% nondeductible excise tax on the amount by which certain
distributions considered as paid with respect to any calendar year are less
than the sum of 85% of ordinary income for the calendar year, 95% of capital
gains net income for the calendar year, and 100% of undistributed taxable
income from prior periods. Qualification as a REIT also involves application of
other specific provisions of the Internal Revenue Code. Two specific provisions
are an income test and an asset test. At least 75% of HPCIs gross income,
excluding gross income from prohibited transactions, for each taxable year must
be derived directly or indirectly from investments relating to real property or
mortgages on real property. Additionally, at least 75% of HPCIs total assets
must be represented by real estate assets. At December 31, 2003, HPCI had
qualifying income and qualifying assets that exceeded 75%. Although HPCI intends to operate in a manner designed to qualify as a
REIT, future economic, market, legal, tax, or other considerations may cause it
to determine that it is in its best interests and the best interests of holders
of common and preferred securities to revoke the REIT election. As long as any
class of preferred securities are outstanding, any such determination may be
made without shareholder approval, but will require the approval of a majority
of independent directors. 15




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Environmental liabilities associated with real property securing loans
underlying HPCIs participation interests could reduce the fair market value of
its participation interests and make the property more difficult to sell. In its capacity of servicer, the Bank may be forced to foreclose on a
defaulted commercial mortgage and/or residential mortgage loan
underlying HPCI participation interest to recover HPCI's
investment in the mortgage loan. The Bank may be subject to environmental
liabilities in connection with the underlying real property, which could exceed
the value of the real property. Although the Bank exercises due diligence to
discover potential environmental liabilities prior to the acquisition of any
property through foreclosure, hazardous substances or wastes, contaminants,
pollutants, or their sources may be discovered on properties during the Banks
ownership or after a sale to a third party. Even though HPCI may sell to the
Bank, at fair value, the participation interest in any loan prior to the time the
real property securing that loan becomes foreclosed property, the discovery of
these liabilities, any associated costs for removal of hazardous substances,
wastes, contaminants, or pollutants, and the difficulty in selling the
underlying real estate, could have a material adverse effect on the fair value
of that loan and therefore HPCI may not recover any or all of its investment in
the underlying loan. HPCI may redeem the Class C and Class D preferred securities upon the
occurrence of certain special events and holders of such securities may receive
a redemption amount that is less than the then current market price for the
securities. At any time following the occurrence of certain special events, HPCI will
have the right to redeem the Class C and Class D preferred securities in whole,
subject to the prior written approval of the OCC. The occurrence of such an
event will not, however, give a preferred shareholder any right to request that
such Class C or Class D preferred securities be redeemed. A special event
includes:  
    
    a tax event which occurs when HPCI receives an opinion of
counsel to the effect that, as a result of a judicial decision or
administrative pronouncement, ruling, or other action or as a result
of certain changes in the tax laws, regulations, or related
interpretations, there is a significant risk that dividends with
respect to HPCIs capital stock will not be fully deductible by HPCI
or it will be subject to a significant amount of additional taxes or
governmental charges;
    
    an investment company event which occurs when HPCI receives
an opinion of counsel to the effect that, as a result of certain
changes in the applicable laws, regulations, or related
interpretations, there is a significant risk that HPCI will be
considered an investment company under the Investment Company Act of
1940; and
    
    a regulatory capital event which occurs when, as a result of
certain changes in the applicable laws, regulations, or related
interpretations, there is a significant risk that HPCIs Class C
preferred securities will no longer constitute Tier 1 capital of the
Bank (other than as a result of limitations on the portion of Tier 1
capital that may consist of minority interests in subsidiaries of
the Bank). In the event HPCI redeems its Class C or Class D preferred securities,
holders of such securities will be entitled to receive $25.00 per share plus
accrued and unpaid dividends on such shares. The redemption amount may be
significantly lower than the then current market price of the Class C or Class
D preferred securities. 
 Item 2: Properties HPCI does not own any material physical property or real estate. 
 Item 3: Legal Proceedings HPCI is not the subject of any material litigation. HPCI is not currently
involved in nor, to Managements knowledge, is currently threatened with any
material litigation with respect to the loans underlying its participation
interests other than routine litigation arising in the ordinary course of
business. 
 Item 4: Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the period
covered by this report. 16




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##### Table of Contents



Part II 
 Item 5: Market for Registrants Common Equity and Related Shareholder Matters There is no established public trading market for HPCIs common stock. As
of March 30, 2004, there were three common shareholders of record, all of which
are affiliates of the Bank. During 2003, 2002 and 2001, dividends of $289.6
million, $382.8 million and $539.2 million were paid to common shareholders,
respectively, a large majority of which were paid on the last business day in
each year. Information regarding restrictions on dividends, as required by this item,
is set forth in Item 1 Dividend Policy and Restrictions. No HPCI securities
were issued under compensation plans. 
 Item 6: Selected Financial Data The data presented below represents selected financial data relative to
HPCI for, and as of the end of, the years ended December 31, 2003, 2002, 2001,
2000 and 1999. (in thousands of dollars): Table 4 - Selected Financial Data (in thousands of dollars)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999STATEMENTS OF INCOME:Interest and fee income
    
    $
    274,401
    
    
    $
    347,754
    
    
    $
    526,445
    
    
    $
    549,718
    
    
    $
    497,527Provision for loan losses
    
    
    (41,219
    )
    
    
    (161
    )
    
    
    48,510
    
    
    
    2,293
    
    
    
    Non-interest income
    
    
    6,901
    
    
    
    6,759
    
    
    
    1,646
    
    
    
    
    
    
    
    Non-interest expense
    
    
    13,886
    
    
    
    13,282
    
    
    
    10,015
    
    
    
    7,983
    
    
    
    8,234Net income before
preferred dividends
    
    
    308,539
    
    
    
    341,437
    
    
    
    469,540
    
    
    
    539,442
    
    
    
    489,293Dividends on preferred stock
    
    
    18,911
    
    
    
    23,814
    
    
    
    21,827
    
    
    
    80
    
    
    
    80Net income applicable
to common shares
    
    
    289,628
    
    
    
    317,623
    
    
    
    447,713
    
    
    
    539,362
    
    
    
    489,213Dividends on common stock
    
    
    289,628
    
    
    
    382,840
    
    
    
    539,170
    
    
    
    458,335
    
    
    
    413,760BALANCE SHEET HIGHLIGHTS:At period end:Loan participation interests, net
of allowance for loan losses
    
    $
    5,218,536
    
    
    $
    4,893,137
    
    
    $
    5,203,286
    
    
    $
    5,744,822
    
    
    $
    5,939,286Total assets
    
    
    5,405,978
    
    
    
    5,517,021
    
    
    
    5,948,759
    
    
    
    6,898,273
    
    
    
    6,219,362Total shareholders equity
    
    
    5,405,978
    
    
    
    5,516,351
    
    
    
    5,948,728
    
    
    
    6,898,273
    
    
    
    6,218,632Average balances:Loan participation interests, net
of allowance for loan losses
    
    $
    5,027,857
    
    
    $
    5,098,098
    
    
    $
    6,261,235
    
    
    $
    5,997,188
    
    
    $
    6,201,061Total assets
    
    
    5,647,772
    
    
    
    6,052,136
    
    
    
    7,044,550
    
    
    
    6,610,388
    
    
    
    6,530,939Total shareholders equity
    
    
    5,643,692
    
    
    
    6,044,404
    
    
    
    7,043,309
    
    
    
    6,610,389
    
    
    
    6,530,943KEY RATIOS AND STATISTICS:Net interest margin
    
    
    4.77
    %
    
    
    5.82
    %
    
    
    7.46
    %
    
    
    8.28
    %
    
    
    7.84
    %Return on average assets
    
    
    5.13
    
    
    
    5.25
    
    
    
    6.36
    
    
    
    8.16
    
    
    
    7.49Return on average equity
    
    
    5.13
    
    
    
    5.25
    
    
    
    6.36
    
    
    
    8.16
    
    
    
    7.49Dividend payout ratio
    
    
    100.00
    
    
    
    121.00
    
    
    
    121.00
    
    
    
    85.00
    
    
    
    85.00Average shareholders equity to
average assets
    
    
    99.93
    
    
    
    99.87
    
    
    
    99.98
    
    
    
    100.00
    
    
    
    100.00Preferred dividend coverage ratio
    
    
    16.32
    x
    
    
    14.34
    x
    
    
    21.51
    x
    
    NM
    
    
    NANM, Not a meaningful value.
 All
of HPCIs common stock is owned by Huntington, HPCII, and HPCH-III and,
therefore, earnings per common share information is not presented. At the end
of all years presented, HPCI did not have any interest-bearing liabilities and
therefore, no liabilities are presented under this item. 17




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##### Table of Contents



Item 7: Managementss Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION Huntington Preferred Capital, Inc. (HPCI) is an Ohio corporation operating
as a real estate investment trust (REIT) for federal income tax purposes.
HPCIs principal business objective is to acquire, hold, and manage mortgage
assets and other authorized investments that will generate net income for
distribution to its shareholders. HPCI is a party to an amended and restated Loan Subparticipation Agreement
with Holdings, a Loan Subparticipation Agreement with HPCH-III, and
an amended and restated Loan
Participation Agreement with the Bank. The Bank is required, through its
participation and/or subparticipation agreements, to service HPCIs loan
portfolio in a manner substantially the same as for similar work for
transactions on its own behalf. The Bank also collects and remits principal and
interest payments, maintains perfected collateral positions, and submits and
pursues insurance claims. In addition, the Bank provides to HPCI accounting and
reporting services as required. The Bank is required to pay all expenses
related to the performance of its duties under the participation and
subparticipation agreements. All of these participation interests to date were
acquired directly or indirectly from the Bank. Forward-looking Statements This report, including managements discussion and analysis of financial
condition and results of operations, contains forward-looking statements about
HPCI. These include descriptions of products or services, plans, or objectives
of Management for future operations, and forecasts of its 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 under the heading Business Risks included in Item 1 of this
report and other factors described from time to time in HPCIs other filings
with the Securities and Exchange Commission (SEC). 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. HPCI does not 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. Critical Accounting Policies and Use of Significant Estimates HPCIs financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The preparation of
financial statements in conformity with GAAP requires Management to establish
critical accounting policies and make accounting estimates, assumptions, and
judgments that affect amounts recorded and reported in its financial
statements. Note 1 to the consolidated financial statements included in this
report lists significant accounting policies used by Management in the
development and presentation of HPCIs financial statements. This discussion
and analysis, the significant accounting policies, and other financial
statement disclosures identify and address key variables and other qualitative
and quantitative factors that are necessary for an understanding and evaluation
of the organization and its financial position, results of operations, and cash
flows. An accounting estimate requires assumptions about uncertain matters that
could have a material effect on the financial statements if a different amount
within a range of estimates were used or if estimates changed from period to
period. Readers of this report should understand that estimates are made under
facts and circumstances at a point in time, and changes in those facts and
circumstances could produce actual results that differ from when those
estimates were made. Management has identified the allowance for loan losses
(ALL) as the most significant accounting estimate. At December 31, 2003, the
ALL was $84.5 million. The ALL represents Managements estimate as to the
level of a reserve considered appropriate to absorb inherent credit losses in
the loan portfolio. Many factors affect the ALL, some quantitative, some
subjective. Management believes the process for determining the ALL considers
the potential factors that could result in credit losses. However, the process
includes judgmental elements and may be subject to significant change. To the
extent actual outcomes differ from Management estimates, additional provision
for credit losses could be required, which could adversely affect earnings or
financial performance in future periods. A discussion about the process used
to estimate the ALL is presented in the Credit Risk section of Managements
Discussion and Analysis in this report. 18




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##### Table of Contents



Distribution of Florida Loan Participation Interests On December 31, 2001, in anticipation of the eventual sale by the Bank to
SunTrust Banks, Inc. (SunTrust) of its Florida banking operations, which closed
on February 15, 2002, HPCI completed its $1.3 billion distribution to common
shareholders, Holdings and Huntington. This distribution consisted of cash and
the net book value of participation interests in loans that were included in
the sale to SunTrust, including the related accrued interest and allowance for
loan losses. This distribution represented approximately 17% of HPCIs total
assets as of December 31, 2001. OVERVIEW HPCIs income is primarily derived from its participation in loans
acquired from the Bank and Holdings. Income varies based on the level of these
assets and their respective interest rates. The cash flows from these assets
are used to satisfy HPCIs preferred dividend obligations. The preferred stock
is considered equity and, therefore, the dividends are not reflected as interest
expense. HPCI reported net income before preferred dividends of $308.5 million for
2003, $341.4 million for 2002, and $469.5 million for 2001. Net income
available to common shareholders was $289.6 million, $317.6 million, and $447.7
million for the same respective periods. Average assets approximated average
shareholders equity (including preferred stock) and, therefore, return on
average assets (ROA) and return on average equity (ROE) were the same for all
annual periods presented. ROA and ROE were 5.13% for 2003, 5.25% for 2002, and
6.36% for 2001. The reason amounts in 2003 and 2002 are less than
2001 is due to the distribution of Florida loan participation interests on December 31,
2001, as previously discussed, as well as a decline in interest rates. At December 31, 2003 and 2002, HPCI had total assets and total equity
(including preferred stock) of $5.4 billion and $5.5 billion, respectively. At
the most recent year end, an aggregate of $5.3 billion, or 98.1% of total
assets, consisted of 100% participation interests in loans, while at the prior
year end, an aggregate of $5.0 billion, or 91.2% of total assets, consisted of
99% participation interests in loans. HPCI has not acquired
additional participation interests in commercial loans in 2003, but
did acquire participation interests in $269.8 million of residential
real estate loans in June 2003. The following table shows the composition
of HPCIs gross participation interests in loans at the end of the most recent
five years: Table 5 - Participation Interests in Loans % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total(in thousands of dollars)
    
    2003
    
    Assets
    
    2002
    
    Assets
    
    2001
    
    Assets
    
    2000
    
    Assets
    
    1999
    
    AssetsAt December 31,Commercial
    
    $
    147,211
    
    
    
    2.7
    %
    
    $
    344,858
    
    
    
    6.3
    %
    
    $
    646,509
    
    
    
    10.9
    %
    
    $
    614,956
    
    
    
    8.9
    %
    
    $
    813,809
    
    
    
    13.1
    %Commercial real estate
    
    
    4,245,092
    
    
    
    78.5
    
    
    
    3,922,467
    
    
    
    71.1
    
    
    
    3,678,061
    
    
    
    61.8
    
    
    
    3,894,527
    
    
    
    56.5
    
    
    
    3,688,669
    
    
    
    59.3Consumer
    
    
    622,575
    
    
    
    11.5
    
    
    
    612,357
    
    
    
    11.1
    
    
    
    783,735
    
    
    
    13.2
    
    
    
    971,594
    
    
    
    14.1
    
    
    
    791,396
    
    
    
    12.7Residential real estate
    
    
    288,190
    
    
    
    5.3
    
    
    
    153,808
    
    
    
    2.8
    
    
    
    270,671
    
    
    
    4.6
    
    
    
    355,571
    
    
    
    5.2
    
    
    
    749,563
    
    
    
    12.1Total
    
    $
    5,303,068
    
    
    
    98.0
    %
    
    $
    5,033,490
    
    
    
    91.3
    %
    
    $
    5,378,976
    
    
    
    90.5
    %
    
    $
    5,836,648
    
    
    
    84.7
    %
    
    $
    6,043,437
    
    
    
    97.2
    %
 Shareholders equity (including preferred stock) declined from $5.5
billion at December 31, 2002, to $5.4 billion at December 31, 2003. This
reflected the aggregate dividend payments on the common and preferred
securities and the return of capital to HPCIs common shareholders during the
recent year offset by the $308.5 million of net income in 2003. 19




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##### Table of Contents



RESULTS OF OPERATIONS Interest and Fee Income HPCIs primary source of revenue is interest and fee income on its
participation interests in loans. The table below shows the average annual
balances, interest and fee income, and yields for the twelve-month periods
ended December 31: Table 6 - Interest and Fee Income 2003
    
    2002
    
    2001Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    Average(in millions of dollars)
    
    Balance
    
    Income
    
    Yield
    
    Balance
    
    Income
    
    Yield
    
    Balance
    
    Income
    
    YieldLoan participation interests:Commercial
    
    $
    249.3
    
    
    $
    11.4
    
    
    
    4.53
    %
    
    $
    503.2
    
    
    $
    25.8
    
    
    
    5.13
    %
    
    $
    560.1
    
    
    $
    41.5
    
    
    
    7.41
    %Commercial real estate
    
    
    4,066.2
    
    
    
    191.7
    
    
    
    4.65
    
    
    
    3,846.6
    
    
    
    219.4
    
    
    
    5.70
    
    
    
    4,182.5
    
    
    
    312.1
    
    
    
    7.46Consumer
    
    
    575.1
    
    
    
    50.8
    
    
    
    8.84
    
    
    
    697.5
    
    
    
    75.2
    
    
    
    10.78
    
    
    
    1,068.0
    
    
    
    102.7
    
    
    
    9.62Residential real estate
    
    
    254.4
    
    
    
    14.1
    
    
    
    5.55
    
    
    
    211.3
    
    
    
    15.0
    
    
    
    7.10
    
    
    
    558.2
    
    
    
    42.2
    
    
    
    7.56Total loan participations
    
    
    5,144.9
    
    
    
    268.1
    
    
    
    5.16
    
    
    
    5,258.6
    
    
    
    335.4
    
    
    
    6.38
    
    
    
    6,368.8
    
    
    
    498.5
    
    
    
    7.83Interest bearing deposits
in banks
    
    
    546.3
    
    
    
    6.3
    
    
    
    1.14
    
    
    
    716.6
    
    
    
    12.3
    
    
    
    1.72
    
    
    
    692.8
    
    
    
    27.9
    
    
    
    4.02Total
    
    $
    5,691.3
    
    
    $
    274.4
    
    
    
    4.77
    %
    
    $
    5,975.2
    
    
    $
    347.7
    
    
    
    5.82
    %
    
    $
    7,061.6
    
    
    $
    526.4
    
    
    
    7.46
    %
 The declines in interest and fee income experienced during 2003 and 2002
were due to declines in interest rates and lower earning assets. The decrease
in yields was primarily driven by participations in commercial real estate
loans, which decreased to 4.65% in 2003 from 5.70% and 7.46% in 2002 and 2001,
respectively. The declines in the yields earned on participation interests in
both 2003 and 2002 were indicative of the changes in the interest rate
environment during the periods. The table below shows changes in interest and fee income for the twelve
months ended December 31, 2003 and 2002 due to volume and rate variances for
each category of earning assets. The change in interest and fees not solely due
to changes in volume or rates has been allocated in proportion to the absolute
dollar amounts of the change in volume and rate. Table 7 - Changes in Interest and Fee Income 2003
    
    2002Increase (Decrease) From
    
    Increase (Decrease) FromPrevious Year Due To:
    
    Previous Year Due To:(in millions of dollars)
    
    Volume
    
    Yield
    
    Total
    
    Volume
    
    Yield
    
    TotalLoan participation interests:Commercial
    
    $
    (12.3
    )
    
    $
    (2.0
    )
    
    $
    (14.3
    )
    
    $
    (3.9
    )
    
    $
    (11.8
    )
    
    $
    (15.7
    )Commercial real estate
    
    
    11.4
    
    
    
    (39.1
    )
    
    
    (27.7
    )
    
    
    (23.6
    )
    
    
    (69.1
    )
    
    
    (92.7
    )Consumer
    
    
    (12.0
    )
    
    
    (12.4
    )
    
    
    (24.4
    )
    
    
    (38.8
    )
    
    
    11.3
    
    
    
    (27.5
    )Residential real estate
    
    
    2.7
    
    
    
    (3.6
    )
    
    
    (0.9
    )
    
    
    (24.8
    )
    
    
    (2.4
    )
    
    
    (27.2
    )Total loan participations
    
    
    (10.2
    )
    
    
    (57.1
    )
    
    
    (67.3
    )
    
    
    (91.1
    )
    
    
    (72.0
    )
    
    
    (163.1
    )Interest bearing deposits
in banks
    
    
    (2.4
    )
    
    
    (3.6
    )
    
    
    (6.1
    )
    
    
    0.9
    
    
    
    (16.5
    )
    
    
    (15.6
    )Interest and fee income
    
    $
    (12.6
    )
    
    $
    (60.7
    )
    
    $
    (73.4
    )
    
    $
    (90.2
    )
    
    $
    (88.5
    )
    
    $
    (178.7
    )
 In the table above, individual components include participations in
non-accrual loans and related interest received. The amount of interest income
that would have been recorded under original terms for participations in loans
classified as non-accrual was $2.6 million for the twelve months ended December
31, 2003. Amounts actually received and recorded as interest income for these
participations totaled $1.2 million in 2003. 20




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##### Table of Contents



Provision for Loan Losses and Allowance for Loan Losses The provision for loan losses is the charge or credit to earnings
necessary to maintain the ALL at a level adequate to absorb Managements
estimate of inherent losses in the loan portfolio. The provision for loan
losses was a credit of $41.2 million for 2003, versus a credit of $0.2 million
for 2002, and an expense of $48.5 million for 2001. The continued decline in
provision expense was indicative of Managements judgment regarding the
adequacy of the allowance for loan losses and lower non-performing asset (NPA)
balances at December 31, 2003. Additional information regarding the Allowance
for Loan Losses is set forth in the caption Allowance for Loan Losses below. Non-Interest Income and Non-Interest Expense Non-interest income was $6.9 million, $6.8 million and $1.6 million in
2003, 2002 and 2001, respectively. This primarily represents rental income
received from the Bank related to real estate acquired in 2000, and leasehold
improvements ultimately acquired by HPCLI in the fourth quarter of 2001. In
2002, HPCI began receiving fees from the Bank for use of its assets as
collateral for the Banks advances from the Federal Home Loan Bank of
Cincinnati (FHLBC). These fees totaled $718,000 in 2003, an increase from the
$641,000 received in 2002. See note 10 to the consolidated financial statements
included in this report for more information regarding use of HPCIs assets as
collateral for the Banks advances from the FHLBC. Non-interest expense was $13.9 million, $13.3 million and $10.0 million in
2003, 2002 and 2001, respectively. Non-interest expense includes fees paid
monthly to the Bank for servicing the loans underlying the participation
interests, and other costs such as depreciation on premises and equipment and
professional service fees. HPCI paid servicing fees of $7.6 million, $6.7
million and $8.3 million for the year ended December 31, 2003, 2002 and 2001,
respectively. Depreciation and amortization expenses totaled $5.5 million, $5.8
million and $1.5 million for the years ended December 31, 2003, 2002 and 2001,
respectively. As of June 1, 2003, the annual servicing fee the Bank charged was:  
    
    0.125% of the outstanding principal balances of the
underlying commercial and commercial real estate loans,
    
    0.320% of the outstanding principal balances of the underlying consumer loans, and
    
    0.2997% of the outstanding principal balances of the underlying residential real estate loans. Prior to June 1, 2003, the servicing fee the Bank charged was:  
    
    0.125% of the outstanding principal balance of the underlying
commercial real estate, commercial, and consumer loan balances and
    
    2.35% of the interest income collected on residential real
estate loans. Income Taxes HPCI has elected to be treated as a REIT for Federal income tax purposes
and intends to maintain compliance with the provisions of the Internal Revenue
Code and, therefore, is not subject to income taxes. HPCIs subsidiary, HPCLI,
elected to be treated as a taxable REIT subsidiary and, therefore, a separate
provision related to its income taxes is included in the accompanying
consolidated financial statements. MARKET RISK Interest rate risk is the primary market risk to which HPCI has exposure.
It results from timing differences in the repricing and maturity of loan
participations and changes in relationships between market interest rates and
the yields on assets. If there is a decline in market interest rates, HPCI may
experience a reduction in interest income on its participation interests and a
corresponding decrease in funds available to be distributed to shareholders.
Huntington conducts its interest rate risk management on a centralized basis
and does not manage HPCIs interest rate risk seperately. Huntingtons board of
directors establishes broad policies regarding interest rate and market risk,
liquidity risk, counter-party credit risk, and settlement risk. Huntingtons
asset and liability committee establishes specific operating limits within the
parameters of the board of directors policies. A key element used in Huntingtons interest rate risk management is an
income simulation model, which includes, among other things, assumptions for
loan prepayments on the existing portfolio and new loan volumes. Using that
model for HPCI as of December 31, 2003, and assuming no new loan participation
volumes, interest income for the next 12 month period would be expected to
increase by 10.8% based on a gradual 200 basis point increase in rates above
the forward rates implied in the December 31, 2003 yield curve. 21




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##### Table of Contents



The following table shows data with respect to interest rates of the loans
underlying HPCIs loan participations at December 31, 2003 and 2002,
respectively: Table 8 - Total Loan Participation Interests by Interest Rates December 31, 2003
    
    Fixed Rate
    
    Variable RatePercentage by
    
    
    
    
    
    
    
    
    
    Percentage byAggregate
    
    Aggregate
    
    
    
    
    
    Aggregate
    
    Aggregate(in thousands of
    
    Number
    
    Principal
    
    Principal
    
    Number
    
    Principal
    
    Principaldollars)
    
    of Loans
    
    Balance
    
    Balance
    
    of Loans
    
    Balance
    
    Balanceunder 5.00%
    
    
    594
    
    
    $
    84,215
    
    
    
    6.9
    %
    
    
    4,111
    
    
    $
    3,275,013
    
    
    
    80.3
    %5.00% to 5.99%
    
    
    2,764
    
    
    
    247,718
    
    
    
    20.2
    
    
    
    1,330
    
    
    
    312,117
    
    
    
    7.76.00% to 6.99%
    
    
    3,593
    
    
    
    269,242
    
    
    
    21.9
    
    
    
    1,138
    
    
    
    236,003
    
    
    
    5.87.00% to 7.99%
    
    
    4,500
    
    
    
    252,023
    
    
    
    20.6
    
    
    
    801
    
    
    
    171,508
    
    
    
    4.28.00% to 8.99%
    
    
    5,265
    
    
    
    175,452
    
    
    
    14.3
    
    
    
    415
    
    
    
    71,762
    
    
    
    1.89.00% to 9.99%
    
    
    4,071
    
    
    
    99,988
    
    
    
    8.2
    
    
    
    108
    
    
    
    9,885
    
    
    
    0.210.00% to 10.99%
    
    
    2,168
    
    
    
    48,859
    
    
    
    4.0
    
    
    
    19
    
    
    
    1,781
    
    
    
    0.011.00% to 11.99%
    
    
    835
    
    
    
    16,550
    
    
    
    1.4
    
    
    
    2
    
    
    
    19
    
    
    
    0.012.00% and over
    
    
    4,672
    
    
    
    30,933
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    28,462
    
    
    $
    1,224,980
    
    
    
    100.0
    %
    
    
    7,924
    
    
    $
    4,078,088
    
    
    
    100.0
    %
 December 31, 2002
    
    Fixed Rate
    
    Variable RatePercentage by
    
    
    
    
    
    
    
    
    
    Percentage byAggregate
    
    Aggregate
    
    
    
    
    
    Aggregate
    
    Aggregate(in thousands of
    
    Number
    
    Principal
    
    Principal
    
    Number
    
    Principal
    
    Principaldollars)
    
    of Loans
    
    Balance
    
    Balance
    
    of Loans
    
    Balance
    
    Balanceunder 5.00%
    
    
    149
    
    
    $
    26,584
    
    
    
    2.2
    %
    
    
    2,655
    
    
    $
    2,622,152
    
    
    
    68.9
    %5.00% to 5.99%
    
    
    322
    
    
    
    32,233
    
    
    
    2.6
    
    
    
    1,794
    
    
    
    370,021
    
    
    
    9.76.00% to 6.99%
    
    
    1,826
    
    
    
    157,548
    
    
    
    12.8
    
    
    
    1,213
    
    
    
    269,314
    
    
    
    7.17.00% to 7.99%
    
    
    5,598
    
    
    
    375,074
    
    
    
    30.5
    
    
    
    1,238
    
    
    
    329,605
    
    
    
    8.78.00% to 8.99%
    
    
    7,441
    
    
    
    278,448
    
    
    
    22.7
    
    
    
    788
    
    
    
    159,784
    
    
    
    4.29.00% to 9.99%
    
    
    6,537
    
    
    
    173,596
    
    
    
    14.1
    
    
    
    390
    
    
    
    49,590
    
    
    
    1.310.00% to 10.99%
    
    
    3,638
    
    
    
    87,328
    
    
    
    7.1
    
    
    
    34
    
    
    
    3,709
    
    
    
    0.111.00% to 11.99%
    
    
    1,407
    
    
    
    32,037
    
    
    
    2.6
    
    
    
    3
    
    
    
    28
    
    
    
    0.012.00% and over
    
    
    8,705
    
    
    
    66,202
    
    
    
    5.4
    
    
    
    3
    
    
    
    237
    
    
    
    0.0Total
    
    
    35,623
    
    
    $
    1,229,050
    
    
    
    100.0
    %
    
    
    8,118
    
    
    $
    3,804,440
    
    
    
    100.0
    %
 22




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##### Table of Contents



The following table shows the remaining maturity of HPCIs interest
earning assets at December 31, 2003 and 2002, respectively. Table 9 - Maturities of Interest Earning Assets December 31, 2003
    
    
    
    
    
    Within one
    
    One to Three
    
    Three to Five
    
    Over Five(in thousands of dollars)
    
    Overnight
    
    Year
    
    Years
    
    Years
    
    Years
    
    TotalLoan participations:Fixed rate
    
    $
    
    
    
    $
    84,149
    
    
    $
    142,550
    
    
    $
    259,561
    
    
    $
    738,720
    
    
    $
    1,224,980Variable rate
    
    
    
    
    
    
    1,071,619
    
    
    
    1,074,175
    
    
    
    702,139
    
    
    
    1,230,155
    
    
    
    4,078,088Total
    
    $
    
    
    
    $
    1,155,768
    
    
    $
    1,216,725
    
    
    $
    961,700
    
    
    $
    1,968,875
    
    
    $
    5,303,068
 December 31, 2002
    
    
    
    
    
    Within one
    
    One to Three
    
    Three to Five
    
    Over Five(in thousands of dollars)
    
    Overnight
    
    Year
    
    Years
    
    Years
    
    Years
    
    TotalLoan participations:Fixed rate
    
    $
    
    
    
    $
    115,426
    
    
    $
    229,097
    
    
    $
    211,274
    
    
    $
    673,253
    
    
    $
    1,229,050Variable rate
    
    
    
    
    
    
    1,182,720
    
    
    
    889,445
    
    
    
    622,628
    
    
    
    1,109,647
    
    
    
    3,804,440Total
    
    $
    
    
    
    $
    1,298,146
    
    
    $
    1,118,542
    
    
    $
    833,902
    
    
    $
    1,782,900
    
    
    $
    5,033,490
 OFF-BALANCE SHEET ARRANGEMENTS Under the terms of the participation and subparticipation agreements, HPCI
is obligated to make funds or credit available to the Bank, either directly,
indirectly through Holdings, or indirectly through Holdings and HPC
Holdings-III, Inc., so that the Bank my extend credit to any borrowers, or pay
letters of credit issued for the account of any borrowers, to the extent
provided in the loan agreements underlying HPCIs participation interests. The
unfunded commitments at December 31, 2003 and 2002 totaled $1.1 billion and
$911 million, respectively. CREDIT QUALITY 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. Credit risk
is mitigated through a combination of credit policies and processes and
portfolio diversification. These include loan origination/underwriting
criteria, portfolio monitoring processes, and effective problem asset
management. HPCIs exposure to credit risk is managed by personnel of the Bank through
this credit risk management process. Based upon an assessment of the credit
risk inherent in HPCIs portfolio of loan participation interests, an ALL is
transferred from the Bank to Holdings and then from Holdings to HPCI on loans
underlying the participations at the time the participations are acquired.
Prior to the fourth quarter of 2001, HPCI transferred a portion of the ALL
related to loan paydowns and other similar transactions underlying the
participation interests back to the Bank. Subsequently, with concerns over the
general economy and the deteriorating credit quality in the loan participation
portfolio, HPCI ceased transferring the allowance for such transactions to
allow the ALL to build appropriately. The maximum level of credit exposure to individual commercial borrowers is
limited by policy guidelines based on the default probabilities associated with
the credit facilities extended to each borrower or related group of borrowers.
All authority to grant commitments is delegated through the Banks independent
credit administration function, and is monitored and regularly updated in a
centralized database. Concentration risk is managed with limits on loan type, geographic and
industry diversification, country limits, and loan quality factors. The checks
and balances in the credit process and the independence of the credit
administration and risk management functions are designed to minimize
problems and to facilitate the early recognition of problems when they do
occur. The following table provides delinquency information for the loans
underlying HPCIs loan participations at December 31, 2003. 23




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##### Table of Contents



Table 10 - Loan Participation Interests Delinquencies Percentage byTotal
    
    Aggregate
    
    Aggregate(in thousands of
    
    Number
    
    Principal
    
    Principaldollars)
    
    of Loans
    
    Balance
    
    BalanceCurrent
    
    
    29,497
    
    
    $
    4,477,522
    
    
    
    84.5
    %1 to 30 days
    
    
    5,117
    
    
    
    758,584
    
    
    
    14.331 to 60 days
    
    
    1,013
    
    
    
    31,466
    
    
    
    0.661 to 90 days
    
    
    267
    
    
    
    6,941
    
    
    
    0.1over 90 days
    
    
    492
    
    
    
    28,555
    
    
    
    0.5Total
    
    
    36,386
    
    
    $
    5,303,068
    
    
    
    100.0
    %
 Commercial Credit Commercial credit approvals are made by the Bank and are based on, among
other factors, the financial strength of the borrower, assessment of the
borrowers management, industry sector trends, type of exposure, transaction
structure, and the general economic outlook. There are two processes for
approving credit risk exposures. The first involves a centralized loan
approval process for the standard products and structures utilized in small
business lending, where individual credit authority is granted to certain
individuals on a regional basis to preserve the companys local decision-making
focus. The second, and more prevalent approach, involves individual approval
of exposures. These approvals are consistent with the authority delegated to
officers located in the geographic regions who are experienced in the
industries and loan structures over which they have responsibility. All Commercial (C&I) and Commercial Real Estate (CRE) credit extensions
are assigned internal risk ratings reflecting the borrowers
probability-of-default and loss-in-event-of-default. This two dimensional
rating methodology, which has 180 individual loan grades, was implemented in
2003 and has provided improved granularity in the portfolio management process.
The probability-of-default is rated on a scale of 1-12 and is applied at the
borrower level. The loss-in-event-of-default is rated on a 1-15 scale and is
associated with each individual credit exposure based on the type of credit
extension and the underlying collateral. In commercial lending, ongoing credit management is dependent on the type
and nature of the loan. In general, quarterly monitoring is normal for all
significant exposures. The internal risk ratings are revised and updated with
each periodic monitoring event. There is also extensive macro portfolio
management analysis on an ongoing basis to continually update default
probabilities and to estimate future losses. In addition to the initial credit analysis initiated by the portfolio
manager during the underwriting process, the loan review group performs
independent credit reviews. The loan review group reviews individual loans,
credit processes, and conducts a portfolio review at each of the regions on a
regular basis. Borrower exposures may be designated as watch list accounts when
warranted by individual company performance, or by industry and environmental
factors. Such accounts are subjected to additional quarterly reviews by the
business line management, the loan review group, and credit administration in
order to adequately assess the borrowers credit status and to take appropriate
action. The Bank has also established a credit workout group composed of highly
skilled and experienced lenders to manage problem credits. The group handles
commercial recoveries, workouts, and problem loan sales, as well as the
day-to-day management of relationships rated substandard or worse. The group
is responsible for developing an action plan, assessing the risk rating, and
determining the adequacy of the reserve, the accrual status, and the ultimate
collectibility of the credits managed. Consumer Credit Extensions of consumer credit by the Bank are based on, among other
factors, the financial strength of the borrower, type of exposure, transaction
structure, and the general economic outlook. Consumer credit decisions are
generally made in a centralized environment utilizing decision models. Each
credit extension is assigned a specific probability-of-default and
loss-in-event-of-default. The probability-of-default is generally a function
of the 24




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##### Table of Contents



borrowers credit bureau score, while the loss-in-event-of-default is
related to the type of collateral and the loan-to-value ratio associated with
the credit extension. In consumer lending, credit risk is managed from a loan type and vintage
performance analysis. All portfolio segments are continuously monitored for
changes in delinquency trends and other asset quality indicators. The
Bank makes extensive use of portfolio assessment models to continuously monitor the
quality of the portfolio and identify under-performing segments. This
information is then incorporated into future origination strategies.
The Banks independent risk management group has a consumer process review
component to ensure the effectiveness and efficiency of the consumer credit
processes. Net Charge-offs Total net charge-offs were $60.0 million, or 1.17% of total loan
participations, for the year ended December 31, 2003, down from $72.2 million,
or 1.37%, for the year ended December 31, 2002. Performance in both periods was
impacted by significant non-performing asset (NPA) sales in the fourth quarter
of each year. For full-year 2004, C&I and CRE net charge-offs are expected to
decline reflecting the improvements made in underwriting, the origination of
higher quality loans, and the success in lowering individual concentrations in
larger C&I and CRE credits, as well as the 2003 fourth quarter sale of lower
credit quality commercial loans, including NPAs. Table 11 - Net Charge-offs As a %
    
    
    
    
    
    As a %
    
    
    
    
    
    As a %
    
    
    
    
    
    As a %
    
    
    
    
    
    As a %of Avg.
    
    
    
    
    
    of Avg.
    
    
    
    
    
    of Avg.
    
    
    
    
    
    of Avg.
    
    
    
    
    
    of Avg.(in thousands of dollars)
    
    2003
    
    Part.
    
    2002
    
    Part.
    
    2001
    
    Part.
    
    2000
    
    Part.
    
    1999
    
    Part.Commercial
    
    $
    20,973
    
    
    
    8.41
    %
    
    $
    29,686
    
    
    
    5.90
    %
    
    $
    32,959
    
    
    
    5.88
    %
    
    $
    1,274
    
    
    
    0.18
    %
    
    $
    1,203
    
    
    
    0.12
    %Commercial real estate
    
    
    13,525
    
    
    
    0.33
    
    
    
    21,599
    
    
    
    0.56
    
    
    
    7,574
    
    
    
    0.18
    
    
    
    1,321
    
    
    
    0.03
    
    
    
    2,760
    
    
    
    0.08Consumer
    
    
    22,999
    
    
    
    4.00
    
    
    
    20,911
    
    
    
    3.00
    
    
    
    18,800
    
    
    
    1.76
    
    
    
    2,589
    
    
    
    0.30
    
    
    
    5,673
    
    
    
    0.78Residential real estate
    
    
    2,502
    
    
    
    0.98
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    0.00Total Net Charge-offs
    
    $
    59,999
    
    
    
    1.17
    
    
    $
    72,196
    
    
    
    1.37
    
    
    $
    59,333
    
    
    
    0.93
    
    
    $
    5,184
    
    
    
    0.09
    
    
    $
    9,636
    
    
    
    0.16
 Non-performing Assets Non-performing assets (NPAs) consist of loans that are no longer accruing
interest. When, in the Banks judgement, the borrowers ability and intent to
make periodic interest and principal payments resumes and collectibility is no
longer in doubt, the loan is returned to accrual status. C&I and CRE loans are
generally placed on non-accrual status when collection of principal or interest
is in doubt or when the loan is 90 days past due. When interest accruals are
suspended, accrued interest income is reversed with current year accruals
charged to earnings and prior-year amounts generally charged off as a credit
loss. Consumer loans, excluding residential mortgages, are not placed on
non-accrual status but are charged off in accordance with regulatory statutes,
which is generally no more than 120 days past due. Residential mortgages,
while well secured, are placed on non-accrual status within 180 days past due
as to principal and 210 days past due as to interest, regardless of security.
A charge-off on a residential mortgage loan is recorded when the loan has been
foreclosed and the loan balance exceeds the fair value of the real estate. The
Bank then purchases the remaining loan participation balance. HPCIs
non-performing assets are presented in the following table: Table 12 - Non-Performing Assets At December 31,(in thousands of dollars)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Participation interests in non-accrual loansCommercial
    
    $
    5,176
    
    
    $
    57,112
    
    
    $
    156,874
    
    
    $
    16,025
    
    
    $
    14,684Commercial Real Estate
    
    
    12,987
    
    
    
    32,979
    
    
    
    32,492
    
    
    
    19,638
    
    
    
    23,465Residential Real Estate
    
    
    4,157
    
    
    
    6,455
    
    
    
    8,232
    
    
    
    6,271
    
    
    
    320Total Non-Performing Assets
    
    $
    22,320
    
    
    $
    96,546
    
    
    $
    197,598
    
    
    $
    41,934
    
    
    $
    38,469Non-performing assets as a % of total
participation interests
    
    
    0.42
    %
    
    
    1.92
    %
    
    
    3.67
    %
    
    
    0.72
    %
    
    
    0.64
    %Allowance for loan losses as a % of non-
performing assets
    
    
    378.73
    
    
    
    145.37
    
    
    
    88.91
    
    
    
    218.98
    
    
    
    270.74
 25




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##### Table of Contents



Total NPAs declined to $22.3 million at the end of 2003 from $96.6 million
at December 31, 2002, representing 0.42% and 1.92% of total participation
interests, respectively. During 2001, credit quality trends were deteriorating,
particularly in the C&I and CRE portfolio, caused by a deteriorating economy
and previous decisions in credit underwriting. The Bank strengthened the
independent loan review function and undertook an aggressive review of these
portfolios to ensure that all credits were properly graded and action plans on
individual credits were initiated, where appropriate. In addition, credit
underwriting standards were tightened and the credit approval process was
redesigned. In early 2002, the Banks credit workout group was further strengthened,
with the objective of aggressively seeking economically advantageous
opportunities to reduce the level of NPAs, including NPA sales. These efforts
were reflected in the significant NPA portfolio sales in the 2002 and 2003
fourth quarters. As a result, the 0.42% NPA ratio at the end of 2003
represented the lowest level in many years. The Bank expects NPAs in 2004 to
be comparable with year-end 2003 levels. Underlying loans past due ninety days or more but continuing to accrue
interest were $13.4 million at the end of 2003 and $26.1 million at December
31, 2002. Under the
 participation and subparticipation agreements, the Bank may, in
accordance with HPCIs guidelines, dispose of any underlying loan that becomes classified, is placed
in a non-performing status, or is renegotiated due to the financial
deterioration of the borrower. The Bank may, in accordance with
HPCIs guidelines, institute foreclosure proceedings,
exercise any power of sale contained in any mortgage or deed of trust, obtain a
deed in lieu of foreclosure, or otherwise acquire title to a property
underlying a mortgage loan by operation of law or otherwise in accordance with
the terms of the participation and subparticipation agreement. Prior
to completion of foreclosure or liquidation, the participation is sold to the Bank at fair
market value. The Bank then incurs all costs associated with repossession and
foreclosure. Allowance for Loan Losses The ALL represents the estimate of probable losses inherent in the loan
portfolio at the balance sheet date. Allocation of the ALL is made for
analytical purposes only, and the entire allowance is available to absorb
probable and estimable credit losses inherent in the portfolio. Additions to
the ALL result from recording provision expense for loan losses or loan
recoveries, while reductions reflect charge-offs, or the sale of loans. The Bank has an established process to determine the adequacy of the ALL
that relies on a number of analytical tools and benchmarks. No single statistic
or measurement, in itself, determines the adequacy of the allowance. For
analytical purposes, the allowance is comprised of two components, the
transaction reserve and the economic reserve. The transaction reserve is the
sum of: (1) expected losses associated with loans in each portfolio and (2)
specific reserves that are judgmentally determined for lower-rated credits in
the commercial and industrial and commercial real estate portfolios. The
economic reserve incorporates the Banks determination of risks inherent in
portfolio composition and economic uncertainties. The transaction and economic
components represent the total allowance for loan losses to cover estimated
losses inherent in the loan portfolio. The Banks credit administration group is responsible for determining the
adequacy of HPCIs ALL. The determination of the level of the ALL and,
correspondingly, the provision for loan losses reflects prior loss experiences
as well as various judgments and assumptions, including (1) the evaluation of
credit risk related to both individual borrowers and pools of loans, (2)
observations derived from ongoing internal review and examination processes,
(3) loan portfolio composition, and (4) general economic conditions. Given the
more quantitative methodologies to determine the level of the ALL employed in
2003, and those that will be employed in 2004, the
resultant absolute level of the ALL, as well as the related measures and
ratios, may be subject to increased period-to-period fluctuation. The ALL was $84.5 million at December 31, 2003, down from $140.4 million
at the end of 2002. This represents 1.59% and 2.79% of total loan
participations at the end of 2003 and 2002, respectively. The ALL as a
percentage of non-performing loans was 379% at the end of 2003, compared with
145% at the end of the prior year. The decrease reflected a combination of
factors, including the release of specific reserves allocated to the loans sold
by the Bank, declining overall risk inherent in the loan participation
portfolio due to lower concentration in large, individual commercial loans,
downward trending net charge-offs, and a higher percentage of the total loan
participation portfolio being in lower-risk residential real estate and
consumer loans. 26




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##### Table of Contents



The following table shows the activity in HPCIs ALL: Table 13 - Allowance for Loan Loss Activity (in thousands of dollars)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Balance, beginning of year
    
    $
    140,353
    
    
    $
    175,690
    
    
    $
    91,826
    
    
    $
    104,151
    
    
    $
    87,799Allowance of loan participations
acquired, net
    
    
    45,397
    
    
    
    37,020
    
    
    
    113,291
    
    
    
    (9,434
    )
    
    
    25,988Distribution of participations in
Florida-related loans
    
    
    
    
    
    
    
    
    
    
    (18,604
    )
    
    
    
    
    
    
    Net charge-offs
    
    
    (59,999
    )
    
    
    (72,196
    )
    
    
    (59,333
    )
    
    
    (5,184
    )
    
    
    (9,636
    )Provision (credit) for loan losses
    
    
    (41,219
    )
    
    
    (161
    )
    
    
    48,510
    
    
    
    2,293
    
    
    
    Balance, end of year
    
    $
    84,532
    
    
    $
    140,353
    
    
    $
    175,690
    
    
    $
    91,826
    
    
    $
    104,151Balance, as a percentage of total
loans
    
    
    1.59
    %
    
    
    2.79
    %
    
    
    3.27
    %
    
    
    1.57
    %
    
    
    1.72
    %
 In the 2003 fourth quarter, the Banks credit workout group identified an
economically attractive opportunity to sell $47.7 million lower quality loans, including
non-performing assets (NPAs), which relate to loan participation interests
owned by HPCI. Previously established reserves for these loans were sufficient
to absorb the related charge-offs, including amounts associated with the NPAs. HPCI, through reliance on methods utilized by the Bank, allocates the ALL
to each loan participation category based on an expected loss ratio determined
by continuous assessment of credit quality based on portfolio risk
characteristics and other relevant factors such as historical performance,
internal controls, and impacts from mergers and acquisitions. For the
commercial and commercial real estate loan participations, expected loss
factors are assigned by credit grade at the individual underlying loan level at
the time the loan is originated by the Bank. On a periodic basis, these credit
grades are reevaluated. The aggregation of these factors represents an estimate
of the inherent loss. The portion of the allowance allocated to the more
homogeneous underlying consumer loan participations is determined by developing
expected loss ratios based on the risk characteristics of the various portfolio
segments and giving consideration to existing economic conditions and trends. Table 14 - Allocation of Allowance for Loan Losses(1) (in thousands of dollars)
    

    2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial
    
    $
    25,375
    
    
    
    2.8
    %
    
    $
    75,264
    
    
    
    6.9
    %
    
    $
    103,119
    
    
    
    12.0
    %
    
    $
    38,327
    
    
    
    10.5
    %
    
    $
    38,270
    
    
    
    13.5
    %Consumer
    
    
    8,096
    
    
    
    11.7
    
    
    
    9,979
    
    
    
    12.2
    
    
    
    17,030
    
    
    
    14.6
    
    
    
    25,793
    
    
    
    16.6
    
    
    
    31,693
    
    
    
    13.1Real estateResidential
    
    
    3,500
    
    
    
    5.4
    
    
    
    2,883
    
    
    
    3.1
    
    
    
    1,766
    
    
    
    5.0
    
    
    
    1,305
    
    
    
    6.1
    
    
    
    1,936
    
    
    
    12.4Commercial
    
    
    47,561
    
    
    
    80.1
    
    
    
    26,605
    
    
    
    77.8
    
    
    
    33,886
    
    
    
    68.4
    
    
    
    12,381
    
    
    
    66.8
    
    
    
    12,923
    
    
    
    61.0Total Allocated
    
    
    84,532
    
    
    
    100.0
    %
    
    
    114,731
    
    
    
    100.0
    %
    
    
    155,801
    
    
    
    100.0
    %
    
    
    77,806
    
    
    
    100.0
    %
    
    
    84,822
    
    
    
    100.0
    %Unallocated
    
    
    
    
    
    
    
    
    
    
    25,622
    
    
    
    
    
    
    
    19,889
    
    
    
    
    
    
    
    14,020
    
    
    
    
    
    
    
    19,329
    
    
    
    Total
    
    $
    84,532
    
    
    
    100.0
    %
    
    $
    140,353
    
    
    
    100.0
    %
    
    $
    175,690
    
    
    
    100.0
    %
    
    $
    91,826
    
    
    
    100.0
    %
    
    $
    104,151
    
    
    
    100.0
    %
  (1) Percent represents percentage of loan participation categories to total loan participations. Prior to 2003, HPCI maintained an unallocated component of its ALL. The
unallocated component was eliminated in 2003 with the Banks adoption of the
more granular risk rating system. Most of the prior unallocated reserve was
absorbed into the transaction reserve effective with the improvements in the
determination of the ALL implemented in 2003. LIQUIDITY AND CAPITAL RESOURCES The objective of HPCIs liquidity management is to ensure the availability
of sufficient cash flows to meet all of its financial commitments. In managing
liquidity, various legal limitations placed on a REIT are taken into account. HPCIs principal liquidity needs are to pay operating expenses and
dividends and acquire additional participation interests as the underlying
loans in its portfolio paydown or mature. Operating expenses and dividends are
expected to be funded through cash generated by operations, while the
acquisition of additional participation interests in loans is intended to be
funded with the proceeds obtained from repayment of principal balances by 27




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##### Table of Contents



individual borrowers. HPCI intends to pay dividends on its preferred stock and
common stock in amounts necessary to continue to preserve its status as a REIT
under the Internal Revenue Code. As mentioned previously, HPCI issued to Holdings Class C and D preferred
securities and received a capital contribution of common equity in exchange for
the fair market value of participation interests in certain loans and leasehold
improvements in 2001, which approximated $400 million. The company transferred
the leasehold improvements to HPCLI in exchange for its common shares. Holdings
subsequently sold all of the Class C preferred securities in an underwritten
public offering. HPCI did not receive any of Holdings proceeds from the sale. On December 31, 2001, HPCI distributed its participation interests in
Florida-related loans to its common shareholders, Holdings and Huntington, in
anticipation of the eventual sale of the Florida operations by the Bank that
closed on February 15, 2002. This distribution, which approximated $1.3
billion, consisted of cash and the net book value of participation interests in
loans. At December 31, 2003 and 2002, HPCI had non-interest bearing cash balances
with the Bank totaling $124.1 million and $534.3 million, respectively. HPCI
maintains and transacts all of its cash activity with the Bank and invests
available funds in interest bearing Eurodollar deposits with the Bank for a term of not more
than 30 days. To the extent that the board of directors determines that additional
funding is required, such funds may be raised through additional equity
offerings, debt financings, or retention of cash flow, or a combination of
these methods. However, any cash flow retention must be consistent with the
provisions of the Internal Revenue Code requiring the distribution by a REIT of
at least 90% of its REIT taxable income, excluding capital gains, and must take
into account taxes that would be imposed on undistributed income. Management
does not anticipate that additional funding will be required for at least the
next twelve months. At December 31, 2003, HPCI had no material contractual obligations, or
obligations for capital expenditures. REIT QUALIFICATION TESTS Qualification as a REIT involves application of specific provisions of the
Internal Revenue Code relating to various asset tests. A REIT must satisfy six
asset tests quarterly: (1) 75% of the value of the REITs total assets must
consist of real estate assets, cash and cash items, and government securities;
(2) not more than 25% of the value of the REITs total assets may consist of
securities, other than those includible under the 75% test; (3) not more than
5% of the value of its total assets may consist of securities of any one
issuer, other than those securities includible under the 75% test or securities
of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting
power of any one issuer may be held, other than those securities includible
under the 75% test or securities of taxable REIT subsidiaries; (5) not more
than 10% of the total value of the outstanding securities of any one issuer may
be held, other than those securities includible under the 75% test or
securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities
in one or more taxable REIT subsidiaries which comprise more than 20% of its
total assets. At December 31, 2003, HPCI had met all of the quarterly asset
tests. Also, a REIT must annually satisfy two gross income tests: (1) 75% of its
gross income must be from qualifying income closely connected with real estate
activities; and (2) 95% of its gross income must be derived from sources
qualifying for the 75% test plus dividends, interest and gains from the sale of
securities. In addition, a REIT must
distribute 90% of the REITs taxable income for the taxable year,
excluding any net capital gains, to maintain its non-taxable status for federal
income tax purposes. As of December 31, 2003, HPCI had met all annual income
and distribution tests. HPCI operates in a manner that will not cause it to be deemed an
investment company under the Investment Company Act. The Investment Company
Act exempts from registration as an investment company an entity that is
primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate (Qualifying
Interests). Under positions taken by the SEC staff in no-action letters, in
order to qualify for this exemption, HPCI must invest at least 55% of its
assets in Qualifying Interests and an additional 25% of its assets in real
estate-related assets, although this percentage may be reduced to the extent
that more than 55% of its assets are invested in Qualifying Interests. The
assets in which HPCI may invest under the Internal Revenue Code therefore may
be further limited by the provisions of the Investment Company Act and
positions taken by the SEC staff. At December 31, 2003, HPCI is exempt from
registration as an investment company under the Investment Company Act and
intends to operate its business in a manner that will maintain this exemption. 28




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##### Table of Contents



RESULTS FOR THE FOURTH QUARTER Table 15 - Quarterly Statements of Income 2003
    
    2002(in thousands of dollars)
    
    Fourth
    
    Third
    
    Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstInterest and fee incomeInterest on loan participation interestsCommercial
    
    $
    2,191
    
    
    $
    1,917
    
    
    $
    2,979
    
    
    $
    3,955
    
    
    $
    5,734
    
    
    $
    5,421
    
    
    $
    6,440
    
    
    $
    7,309Commercial real estate
    
    
    46,321
    
    
    
    46,593
    
    
    
    45,879
    
    
    
    46,957
    
    
    
    50,951
    
    
    
    53,512
    
    
    
    54,290
    
    
    
    53,880Consumer
    
    
    12,027
    
    
    
    11,729
    
    
    
    12,388
    
    
    
    13,379
    
    
    
    16,838
    
    
    
    18,198
    
    
    
    18,882
    
    
    
    20,044Residential real estate
    
    
    4,155
    
    
    
    4,689
    
    
    
    3,000
    
    
    
    2,251
    
    
    
    2,807
    
    
    
    3,403
    
    
    
    3,851
    
    
    
    4,56064,694
    
    
    
    64,928
    
    
    
    64,246
    
    
    
    66,542
    
    
    
    76,330
    
    
    
    80,534
    
    
    
    83,463
    
    
    
    85,793Fees from loan participation interests
    
    
    828
    
    
    
    1,566
    
    
    
    2,609
    
    
    
    2,733
    
    
    
    1,988
    
    
    
    2,135
    
    
    
    2,737
    
    
    
    2,441Interest bearing deposits in banks
    
    
    1,193
    
    
    
    1,193
    
    
    
    2,015
    
    
    
    1,854
    
    
    
    3,138
    
    
    
    4,033
    
    
    
    3,284
    
    
    
    1,878Total Interest and Fee Income
    
    
    66,715
    
    
    
    67,687
    
    
    
    68,870
    
    
    
    71,129
    
    
    
    81,456
    
    
    
    86,702
    
    
    
    89,484
    
    
    
    90,112Net Interest Income
    
    
    66,715
    
    
    
    67,687
    
    
    
    68,870
    
    
    
    71,129
    
    
    
    81,456
    
    
    
    86,702
    
    
    
    89,484
    
    
    
    90,112Provision (credit) for loan losses
    
    
    (7,301
    )
    
    
    (18,918
    )
    
    
    (15,000
    )
    
    
    
    
    
    
    (20,000
    )
    
    
    
    
    
    
    3,000
    
    
    
    16,839Net Interest Income After
Provision (Credit) for Loan Losses
    
    
    74,016
    
    
    
    86,605
    
    
    
    83,870
    
    
    
    71,129
    
    
    
    101,456
    
    
    
    86,702
    
    
    
    86,484
    
    
    
    73,273Non-interest incomeRental income
    
    
    1,456
    
    
    
    1,458
    
    
    
    1,463
    
    
    
    1,806
    
    
    
    1,520
    
    
    
    1,530
    
    
    
    1,533
    
    
    
    1,535Collateral fees
    
    
    200
    
    
    
    212
    
    
    
    146
    
    
    
    160
    
    
    
    177
    
    
    
    191
    
    
    
    273
    
    
    
    1,656
    
    
    
    1,670
    
    
    
    1,609
    
    
    
    1,966
    
    
    
    1,697
    
    
    
    1,721
    
    
    
    1,806
    
    
    
    1,535Non-interest expenseServicing fees
    
    
    2,131
    
    
    
    2,101
    
    
    
    1,750
    
    
    
    1,575
    
    
    
    1,647
    
    
    
    1,623
    
    
    
    1,715
    
    
    
    1,729Depreciation
    
    
    1,377
    
    
    
    1,378
    
    
    
    1,383
    
    
    
    1,401
    
    
    
    1,437
    
    
    
    1,428
    
    
    
    1,450
    
    
    
    1,452Other
    
    
    132
    
    
    
    181
    
    
    
    95
    
    
    
    382
    
    
    
    150
    
    
    
    101
    
    
    
    92
    
    
    
    458Total Non-interest Expense
    
    
    3,640
    
    
    
    3,660
    
    
    
    3,228
    
    
    
    3,358
    
    
    
    3,234
    
    
    
    3,152
    
    
    
    3,257
    
    
    
    3,639Income Before Income Taxes
    
    
    72,032
    
    
    
    84,615
    
    
    
    82,251
    
    
    
    69,737
    
    
    
    99,919
    
    
    
    85,271
    
    
    
    85,033
    
    
    
    71,169Income taxes
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    25
    
    
    
    22
    
    
    
    25
    
    
    
    (117
    )Net Income Before Preferred Dividends
    
    
    72,008
    
    
    
    84,591
    
    
    
    82,227
    
    
    
    69,713
    
    
    
    99,894
    
    
    
    85,249
    
    
    
    85,008
    
    
    
    71,286Dividends on Preferred Stock
    
    
    4,562
    
    
    
    4,488
    
    
    
    4,787
    
    
    
    5,074
    
    
    
    5,709
    
    
    
    5,892
    
    
    
    6,231
    
    
    
    5,982Net Income Applicable to
Common Shares(1)
    
    $
    67,446
    
    
    $
    80,103
    
    
    $
    77,440
    
    
    $
    64,639
    
    
    $
    94,185
    
    
    $
    79,357
    
    
    $
    78,777
    
    
    $
    65,304
  (1) All of HPCIs common stock is owned by Huntington, HPCII, and HPCH-III and therefore, earnings per common share information is
not presented. Net income before preferred dividends for the fourth quarter 2003 was
$72.0 million, down from $99.9 million for the fourth quarter 2002. Net income
applicable to common shares was $67.4 million for the fourth quarter of 2003
and $94.2 million for the fourth quarter of 2002, after dividend declarations
and payments on preferred stock of $4.6 million and $5.7 million, respectively.
The fourth quarter 2003 included a credit in the provision for loan losses of
$7.3 million, while the prior year quarter was impacted by a provision credit
of $20.0 million. Lower interest rates and earning assets also adversely
impacted the performance of the company in the recent quarter. Interest and fee income for the recent quarter was $66.7 million, which
was down from $81.5 million for the prior year quarter. The yield on earning
assets declined to 4.54% from 5.46% for the same respective quarterly periods. Total assets declined to $5.4 billion at the end of 2003, down from $5.5
billion at December 31, 2002. HPCI paid its fourth quarter preferred dividends
and paid dividends and returned capital to its common shareholders on December
31, 2003. The allowance for loan losses decreased to 1.59% of total loan
participation interests at December 31, 2003 from 2.79% at the end of the prior
year quarter. Net charge-offs in the fourth quarter of 2003 were $13.3 million,
versus $12.9 million for the fourth quarter of 2002. This represents 1.00% and
0.99% of average loan participations for the same respective quarterly periods. HPCLI received from the Bank rent of $1.5 million in the fourth quarters
of 2003 and 2002, which is reflected in non-interest income. Non-interest
expense included depreciation and amortization expense for all premises and
equipment, which amounted to $1.4 million for the fourth quarters of 2003 and
2002. Servicing fees paid by 29




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##### Table of Contents



HPCI were $2.1 million for the fourth quarter of
2003, while $1.6 million was paid in the fourth quarter of 2002. HPCLI is a
taxable REIT subsidiary and therefore provisions of $24,000 and $25,000 for
income taxes applied to its taxable income are reflected in the fourth quarters
of 2003 and 2002, respectively. 
 Item 7A: Quantitative and Qualitative Disclosures about Market Risk. Information required by this item is set forth in the caption Market
Risk included in Item 7 above. 
 Item 8: Financial Statements and Supplementary Data The following consolidated financial statements of HPCI at December 31,
2003 and 2002 and for the years ended December 31, 2003, 2002, and 2001 are
included in this report at the pages indicated. Quarterly statements of income
are found on page 29 of this report. PageReport of Management
    
    
    31Independent Auditors Report
    
    
    32Consolidated Balance Sheets
    
    
    33Consolidated Statements of Income
    
    
    34Consolidated Statement of Changes in Shareholders Equity
    
    
    35Consolidated Statements of Cash Flows
    
    
    36Notes to Consolidated Financial Statements
    
    
    37
 30




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##### Table of Contents



Report of Management The management of HPCI is responsible for the financial information and
representations contained in the consolidated financial statements and other
sections of this report. The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States. In all material respects, they reflect the substance of
transactions that should be included based on informed judgments, estimates,
and currently available information. HPCI utilizes accounting and other control systems maintained by
Huntington Bancshares Incorporated (Huntington) that, in the opinion of
management, provide reasonable assurance that (1) transactions are properly
authorized, (2) that the assets are properly safeguarded, and (3) transactions
are properly recorded and reported to permit the preparation of the financial
statements in conformity with accounting principles generally accepted in the
United States. Huntingtons systems of internal accounting controls include the
careful selection and training of qualified personnel, appropriate segregation
of responsibilities, communication of written policies and procedures, and a
broad program of internal audits. The costs of the controls are balanced
against the expected benefits. During 2003, the Audit Committee of the Board of
Directors met with management, Huntingtons internal auditors, and the
independent auditors, Ernst & Young LLP, to review the scope of the audits and
to discuss the evaluation of internal accounting controls and financial
reporting matters. The independent and internal auditors have free access to
and meet confidentially with the Audit Committee to discuss appropriate
matters. Also during 2002, HPCI formed a Disclosure Review Committee. This
committees purpose is to design and maintain disclosure controls and
procedures to ensure that material information relating to the financial and
operating condition of HPCI is properly reported to its chief executive officer
or president, chief financial officer or principal accounting officer, internal
auditors, and the Audit Committee of the Board of Directors in connection with
the preparation and filing of periodic reports and the certification of those
reports by the chief executive officer or president and the chief financial
officer or principal accounting officer. The independent auditors are responsible for expressing an informed
judgment as to whether the consolidated financial statements present fairly, in
accordance with accounting principles generally accepted in the United States,
the financial position, results of operations and cash flows of HPCI. They
obtained an understanding of HPCIs internal accounting controls and conducted
such tests and related procedures as they deemed necessary to provide
reasonable assurance, giving due consideration to materiality, that the
consolidated financial statements contain neither misleading nor erroneous
data. /s/ Michael J. McMennamin
    
    /s/ John D. Van FleetMichael J. McMennamin
    
    John D. Van FleetPresident
    
    Vice President
 31




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##### Table of Contents



Report of Ernst & Young LLP, Independent Auditors To the Board of Directors and Shareholders
Huntington Preferred Capital, Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of Huntington
Preferred Capital, Inc. and Subsidiary as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in shareholders equity,
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Huntington
Preferred Capital, Inc. and Subsidiary at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States. -s- ERNST & YOUNG LLP Columbus, Ohio
March 19, 2004 32




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##### Table of Contents



Part I. Financial Information
Financial Statements Huntington Preferred
Capital, Inc. 
 Consolidated Balance
Sheets
 December 31,
    
    December 31,(in thousands of dollars, except share data)
    
    2003
    
    2002AssetsCash
    
    $
    124,085
    
    
    $
    534,254Due from affiliates
    
    
    13,652
    
    
    
    7,440Loan participation interests:Commercial
    
    
    147,211
    
    
    
    344,858Commercial real estate
    
    
    4,245,092
    
    
    
    3,922,467Consumer
    
    
    622,575
    
    
    
    612,357Residential real estate
    
    
    288,190
    
    
    
    153,808Total loan participation interests
    
    
    5,303,068
    
    
    
    5,033,490Allowance for loan losses
    
    
    (84,532
    )
    
    
    (140,353
    )Net loan participation interests
    
    
    5,218,536
    
    
    
    4,893,137Premises and equipment
    
    
    32,126
    
    
    
    38,088Accrued income and other assets
    
    
    17,579
    
    
    
    44,102Total Assets
    
    $
    5,405,978
    
    
    $
    5,517,021Liabilities and Shareholders EquityLiabilitiesDividends payable and other liabilities
    
    $
    
    
    
    $
    670Total Liabilities
    
    
    
    
    
    
    670Shareholders EquityPreferred securities, Class A, 8.000% noncumulative, non-
exchangeable; $1,000 par and liquidation value per share;
1,000 shares authorized, issued and outstanding
    
    
    1,000
    
    
    
    1,000Preferred securities, Class B, variable-rate noncumulative and
conditionally exchangeable; $1,000 par and liquidation
value per share; authorized 500,000 shares; 400,000
shares issued and outstanding
    
    
    400,000
    
    
    
    400,000Preferred securities, Class C, 7.875% noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 2,000,000 shares authorized, issued, and outstanding
    
    
    50,000
    
    
    
    50,000Preferred securities, Class D, variable-rate noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 14,000,000 shares authorized, issued, and outstanding
    
    
    350,000
    
    
    
    350,000Preferred securities, $25 par value, 10,000,000 shares
authorized; no shares issued or outstanding
    
    
    
    
    
    
    Common stock
- without par value; 14,000,000 shares authorized,
issued and outstanding
    
    
    4,604,978
    
    
    
    4,715,351Retained earnings
    
    
    
    
    
    
    Total Shareholders Equity
    
    
    5,405,978
    
    
    
    5,516,351Total Liabilities and Shareholders Equity
    
    $
    5,405,978
    
    
    $
    5,517,021
 See notes to consolidated financial statements. 33




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##### Table of Contents



Huntington Preferred
Capital, Inc. 
 Consolidated Statements
of Income
 Twelve Months Ended December 31,(in thousands of dollars)
    
    2003
    
    2002
    
    2001Interest and fee incomeInterest on loan participation interestsCommercial
    
    $
    11,042
    
    
    $
    24,904
    
    
    $
    40,543Commercial real estate
    
    
    185,750
    
    
    
    212,633
    
    
    
    304,580Consumer
    
    
    49,523
    
    
    
    73,962
    
    
    
    100,767Residential real estate
    
    
    14,095
    
    
    
    14,621
    
    
    
    41,201Total loan participation interest income
    
    
    260,410
    
    
    
    326,120
    
    
    
    487,091Fees from loan participation interests
    
    
    7,736
    
    
    
    9,301
    
    
    
    11,496Interest on deposits with The Huntington
National Bank
    
    
    6,255
    
    
    
    12,333
    
    
    
    27,858Total Interest and Fee Income
    
    
    274,401
    
    
    
    347,754
    
    
    
    526,445Provision (credit) for loan losses
    
    
    (41,219
    )
    
    
    (161
    )
    
    
    48,510Interest Income After Provision (Credit) for Loan Losses
    
    
    315,620
    
    
    
    347,915
    
    
    
    477,935Non-interest incomeRental income
    
    
    6,183
    
    
    
    6,118
    
    
    
    1,646Collateral fees
    
    
    718
    
    
    
    641
    
    
    
    Total Non-interest income
    
    
    6,901
    
    
    
    6,759
    
    
    
    1,646Non-interest expenseServicing fees
    
    
    7,559
    
    
    
    6,715
    
    
    
    8,294Depreciation
    
    
    5,527
    
    
    
    5,767
    
    
    
    1,529Loss on sale of fixed assets
    
    
    336
    
    
    
    483
    
    
    
    Other
    
    
    464
    
    
    
    317
    
    
    
    192Total Non-interest expense
    
    
    13,886
    
    
    
    13,282
    
    
    
    10,015Income Before Income Taxes
    
    
    308,635
    
    
    
    341,392
    
    
    
    469,566Income taxes
    
    
    96
    
    
    
    (45
    )
    
    
    26Net Income before preferred dividends
    
    
    308,539
    
    
    
    341,437
    
    
    
    469,540Dividends declared on preferred securities
    
    
    18,911
    
    
    
    23,814
    
    
    
    21,827Net Income Applicable to Common Shares
    
    $
    289,628
    
    
    $
    317,623
    
    
    $
    447,713
 See notes to consolidated financial statements. 34




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##### Table of Contents



Huntington Preferred
Capital, Inc. 
 Consolidated Statements
of Changes in Shareholders Equity
 Preferred, Class A
    
    Preferred, Class B
    
    Preferred, Class C(in thousands)
    
    Shares
    
    Securities
    
    Shares
    
    Securities
    
    Shares
    
    SecuritiesBalance January 1, 2001
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    
    
    
    $
    Comprehensive Income:Net incomeTotal comprehensive incomeIssuance of Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    $
    50,000Balance December 31, 2001
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000Comprehensive Income:Net incomeTotal comprehensive incomeBalance December 31, 2002
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000Comprehensive Income:Net incomeTotal comprehensive incomeBalance December 31, 2003
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000
 Preferred, Class D
    
    Preferred
    
    Common
    
    Retained(in thousands)
    
    Shares
    
    Securities
    
    Shares
    
    Securities
    
    Shares
    
    Securities
    
    Earnings
    
    TotalBalance January 1, 2001
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    1
    
    
    $
    6,341,717
    
    
    $
    155,556
    
    
    $
    6,898,273Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    469,540
    
    
    
    469,540Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    469,540Issuance of Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Issuance of Class D preferred securities
    
    
    14,000
    
    
    
    350,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,000Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,690
    )
    
    
    (17,690
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (853
    )
    
    
    (853
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,204
    )
    
    
    (3,204
    )Dividends declared on common securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,118
    )
    
    
    (538,052
    )
    
    
    (539,170
    )Common shares issued in 18,666.66667-to-1 split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,999
    
    
    
    
    
    
    
    
    
    
    
    Distribution of participation interests in Florida loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,273,059
    )
    
    
    
    
    
    
    (1,273,059
    )Capital contribution in consideration for the acquisition of
loan participations, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,971
    
    
    
    
    
    
    
    14,971Balance December 31, 2001
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    5,082,511
    
    
    $
    65,217
    
    
    $
    5,948,728Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    341,437
    
    
    
    341,437Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    341,437Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,525
    )
    
    
    (7,525
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,937
    )
    
    
    (3,937
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,272
    )
    
    
    (12,272
    )Dividends declared on common securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (382,840
    )
    
    
    (382,840
    )Return of Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (367,160
    )
    
    
    
    
    
    
    (367,160
    )Balance December 31, 2002
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,715,351
    
    
    $
    
    
    
    $
    5,516,351Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308,539
    
    
    
    308,539Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308,539Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,910
    )
    
    
    (4,910
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,938
    )
    
    
    (3,938
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,983
    )
    
    
    (9,983
    )Dividends declared on common securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (289,628
    )
    
    
    (289,628
    )Return of Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110,373
    )
    
    
    
    
    
    
    (110,373
    )Balance December 31, 2003
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,604,978
    
    
    $
    
    
    
    $
    5,405,978
 See notes to consolidated financial statements. 35




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##### Table of Contents



Huntington Preferred
Capital, Inc. 
 Consolidated Statements
of Cash Flows
 Twelve Months Ended December 31,(in thousands of dollars)
    
    2003
    
    2002
    
    2001Operating ActivitiesNet Income before preferred dividends
    
    $
    308,539
    
    
    $
    341,437
    
    
    $
    469,540Adjustments to reconcile net income to net
cash provided by operating activities:Provision (credit) for loan losses
    
    
    (41,219
    )
    
    
    (161
    )
    
    
    48,510Depreciation and amortization
    
    
    5,527
    
    
    
    5,767
    
    
    
    1,529Loss on disposal of fixed assets
    
    
    336
    
    
    
    483
    
    
    
    Decrease in accrued income and other assets
    
    
    21,918
    
    
    
    2,384
    
    
    
    15,328(Increase) decrease in due from/to Huntington
Preferred Capital Holdings, Inc. and The
Huntington National Bank
    
    
    (6,212
    )
    
    
    286,369
    
    
    
    (69,258
    )(Decrease) Increase in other liabilities
    
    
    (670
    )
    
    
    639
    
    
    
    31Net Cash Provided by Operating Activities
    
    
    288,219
    
    
    
    636,918
    
    
    
    465,680Investing ActivitiesParticipation interests acquired
    
    
    (5,967,359
    )
    
    
    (4,868,942
    )
    
    
    (5,909,528
    )Sales and repayments on loans underlying
participation interests
    
    
    5,687,784
    
    
    
    5,174,877
    
    
    
    5,491,976Proceeds from the sale of fixed assets
    
    
    99
    
    
    
    303
    
    
    
    Purchase of premises and equipment
    
    
    
    
    
    
    
    
    
    
    (797
    )Net Cash (Used for) Provided by Investing Activities
    
    
    (279,476
    )
    
    
    306,238
    
    
    
    (418,349
    )Financing ActivitiesDividends paid on preferred securities
    
    
    (18,911
    )
    
    
    (23,814
    )
    
    
    (21,827
    )Dividends paid on common securities
    
    
    (289,628
    )
    
    
    (382,840
    )
    
    
    (539,170
    )Return of capital to common shareholders
    
    
    (110,373
    )
    
    
    (367,160
    )
    
    
    (1,697
    )Net Cash Used for Financing Activities
    
    
    (418,912
    )
    
    
    (773,814
    )
    
    
    (562,694
    )Change in Cash and Cash Equivalents
    
    
    (410,169
    )
    
    
    169,342
    
    
    
    (515,363
    )Cash and Cash Equivalents:at Beginning of Period
    
    
    534,254
    
    
    
    364,912
    
    
    
    880,275at End of Period
    
    $
    124,085
    
    
    $
    534,254
    
    
    $
    364,912Supplemental information:Net capital contributions from common
shareholders in the form of participation
interests in loans
    
    $
    
    
    
    $
    
    
    
    $
    14,971Capital contributions from preferred
shareholders in the form of participation
interests in loans and leasehold improvements
    
    
    
    
    
    
    
    
    
    
    400,000Capital distribution to common shareholders
in the form of participation interests in loans
    
    
    
    
    
    
    
    
    
    
    (1,271,362
    )Income taxes paid
    
    $
    611
    
    
    $
    
    
    
    $
    Interest paid
    
    
    
    
    
    
    
    
    
    
    
 See notes to consolidated financial statements. 36




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##### Table of Contents



Notes to Consolidated Financial Statements 1. Significant Accounting Policies Basis of Presentation:The consolidated financial statements include the
accounts of Huntington Preferred Capital, Inc. (HPCI) and its subsidiary
and are presented in conformity with accounting principles generally accepted
in the United States (GAAP). The consolidated financial statements 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.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Business:HPCI is an Ohio corporation
operating as a real estate investment trust (REIT) for federal income tax
purposes. HPCIs principal business objective is to acquire, hold, and manage
mortgage assets and other authorized investments that will generate net income
for distribution to its shareholders. Use of Estimates:The preparation of financial statements in conformity with
GAAP requires Management to make estimates and assumptions that affect amounts
reported in the financial statements. Actual results could differ from those
estimates. Loan participation
interests:Loan participation interests in loans are acquired
from the Bank through Holdings by HPCI at the Banks carrying value, which is
the principal amount outstanding plus accrued interest, net of unearned income,
if any, less an allowance for loan losses. Participation interests are
categorized based on the collateral securing the underlying loan. Interest income is accrued based on unpaid principal balances of the
underlying loans as earned. The underlying commercial and commercial real
estate loans are placed on non-accrual status and stop accruing interest when
collection of principal or interest is in doubt. When interest accruals are
suspended, accrued interest income is reversed with current year accruals
charged to earnings and prior year amounts generally charged off as a credit
loss. The underlying consumer loans are not placed on non-accrual status; rather they are
charged off in accordance with regulatory statutes governing the Bank.
Consistent with these statutes, consumer loans are charged off when the Bank,
as servicer, determines that a loan is doubtful of collection. Generally, this
occurs when a loan is 120 days past due. Residential real estate loans are
placed on non-accrual status when principal payments are 180 days past due or
interest payments are 210 days past due. A charge-off on a residential real
estate loan is recorded when the loan has been foreclosed and the loan balance
exceeds the fair value of the collateral. HPCI uses the cost recovery method in accounting for cash received on
non-accrual loans. Under this method, cash receipts are applied entirely
against principal until the loan has been collected in full, after which time
any additional cash receipts are recognized as interest income. When, in
Managements judgment, the borrowers ability to make periodic interest and
principal payments resumes, the loan is returned to accrual status. The Financial Accounting Standards Board (FASB) Statement No. 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Cost of Leases(FAS 91), addresses the
timing of recognition of loan and lease origination fees and certain expenses.
The statement requires that such fees and costs, if material, be deferred and
amortized over the estimated life of the asset. HPCI receives origination fees
related to certain participations it purchases. Prior to July 1, 2003, HPCI did
not defer origination fees and recognized the amounts in the period of
origination. HPCI began to defer origination fees prospectively for all loans
purchased after June 30, 2003. For the third and fourth quarters of 2003, HPCI
deferred a total of $2.2 million in fees. The decision to defer fees from
purchased loans only impacts the timing, not the total amount, of net revenue
recognized over the life of the asset. If HPCI had previously deferred these
fees, the impacts on the prior period financial statements presented in this
document would have been immaterial. Additionally, the decision to
prospectively defer these fees will not materially impact HPCIs future results
of operations and will have no impact on its ability to pay operating expenses
and dividends. HPCI incurs no direct loan origination costs. An underlying loan involved in a participation acquired by HPCI is
considered impaired when, based on current information and events, it is
determined that estimated cash flows are less than the cash flows estimated at
the date of purchase. A loan originated by the Bank is considered impaired
when, based on current information and events, it is probable that it will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that 37




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. The significance of payment delays
and payment shortfalls is determined on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower.
This includes the length of the delay, the reasons for the delay, the
borrowers prior payment record, and the amount of the shortfall in relation to
the principal and interest owed. Loan impairment is measured on a loan-by-loan
basis by comparing the recorded investment in the loan to the present value of
expected future cash flows discounted at the loans effective interest rate,
the loans obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. Impaired Loans are taken into
consideration when evaluating the allowance for Loan Losses. Allowance for Loan Losses:An allowance for loan losses (ALL) is transferred to
HPCI through Holdings from the Bank on loans underlying the participations at
the time the participations are acquired. Prior to the fourth quarter of 2001,
HPCI transferred a portion of the ALL related to loan paydowns and other
similar transactions underlying the participation interests back to the Bank.
Subsequently, with concerns over the general economy and the deteriorating
credit quality in the loan participation portfolio, HPCI ceased transferring
the allowance for such transactions to allow the ALL to build appropriately.
The allowance for loan losses reflects Managements judgment as to the level
considered appropriate to absorb inherent losses in the loan participation
portfolio. This judgment is based on a review of individual loans underlying
the participations, historical loss experience of similar loans owned by the
Bank, economic conditions, portfolio trends, and other factors. When necessary,
the allowance for loan losses will be adjusted through a provision for loan
losses charged to earnings. Loan losses are charged against the allowance when
Management believes the loan balance, or a portion thereof, is uncollectible.
Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses consists of a component for individual loan
impairment and a component of collective loan impairment recognized and
measured pursuant to FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loanan amendment of FASB Statements No. 5 and 15and FASB
Statement No. 5, Accounting for Contingencies, respectively. The component for
individual loan impairment reflects expected losses resulting from quantitative
analyses developed through historical loss experience and specific credit
allocations at the
individual underlying loan level for commercial and commercial real estate
loans. The specific credit allocations are based on a continuous analysis of
all loans by internal credit rating. The historical loss element is determined
using a loss migration analysis that examines both the probability of default
and the loss in the event of default by loan category and internal credit
rating. The loss migration analysis is performed periodically and loss factors
are updated regularly based on actual experience. The component for collective
loan impairment is determined by applying specific probability of default and
loss in the event of default factors to homogeneous segments of the consumer
loan portfolio. Managements determination of the amounts necessary for
concentrations and changes in portfolio mix are also included in the allowance. Premises and Equipment:Premises and equipment, primarily leasehold
improvements, are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization is computed principally by the
straight-line method over the estimated useful lives of the related assets.
Buildings are depreciated over an average of 30 to 40 years. Land improvements
are depreciated over 10 years. Leasehold improvements are amortized over the
lesser of the asset life or term of the related leases. Earnings per Share:All of HPCIs common stock is owned by Huntington, HPCII,
and HPCH-III and therefore, earnings per common share information is not
presented. Income Taxes:HPCI has elected to be treated as a REIT for Federal income tax
purposes and intends to comply with the provisions of the Internal Revenue
Code. Accordingly, HPCI will not be subject to Federal income tax to the extent
it distributes its earnings to stockholders and as long as certain asset,
income and stock ownership tests are met in accordance with the Internal
Revenue Code. As HPCI expects to maintain its status as a REIT for Federal
income tax purposes, only a provision for income taxes is included in the
accompanying financial statements for its subsidiarys taxable income. HPCLI is
a taxable REIT subsidiary for federal income tax purposes. Statement of Cash
Flows:Cash and cash equivalents are defined as Cash. 38




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) 2.New Accounting Standards 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 the recorded 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. The impact of this new pronouncement had no impact
on HPCIs financial condition, results of operations, or cash flows. FASB Interpretation No. 45,Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others(FIN 45):FIN 45 was issued in November 2002, and changes prior practice
in the accounting for, and disclosure of, guarantees requiring certain
guarantees to be recorded at fair value at inception, which differs from the
prior practice of recording a liability generally when a loss is probable and
reasonably estimable, as those terms are defined in FASB Statement No. 5,
Accounting for Contingencies. FIN 45 also requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote, which also differs from prior practice. HPCI
prospectively adopted FIN 45 on January 1, 2003. The impact of this new
pronouncement had no impact on HPCIs financial condition, results of
operations, or cash flows. Early Adoption of FASB Interpretation No. 46,Consolidation of Variable
Interest Entities(FIN 46):In January 2003, the FASB issued FIN 46. This
Interpretation of Accounting Research Bulletin No. 51 (ARB 51), Consolidated
Financial Statements, as amended, addresses consolidation by business
enterprises where ownership interests in an entity may vary over time or, in
many cases, of special-purpose entities (SPEs). To be consolidated for
financial reporting, these entities must have certain characteristics. ARB 51
requires that an enterprises consolidated financial statements include
subsidiaries in which the enterprise has a controlling financial interest. FIN
46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. An enterprise that holds significant
variable interests in such an entity, but is not the primary beneficiary, is
required to disclose certain information regarding its interests in that
entity. FIN 46 applies in the first fiscal year or interim period ending after
December 15, 2003, to variable interest entities in which an enterprise holds
an interest that it acquired before February 1, 2003. It also applies
immediately to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an interest after
that date. FIN 46 may be applied (1) prospectively with a cumulative-effect
adjustment as of the date on which it is first applied, or (2) by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Effective July 1, 2003, HPCI adopted FIN 46. The impact of this new
pronouncement had no impact on HPCIs financial condition, results of
operations, or cash flows. FASB Statement No. 149,Amendment of Statement 133 on Derivative
Instruments and Hedging Activities(FAS 149):FAS 149 was issued in April 2003
to amend and clarify financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under Statement No. 133. The changes in FAS 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, FAS 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative discussed in paragraph 6(b) of Statement No. 133, (2) clarifies when
a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FIN 45,and (4) amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or 39




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) hybrid instruments. FAS 149 is
substantially effective on a prospective basis for contracts entered into or
modified after June 30, 2003. The impact of this new pronouncement had no
impact on HPCIs financial condition, results of operations, or cash flows. FASB Statement No. 150,Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity(FAS 150):FAS 150 was issued in
May 2003 to establish standards for how an issuer such as
Huntington classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. Some of the provisions of FAS 150 are consistent with the
current definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements.The remaining provisions of FAS 150 are consistent with
the FASBs proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own equity shares,
depending on the nature of the relationship established between the holder and
the issuer. FAS 150 does not apply to features that are embedded in a financial
instrument that is not a derivative in its entirety. FAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The impact of this new pronouncement had no impact on
HPCIs financial condition, results of operations, or cash flows. 3.Loan Participation Interests Loan participation interests are categorized based on the collateral
underlying the loan. At December 31, loan participation interests were
comprised of the following: (in thousands of dollars)
    
    2003
    
    2002Commercial
    
    $
    147,211
    
    
    $
    344,858Commercial real estate
    
    
    4,245,092
    
    
    
    3,922,467Consumer
    
    
    622,575
    
    
    
    612,357Residential real estate
    
    
    288,190
    
    
    
    153,808Total Loan Participations
    
    $
    5,303,068
    
    
    $
    5,033,490
 There were no underlying loans outstanding that would be considered a
concentration of lending in any particular industry, group of industries, or
business activity. Underlying loans were, however, generally collateralized by
real estate and were made to borrowers in the four states of Ohio, Michigan,
Indiana, and Kentucky, which comprise 94.8% and 95.8% of the portfolio at
December 31, 2003 and 2002, respectively. On December 31, 2001, in anticipation of the eventual sale by the Bank of
its Florida banking operations to SunTrust Banks, Inc. (SunTrust), which closed
on February 15, 2002, HPCI distributed participation interests in
Florida-related loans to its common shareholders, Holdings and Huntington.
This distribution approximated $1.3 billion and consisted of cash and the net
book value of participation interests in loans, net of $18.6 million of ALL,
which were included in the sale to SunTrust, including the related accrued
interest. This distribution represented approximately 17% of HPCIs total
assets as of December 31, 2001. Participations in Non-Performing Loans and Past Due Loans At December 31, 2003 and 2002, the participations in loans in non-accrual
status and loans past due 90 days or more and still accruing interest, were as
follows: (in thousands of dollars)
    
    2003
    
    2002Commercial
    
    $
    5,176
    
    
    $
    57,112Commercial real estate
    
    
    12,987
    
    
    
    32,979Residential real estate
    
    
    4,157
    
    
    
    6,455Total Participations in Non-Accrual Loans
    
    $
    22,320
    
    
    $
    96,546Participations in Accruing Loans Past Due 90 Days or More
    
    $
    13,363
    
    
    $
    26,060
 The amount of interest that would have been recorded under the original
terms for participations in loans classified as non-accrual was $2.6 million
for 2003, $8.6 million for 2002, and $5.8 million for 2001. Amounts actually
collected 40




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) and recorded as interest income for these
participations totalled $1.2 million, $3.5 million, and $2.8 million over the
same respective years. 4. Allowance for Loan Losses An allowance for loan losses (ALL) is transferred to HPCI from the Bank on
loans underlying the participations at the time the participations are
acquired. Prior to the fourth quarter of 2001, HPCI had been transferring a
portion of the ALL related to loan paydowns and other similar transactions
underlying the participation interests back to the Bank through Holdings.
Subsequently, HPCI ceased transferring the allowance for such transactions. A summary of the transactions in the ALL follows for each of the two years
ended December 31: (in thousands of dollars)
    
    2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    140,353
    
    
    $
    175,690
    
    
    $
    73,222Allowance of loan participations acquired, net
    
    
    45,397
    
    
    
    37,020
    
    
    
    113,291Net loan losses
    
    
    (59,999
    )
    
    
    (72,196
    )
    
    
    (59,333
    )Provision (credit) for loan losses
    
    
    (41,219
    )
    
    
    (161
    )
    
    
    48,510Balance, end of year
    
    $
    84,532
    
    
    $
    140,353
    
    
    $
    175,690
 Loans totaling $22.3 million at December 31, 2003, compared with $96.5
million at December 31, 2002, have been identified as impaired and were on
nonaccrual status, have been measured by the fair value of existing collateral.
Total participation interests in impaired loans, as a percentage of total loan
participations, was 0.42% and 1.92%, as of December 31, 2003 and 2002,
respectively. During the first quarter of 2003, a total of $12.2 million of interest
receivables were determined to be uncollectable and charged off against the
ALL. These interest receivables related to loans that were previously charged
off. 5. Premises and Equipment At December 31, premises and equipment stated at cost were comprised of
the following: (in thousands of dollars)
    
    2003
    
    2002Land and land improvements
    
    $
    365
    
    
    $
    365Buildings
    
    
    533
    
    
    
    533Leasehold improvements
    
    
    106,747
    
    
    
    108,505Total premises and equipment
    
    
    107,645
    
    
    
    109,403Accumulated depreciation
    
    
    (75,519
    )
    
    
    (71,315
    )Net Premises and Equipment
    
    $
    32,126
    
    
    $
    38,088
 Premises and equipment related depreciation and amortization, in the
amounts of $5.5 million, $5.8 million, and $1.5 million, were charged to
expense in the years ended December 31, 2003, 2002, and 2001, respectively. 6.Dividends Holders of Class A preferred securities, a majority of which are currently
held by HPCH-III and the remainder by current and past employees of the Bank
and Huntington, are entitled to receive, if, when, and as declared by the Board
of Directors of HPCI out of funds legally available, dividends at a fixed rate
of $80.00 per share per annum.
Dividends on the Class A preferred securities, if declared, are payable
annually in December to holders of record on the record date fixed for such
purpose by the Board of Directors in advance of payment. The holder of the Class B preferred securities, HPC Holdings-II, Inc., a
direct non-bank subsidiary of Huntington, is entitled to receive, if, when, and
as declared by the Board of Directors of HPCI out of funds legally available,
dividends at a variable rate equal to the three month LIBOR published on the
first day of each calendar quarter times par value. Dividends on the Class B
preferred securities, which are declared quarterly, are payable annually and
are non- 41




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) cumulative. No dividend, except payable in common shares, may be
declared or paid upon Class B preferred securities unless dividend obligations
are satisfied on the Class A, Class C, and Class D preferred securities. Holders of Class C preferred securities are entitled to receive, if, when,
and as declared by the Board of Directors of HPCI out of funds legally
available, dividends at a fixed rate of 7.875% per annum, of the initial
liquidation preference of $25.00 per share, payable quarterly. Dividends
accrue in each quarterly period from the first day of each period, whether or
not dividends are paid with respect to the preceding period. Dividends are not
cumulative and if no dividend is paid on the Class C preferred securities for a
quarterly dividend period, the payment of dividends on HPCIs common stock and
other HPCI-issued securities ranking junior to the Class C preferred securities
(i.e., Class B preferred securities) will be prohibited for that period and at
least the following three quarterly dividend periods. The holder of Class D preferred securities, currently HPCH-III, is
entitled to receive, if, when, and as declared by the Board of Directors of
HPCI out of funds legally available, dividends at a variable rate established
at the beginning of each calendar quarter equal to three month LIBOR published
on the first day of each calendar quarter, plus 1.625% times par value, payable
quarterly. Dividends accrue in each quarterly period from the first day of
each period, whether or not dividends are paid with respect to the preceding
period. Dividends are not cumulative and if no dividend is paid on the Class D
preferred securities for a quarterly dividend period, the payment of dividends
on HPCIs common stock and other HPCI-issued securities ranking junior to the
Class D preferred securities (i.e., Class B preferred securities) will be
prohibited for that period and at least the following three quarterly dividend
periods. A summary of dividends declared by each class of preferred securities
follows for the periods indicated: (in thousands of dollars)
    
    2003
    
    2002
    
    2001Class A preferred securities
    
    $
    80
    
    
    $
    80
    
    
    $
    80Class B preferred securities
    
    
    4,910
    
    
    
    7,525
    
    
    
    17,690Class C preferred securities
    
    
    3,938
    
    
    
    3,937
    
    
    
    853Class D preferred securities
    
    
    9,983
    
    
    
    12,272
    
    
    
    3,204Total preferred dividends declared
    
    $
    18,911
    
    
    $
    23,814
    
    
    $
    21,827
 As of December 31, 2003 and 2002, all declared dividends were paid to
shareholders. For HPCI to meet its statutory requirement for a REIT to distribute 90% of
its taxable income to its shareholders, the holders of common shares received
dividends declared by the board of directors, subject to any preferential
dividend rights of the outstanding preferred securities. Dividends on common
stock declared for each of the years ended December 31, 2003, 2002, and 2001,
were $289.6 million, $382.8 million, and $539.2 million, respectively. 7.Related Party Transactions HPCI is a party to an Amended and Restated Loan Subparticipation Agreement
with Holdings, a Loan Subparticipation Agreement with HPCH-III, and a Loan
Participation Agreement with the Bank. Under these agreements, HPCI holds a
100% participation interest and a subparticipation interest in Holdings 100%
participation interest in loans originated by the Bank and its subsidiaries.
The participation and subparticipation interests were in commercial, commercial
real estate, residential real estate, and consumer loans that were either
directly underwritten by the Bank and its subsidiaries or acquired by the Bank.
On May 12, 2003, the amendments to and new participation and subparticipation
agreements were approved by the Board of Directors to allow HPCI to acquire
interests in loans directly from the Bank. Prior to this date, participation
interests in loans were acquired from the Bank only through Holdings at the
Banks carrying value, which is the principal amount outstanding plus
accrued interest, net of unearned income, if any, less an ALL. The amended
and new agreements also allow for HPCI to acquire up to a 100% participation
interest in such loans. HPCI expects to continue to purchase such interests,
net of ALL, in the future from the Bank or its affiliates. The Bank performs the servicing of the commercial, commercial real estate,
residential real estate, and consumer loans underlying the participations held
by HPCI in accordance with normal industry practice under the amended
participation agreements and subparticipation agreements. As of June 1, 2003,
the annual servicing fee the Bank 42




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) charges was 0.125% of the outstanding
principal balances of the underlying commercial and commercial real estate
loans, 0.320% of the outstanding principal balances of the underlying consumer
loans, and 0.2997% of the outstanding principal balances of the underlying
residential real estate loans. Prior to June 1, 2003, the servicing fee the
Bank charged, on an annual basis, was 0.125% with respect to the underlying
commercial real estate, commercial, and consumer loan balances and 2.35% of the
interest income collected on residential real estate loans. In its capacity as
servicer, the Bank collects and holds the loan payments received on behalf of
HPCI until the end of each month. At month end, the payments are transferred to
HPCI and, accordingly, HPCI does not reflect any receivables for payments from
the Bank in the accompanying consolidated financial statements. Servicing fee
expense paid to the Bank totaled $7.6 million, $6.7 million and $8.3 million
for the respective years ended December 31, 2003, 2002, and 2001. Huntington and the Banks personnel handle day-to-day operations of HPCI
such as financial analysis and reporting, accounting, tax reporting, and other
administrative functions. On a monthly basis, HPCI reimburses the Bank and
Huntington for the cost related to the time spent by employees for performing
these functions. These personnel costs totaled $282,000, $162,000, and
$162,000, respectively, for the years ended December 31, 2003, 2002, and 2001. In February 2001, Huntington purchased 18,667 shares of the 14 million
outstanding common shares of HPCI from Holdings (after adjusting for the April
2001 18,666.67-for-1 stock split). Prior to February 2001, Holdings was the
owner of 100% of the outstanding common stock of HPCI. On July 1, 2002,
Holdings exchanged 4.55 million common shares of HPCI and certain other assets
for two classes of HPC IIs preferred stock. On December 27, 2002, Holdings
contributed its ownership in HPCIs Class A and Class D preferred securities
and its remaining common stock to HPCH-III. The following table represents the
current ownership of HPCIs common and preferred securities: Number ofCommon
    
    Number of Preferred SecuritiesOwner at December 31, 2003:
    
    Shares
    
    Class A
    
    Class B
    
    Class C
    
    Class DHPC II
    
    
    4,550,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    HPCH-III
    
    
    9,431,333
    
    
    
    893
    
    
    
    
    
    
    
    
    
    
    
    14,000,000HPC Holdings II, Inc.
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    
    
    
    
    Huntington
    
    
    18,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total held by related parties
    
    
    14,000,000
    
    
    
    893
    
    
    
    400,000
    
    
    
    
    
    
    
    14,000,000Other shareholders
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    2,000,000
    
    
    
    
 As of December 31, 2003, 10.7% of the Class A preferred securities were
owned by current and past employees of Huntington and its subsidiaries in
addition to the 89.3% owned by HPCH-III. The Class A preferred securities are
non-voting. All of the Class B preferred securities are owned by HPC Holdings
II, Inc., a non-bank subsidiary of Huntington and are non-voting. In 2001,
the Class C preferred securities were obtained by Holdings, who sold the
securities to the public. Various board members and executive officers of
HPCI have purchased a portion of the Class C preferred securities. At
December 31, 2003, a total of 7,100 shares, or 0.355%, were beneficially owned
by HPCI board members and executive officers in the aggregate. All of the
Class D preferred securities owned by HPCH-III are being held for possible
sale to the public in the future. In the event HPCI redeems its Class
C or Class D preferred securities, holders of such securities will be
entitled to receive $25.00 per share plus accrued and unpaid
dividends on such shares. The redemption amount may be significantly
lower than the then current market price of the Class C or Class D
preferred securities. Actual dividends paid to the Class C and D
shareholders in the fourth quarter of 2003 were $984,375 and $2,428,125,
respectively, and were paid on December 31, 2003. Both the Class C and D preferred securities are entitled to one-tenth of
one vote per share on all matters submitted to HPCI shareholders. The Class C
and D preferred securities are exchangeable, without shareholder approval or
any action of shareholders, for preferred securities of the Bank with
substantially equivalent terms as to
dividends, liquidation preference, and redemption if the Office of the
Comptroller of the Currency (OCC) so directs only under the following
circumstances where the Bank becomes or may in the near term become
undercapitalized, or the Bank is placed in conservatorship or receivership.
The Class C and Class D preferred securities are redeemable at HPCIs option
on or after December 31, 2021, and December 31, 2006, respectively, with prior
consent of the OCC. As HPCIs common stock is held by related parties, there is no established
public trading market for the stock. HPCIs premises and equipment were acquired from the Bank through
Holdings. Leasehold improvements were subsequently contributed to HPCLI for its
common shares in the fourth quarter of 2001. HPCLI charges rent to the 43




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Notes to Consolidated Financial Statements (Continued) Bank for
use of applicable facilities by the Bank. During the respective years ended
December 31, 2003, 2002, and 2001, HPCLI received $6.2 million, $6.1 million,
and $1.6 million of rental income. Rental income was reflected as a component
of non-interest income in the consolidated statements of income. The Bank is eligible to obtain advances from various federal and
government-sponsored agencies such as the Federal Home Loan Bank of Cincinnati.
From time to time, HPCI may be asked to act as guarantor of the Banks
obligations under such advances and/or pledge all or a portion of its assets in
connection with those advances. See note 10 for further information regarding
the pledging of HPCIs assets in association with the Banks advances. HPCI holds a 100% subparticipation interest in Holdings 100%
participation interests in loans originated by the Bank and its subsidiaries.
HPCI also has the ability to directly purchase up to 100% participation
interests in loans originated by the Bank and its subsidiaries. The
participation and subparticipation interests are in commercial, commercial real
estate, residential real estate, and consumer loans that were either directly
underwritten by the Bank and its subsidiaries or acquired by the Bank. HPCI
expects to continue to purchase such interests, net of ALL, in the future from
Holdings or the Bank. See Note 3 for the amount of the participations
outstanding. HPCI has a non-interest bearing receivable from Holdings of $13.7 million and
$7.4 million at December 31, 2003 and 2002, respectively. These balances
represent unsettled cash transactions that occur in the ordinary course of business. HPCI maintains and transacts all of its cash activity through a
non-interest bearing demand deposit account with the Bank. In addition, to the
extent that it does not jeopardize its qualification as a REIT, HPCI invests
available funds in Eurodollar deposits with the Bank for a term of not more
than 30 days. 8. Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of
operations for the years ended December 31: (in thousands of dollars)
    
    Fourth
    
    Third
    
    Second
    
    First2003Interest and fee income
    
    $
    66,715
    
    
    $
    67,687
    
    
    $
    68,870
    
    
    $
    71,129Provision (credit) for loan losses
    
    
    (7,301
    )
    
    
    (18,918
    )
    
    
    (15,000
    )
    
    
    Non-interest income
    
    
    1,656
    
    
    
    1,670
    
    
    
    1,609
    
    
    
    1,966Non-interest expense
    
    
    3,640
    
    
    
    3,660
    
    
    
    3,228
    
    
    
    3,358Income before income taxes
    
    
    72,032
    
    
    
    84,615
    
    
    
    82,251
    
    
    
    69,737Income taxes
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24Net income before preferred dividends
    
    
    72,008
    
    
    
    84,591
    
    
    
    82,227
    
    
    
    69,713Dividends on preferred stock
    
    
    4,562
    
    
    
    4,488
    
    
    
    4,787
    
    
    
    5,074Net income applicable to common shareholders
    
    $
    67,446
    
    
    $
    80,103
    
    
    $
    77,440
    
    
    $
    64,6392002Interest and fee income
    
    $
    81,456
    
    
    $
    86,702
    
    
    $
    89,484
    
    
    $
    90,112Provision (credit) for loan losses
    
    
    (20,000
    )
    
    
    
    
    
    
    3,000
    
    
    
    16,839Non-interest income
    
    
    1,697
    
    
    
    1,721
    
    
    
    1,806
    
    
    
    1,535Non-interest expense
    
    
    3,234
    
    
    
    3,152
    
    
    
    3,257
    
    
    
    3,639Income before income taxes
    
    
    99,919
    
    
    
    85,271
    
    
    
    85,033
    
    
    
    71,169Income taxes
    
    
    25
    
    
    
    22
    
    
    
    25
    
    
    
    (117
    )Net income before preferred dividends
    
    
    99,894
    
    
    
    85,249
    
    
    
    85,008
    
    
    
    71,286Dividends on preferred stock
    
    
    5,709
    
    
    
    5,892
    
    
    
    6,231
    
    
    
    5,982Net income applicable to common shareholders
    
    $
    94,185
    
    
    $
    79,357
    
    
    $
    78,777
    
    
    $
    65,304
 44




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Notes to Consolidated Financial Statements (Continued) 9. Fair Value of Financial Instruments The following methods and assumptions were used by HPCI to estimate the
fair value of the classes of financial instruments: Cash and due from
affiliates- The carrying value approximates the fair value
for cash and short-term investments. Loan participation
interests- Underlying variable rate loans that reprice frequently are
based on carrying amounts, as adjusted for estimated credit losses. The fair
values for other loans are estimated using discounted cash flow analyses and
employ interest rates currently being offered for loans with similar terms. The
rates take into account the position of the yield curve, as well as an
adjustment for prepayment risk, operating costs, and profit. This value is also
reduced by an estimate of probable losses in the loan portfolio. Based upon the
calculations, the carrying values disclosed in the accompanying consolidated
financial statements approximate fair value. 10.Commitments and Contingencies The Bank is eligible to obtain advances from various federal and
government-sponsored agencies such as the Federal Home Loan Bank (FHLB). From time to time, HPCI may be asked to act as guarantor of the
Banks obligations under such advances and/or pledge all or a portion of its
assets in connection with those advances. Any such guarantee and/or pledge
would rank senior to HPCIs common and preferred securities upon liquidation.
Accordingly, any federal or government-sponsored agencies that make advances to
the Bank where HPCI has acted as guarantor or has pledged all or a portion of
its assets as collateral will have a liquidation preference over the holders of
HPCIs securities. Any such guarantee and/or pledge in connection with the
Banks advances from federal or government-sponsored agencies falls within the
definition of Permitted Indebtedness (as defined in HPCIs articles of
incorporation) and, therefore, HPCI is not required to obtain the consent of
the holders of its common or preferred securities for any such guarantee and/or
pledge. The Bank is currently eligible to obtain one or more advances from the
FHLB based upon the amount of FHLB capital stock owned by the Bank. As of
December 31, 2003, the Banks total borrowing capacity under this facility was
capped at $1.4 billion. As of this same date, the Bank had borrowings of $1.3
billion under this facility. In addition, the FHLB issued a standby letter of
credit for the account of a customer of Huntington totaling $18.2 million which
was secured by loans which have been participated to HPCI. HPCI has entered into an agreement with the Bank with respect to the
pledge of HPCIs assets to collateralize the Banks borrowings from the FHLB.
The agreement provides, among other things, that the Bank will not place at
risk HPCIs assets in excess of an aggregate amount or percentage of such
assets established from time to time by HPCIs board of directors, including a
majority of HPCIs independent directors. HPCIs board has set this limit at
$1.0 billion, which limit may be changed in the future by the board of
directors, including a majority of HPCIs independent directors. As of December
31, 2003, HPCIs pledged collateral was limited to HPCIs interest in 1-4
family residential mortgages and second mortgage loans, totalling $651 million.
The agreement also provides that the Bank will pay HPCI a monthly fee based
upon the pledged collateral held by HPCI. The Bank paid HPCI a total of $718
thousand and $641 thousand in the respective annual periods ended December 31,
2003 and 2002, representing twelve basis points per year on the collateral
pledged, as compensation for making such assets
available to the Bank as collateral. No fees were received in 2001, as HPCI
began receiving these fees after the first quarter of 2002. Under the terms of the participation and subparticipation agreements, HPCI
is obligated to make funds or credit available to the Bank, either directly,
indirectly through Holdings, or indirectly through Holdings and HPC
Holdings-III, Inc., so that the Bank my extend credit to any borrowers, or pay
letters of credit issued for the account of any borrowers, to the extent
provided in the loan agreements underlying HPCIs participation interests. The
unfunded commitments at December 31, 2003 and 2002 totaled $1.1 billion and
$911 million, respectively. 11.Segment Reporting HPCIs operations consist of acquiring, holding, and managing its
participation interests. Accordingly, HPCI only operates in one segment. HPCI
has no external customers and transacts all of its business with the Bank and
its affiliates. 45




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##### Table of Contents



Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On February 24, 2004, the Audit Committee of HPCI decided to dismiss Ernst
& Young LLP as HPCIs independent accountants, and appointed Deloitte & Touche
LLP as HPCIs new independent accountants to audit HPCIs financial statements
for the year ending December 31, 2004. Ernst & Young LLPs dismissal is
effective on March 30, 2004. The audit reports of Ernst & Young LLP on the financial statements of HPCI
and subsidiary as of and for the years ended December 31, 2003 and 2002, did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles. During HPCIs two most recent years ended December 31, 2003, and the
subsequent interim period through March 30, 2004, there were no disagreements
between HPCI and Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure
(within the meaning of Item 304(a)(1)(iv) of Regulation S-K) and there were no
reportable events (as defined by Item 304(a)(1)(v) of Regulation S-K). During HPCIs two most recent years ended December 31, 2003, and the
subsequent interim period through March 30, 2004, neither HPCI nor anyone on
its behalf consulted with Deloitte & Touche LLP regarding any of the matters or
events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K. 
 Item 9A: Controls and Procedures HPCIs
management, with the participation of its President (principal
executive officer) and the Vice President (principal financial
officer), evaluated the effectiveness of Huntingtons
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this report. Based upon such evaluation, HPCIs President and
Vice President have concluded that, as of the end of such period,
HPCIs disclosure controls and procedures are effective. There have not been any changes in Huntingtons internal control over
financial reporting (as such term is defined in Rules 13a-15(f) ad 15d-15(f)
under the Exchange Act) during the quarter ended December 31, 2003 to which
this report relates that have materially affected, or are reasonably likely to
materially affect, HPCIs internal control over financial reporting. 
 Part III 
 Item 10: Directors and Executive Officers of the Registrant Information required by this item is set forth under the caption Election
of Directors and under the caption Section 16(a) Beneficial Ownership
Reporting Compliance of HPCIs 2004 Information Statement, and is incorporated
herein by reference. 
 Item 11: Executive Compensation Information required by this item is set forth under the caption
Compensation of Directors and Executive Officers of HPCIs 2004 Information
Statement and is incorporated herein by reference. 
 Item 12: Security Ownership of Certain Beneficial Owners and Management Information required by this item is set forth under the caption
Ownership of Voting Stock of HPCIs 2004 Information Statement and is
incorporated herein by reference. 
 Item 13: Certain Relationships and Related Transactions Information required by this item is set forth under the caption
Transactions with Directors and Officers and Transactions with Certain
Beneficial Owners of HPCIs 2004 Information Statement and is incorporated
herein by reference. 
 Item 14: Principal Accounting Fees and Services Information required by this item is set forth under the caption Proposal
to Ratify the Appointment of Independent Auditors of HPCIs 2004 Information
Statement and is incorporated herein by reference. 46




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Part IV 
 Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K  (a)
    
    The following documents are filed as part of this report:  (1)
    
    The report of independent auditors and consolidated financial statements
appearing in Item 8.(2)
    
    HPCI is not filing separately financial statement schedules because
of the absence of conditions under which they are required or because
the required information is included in the consolidated financial
statements or the notes thereto.(3)
    
    The exhibits required by this item are listed in the Exhibit Index on
pages 49 and 50 of this Form 10- K.  (b)
    
    Reports on Form 8-K.  During the quarter ended December 31, 2003, HPCI filed no Current Reports
on Form 8-K.  (c)
    
    The exhibits to this Form 10-K begin on page 51.(d)
    
    See Item 15 (a) (2) above. 47




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Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 2004. HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant) By:
    
    /s/ Michael J. McMennamin
    
    
    
    By:
    
    /s/ John D. Van FleetMichael J. McMennamin
    
    
    
    
    
    John D. Van FleetPresident and Director
    
    
    
    
    
    Vice President and Director(Principal Executive Officer)
    
    
    
    
    
    (Principal Financial and Accounting Officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March, 2004. /s/ Richard A. Cheap *
Richard A. Cheap
    
    Director/s/ Stephen E. Dutton *

Stephen E. Dutton
    
    Director/s/ R. Larry Hoover *

R. Larry Hoover
    
    Director/s/ Edward J. Kane *

Edward J. Kane
    
    Director/s/ Roger E. Kephart *

Roger E. Kephart
    
    Director/s/ James D. Robbins *

James D. Robbins
    
    Director/s/ Thomas P. Reed *

Thomas P. Reed
    
    Director* /s/ Michael J. McMennamin

Michael J. McMennaminAttorney-in fact for each of the persons indicated.
 48




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##### Table of Contents



Exhibit Index This
document incorporates by reference certain documents listed below that
HPCI has previously filed with the SEC (file number 000-33243). The documents incorporated by reference may be read and copied at the
Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC also maintains an internet world-wide web site that contains
reports, proxy statements, and other information about issuers, like HPCI, who
file electronically with the SEC. The address of the site is
http://www.sec.gov. 3.(i).
    
    Amended and Restated Articles of Incorporation (previously filed as
Exhibit 3(a)(ii) to Amendment No. 4 to Registration Statement of Form S-11
(File No. 333-61182), filed with the Securities and Exchange Commission on
October 12, 2001, and incorporated herein by reference.)3.(ii).
    
    Code of Regulations (previously filed as Exhibit 3(b) to the
Registrants Registration Statement of Form S-11 (File No. 333-61182),
filed with the Securities and Exchange Commission on May 17, 2001, and
incorporated herein by reference.)4.
    
    Specimen of certificate representing Class C preferred securities,
previously filed as Exhibit 4 to the Registrants Amendment No. 1 to
Registration Statement of Form S-11 (File No. 333-61182), filed with the
Securities and Exchange Commission on May 31, 2001, and incorporated
herein by reference.10.(a).
    
    Second Amended and Restated Loan Participation Agreement,
 dated March
30, 2004, between The Huntington National Bank and Huntington Preferred
Capital Holdings, Inc.(b).
    
    Second Amended and Restated Loan Subparticipation Agreement,
 dated March 30, 2004, between Huntington Preferred Capital Holdings, Inc. and Huntington
Preferred Capital, Inc.(c).
    
    Amended and Restated Loan
Subparticipation Agreement, dated March 30, 2004, between HPC
Holdings-III, Inc. and Huntington Preferred Capital, Inc.(d).
    
    Amended and Restated Loan
Subparticipation Agreement, dated March 30, 2004, between Huntington Preferred Capital Holdings, Inc.
and HPC Holdings-III, Inc.(e).
    
    Amended and Restated Loan Participation Agreement,
 dated March 30, 2004, between The Huntington National Bank and Huntington Preferred
Capital, Inc.(f).
    
    Subscription Agreement, dated October 15, 2001, for the Class C
preferred securities between Huntington Preferred Capital, Inc., The
Huntington National Bank, and Huntington Preferred Capital Holdings, Inc.
(previously filed as Exhibit 10(f) to Annual Report on Form 10-K for the
year ended December 31, 2001, and incorporated herein by reference).(g).
    
    Subscription Agreement, dated October 15, 2001, for the Class D
preferred securities between Huntington Preferred Capital, Inc., The
Huntington National Bank, and Huntington Preferred Capital Holdings, Inc.
(previously filed as Exhibit 10(g) to Annual Report on Form 10-K for the
year ended December 31, 2001, and incorporated herein by reference).
  14.
    
    Code of Business Conduct and Ethics and Financial Code of
Ethics for Chief Executive Officer and Senior Financial Officers,
adopted by Huntington Bancshares Incorporated as applicable to all of
its affiliated companies, and ratified by HPCI's Board of Directors
on March 25, 2004, are available
on Huntington Bancshares Incorporateds website at
http://www.investquest.com/iq/h/hban/main/cg/cg.htm#top.16.
    
    Letter Regarding Change in Certifying Accountants.21.
    
    List of Subsidiaries.24.
    
    Power of Attorney. 49




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31.1.
    
    Sarbanes-Oxley Act 302 Certification  signed by Michael J. McMennamin, President.31.2.
    
    Sarbanes-Oxley Act 302 Certification  signed by John D. Van Fleet, Vice President.32.1.
    
    Sarbanes-Oxley Act 906 Certification  signed by Michael J. McMennamin, President.32.2.
    
    Sarbanes-Oxley Act 906 Certification  signed by John D. Van Fleet, Vice President. 50