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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) þ Annual
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the fiscal year ended December 31, 2004 or oTransition
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
(State or other jurisdiction of
incorporation or organization)
    
    31-1356967
(I.R.S. Employer
Identification No.)41 S. High Street, Columbus, OH
(Address of principal executive offices)
    
    43287
(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)
(Title of class) 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. þ Yes o 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). o þ
 All common stock is held by affiliates of the registrant as of December 31, 2004. As of
February 28, 2005, 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, 2004: $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 2005 Annual Shareholders Meeting.




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HUNTINGTON PREFERRED CAPITAL, INC. INDEX Part I.Item 1. Business
    
    
    3Item 2. Properties
    
    
    17Item 3. Legal Proceedings
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Part II.Item 5. Market for Registrants Common Equity and Related Shareholder Matters
    
    
    17Item 6. Selected Financial Data
    
    
    18Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 8. Financial Statements and Supplementary Data
    
    
    33Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    50Item 9A. Controls and Procedures
    
    
    50Item 9B. Other Information
    
    
    50Part III.Item 10. Directors and Executive Officers of the Registrant
    
    
    50Item 11. Executive Compensation
    
    
    50Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    50Item 13. Certain Relationships and Related Transactions
    
    
    50Item 14. Principal Accounting Fees and Services
    
    
    50Part IV.Item 15. Exhibits and Financial Statement Schedules
    
    
    50Signatures
    
    
    52ExhibitsExhibit 21Exhibit 24Exhibit 31AExhibit 31BExhibit 32AExhibit 32BExhibit 99AExhibit 99BExhibit 99 (c)
 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, 2004: (FLOW CHART) Effective February 18,
2005, Huntington Preferred Capital Holdings, Inc. transferred 34% of
the ownership of HPC Holdings-III, Inc. to
Huntington Capital Financing LLC, an indirect subsidiary of the Bank. 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). As of
December 31, 2004, 97.1% of HPCIs assets were invested in REIT Qualified Assets and 2.9% were
invested in commercial and consumer loans and other assets that were not REIT Qualified Assets.
HPCI must satisfy other asset and income tests in order to remain qualified as a REIT. In
addition, HPCI must satisfy other tests in order to maintain its exemption from the registration
requirements of the Investment Company Act. Additional information regarding these tests is set
forth in the 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, 2004, $3.4 billion, or 89.6%, 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. The remaining balance is comprised
of $0.3 billion of second, third, and fourth mortgages, and $0.1 billion of loans secured by
non-real property. 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, or 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
Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage Association (FNMA). For
2005, the maximum principal balance allowed on conforming residential real estate loans ranges from
$359,650 for one-unit residential loans to $691,600 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 4




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certain other respects from the requirements of such programs other than the requirements
relating to creditworthiness of the mortgagors. 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 loans underlying HPCIs loan
participations at December 31, 2004: Table 1 - Total Loan Participation Interests by Geographic Location
 (in thousands of dollars)
    
    
    
    
    
    
    
    
    
    Percentage byAggregate
    
    
    AggregateNumber
    
    
    Principal
    
    
    PrincipalState
    
    of Loans
    
    
    Balance
    
    
    BalanceOhio
    
    
    18,965
    
    
    $
    2,602,053
    
    
    
    53.2
    %Michigan
    
    
    9,195
    
    
    
    1,417,949
    
    
    
    29.0Indiana
    
    
    2,471
    
    
    
    392,711

    
    
    
    8.0Kentucky
    
    
    1,848
    
    
    
    308,270
    
    
    
    6.432,479
    
    
    
    4,720,983
    
    
    
    96.6All other locations
    
    
    483
    
    
    
    168,290
    
    
    
    3.4Total loan participation interests
    
    
    32,962
    
    
    $
    4,889,273
    
    
    
    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, 2004: Table 2 - Total Loan Participation Interests by Principal Balances
 (in thousands of dollars)
    
    
    
    
    
    
    
    
    
    Percentage byAggregate
    
    
    AggregateNumber
    
    
    Principal
    
    
    PrincipalSize
    
    of Loans
    
    
    Balance
    
    
    BalanceLess than $50,000
    
    
    21,057
    
    
    $
    405,496
    
    
    
    8.3
    %Greater than $50,000 to $100,000
    
    
    4,991
    
    
    
    355,078
    
    
    
    7.3Greater than $100,000 to $250,000
    
    
    3,597
    
    
    
    551,888
    
    
    
    11.3Greater than $250,000 to $500,000
    
    
    1,525
    
    
    
    541,513
    
    
    
    11.1Greater than $500,000 to $1,000,000
    
    
    916
    
    
    
    642,625
    
    
    
    13.1Greater than $1,000,000 to $3,000,000
    
    
    657
    
    
    
    1,092,789
    
    
    
    22.4Greater than $3,000,000 to $5,000,000
    
    
    128
    
    
    
    499,343
    
    
    
    10.2Greater than $5,000,000 to $10,000,000
    
    
    68
    
    
    
    461,094
    
    
    
    9.4Greater than $10,000,000
    
    
    23
    
    
    
    339,447
    
    
    
    6.9Total loan participation interests
    
    
    32,962
    
    
    $
    4,889,273
    
    
    
    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 5




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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 15.8% of HPCIs capitalization; and 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. HPCIs board has limited any such pledges to 25% of HPCIs
assets. In addition, 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. 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.
This could trigger a tax event which would give HPCI the right to
redeem the Class C and Class D preferred securities as more described
in the business section of this report.
Capital ratios
for the Bank as of December 31, 2004 and 2003 are as follows: Table 3 - Capital Ratios for the Bank
 Well-
    
    
    Adequately-Capitalized
    
    
    Capitalized
    
    
    December 31,Minimums
    
    
    Minimums
    
    
    2004
    
    
    2003Tier 1 Risk-Based Capital
    
    
    6.00
    %
    
    
    4.00
    %
    
    
    6.08
    %
    
    
    6.36
    %Total Risk-Based Capital
    
    
    10.00
    
    
    
    8.00
    
    
    
    10.16
    
    
    
    10.65Tier 1 Leverage Ratio
    
    
    5.00
    
    
    
    4.00
    
    
    
    5.66
    
    
    
    6.01
 Conflict of Interests and Related Policies As
of December 31, 2004, the Bank continued to control 98.6% of the voting power of HPCIs
outstanding securities. Accordingly, the Bank expects to 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
 among HPCI, Holdings, the Bank, and their respective affiliates.
HPCIs independent directors have approved an agreement with
the Bank with respect to the pledge of HPCIs assets to
collaterize the Banks borrowings from the Federal Home Loan
Bank (FHLB) as more described in the business risk section of this
report. 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 6




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time for comparable
transactions with others and would not involve more than the normal risk of collectibility or
present other unfavorable features. At December 31, 2004, 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 has policies to guide its administration with respect to the
Banks underwriting 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 7




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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, 2004, 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 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. For each of the years ended December
31, 2004, 2003, and 2002, HPCIs FFO were $273.6 million,
$288.2 million, and $636.9 million,
respectively. These significantly exceeded the minimum requirement, as full dividends on Class A,
Class C, and Class D securities at 150% were $22.3 million, $21.0 million, and $24.2 million, for
the same periods, 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. 8




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HPCI is not prohibited by its Articles of Incorporation from repurchasing its capital
securities; however, 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 distributes 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 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, 2004, HPCI has five 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 9




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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. 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 may be used as a guideline to determine fair compensation for
services rendered. The servicing fee is determined by the mutual agreement of the parties from
time to time during the term of the agreement and is subject to review and adjustment during the
term of the participation agreement. 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. 10




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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. 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, 2004, 96.6% 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 is subject to
certain risks inherent in the underlying commercial real estate assets. At December 31, 2004, 65.9% 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. 11




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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 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. 12




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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. 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, 2004,
all of its officers and six of its nine directors are also officers or directors of the Bank and
/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. 13




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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 $9.9 million in 2004, $7.6
million in 2003, and $6.7 million in 2002. 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 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. Currently,
HPCIs assets have been used to secure only one such facility.
The Bank has obtained a line of credit from the FHLB, which line was capped by the Banks
holdings of FHLB stock at $1.5 billion as December 31, 2004. 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. Prior to October 31, 2004, the
aggregate FHLB advance
 limit
established by HPCIs board was $1.0 billion. Effective as of October 31, 2004, the limit was
adjusted to 25% of total assets, or $1.4 billion as of December 31, 2004, as reflected in the
Corporations month-end management report for the previous month. This limit may be changed in the
future by the board of directors, including a majority of HPCIs independent directors. As of
December 31, 2004, HPCIs total loans pledged were limited to one-to-four family residential
mortgage portfolio and consumer second mortgage loans, which aggregated to $1.0 billion 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 14




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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, 2004, 26.9% 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 increases 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 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 15




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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, 2004, 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. 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 at 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; 16




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
    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 preferred securities. Formal Regulatory Supervisory Agreements On March 1, 2005, Huntington announced that it had entered into formal written agreements with
its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the
Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance
its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. They call for independent third-party reviews, as well as the
submission of written plans and progress reports by Huntingtons management. These written
agreements remain in effect until terminated by the banking regulators. Huntingtons management has been working with its banking regulators over the past several
months and has been taking actions and devoting significant resources to address all of the issues
raised. Huntingtons management believes that the changes that it has already made, and is in the
process of making, will address these issues fully and comprehensively. No assurances, however, can
be provided as to the ultimate timing or outcome of these matters, including any effects on HPCI. 
 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. 
 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 February 28,
2005, there were three common shareholders of record, all of which are affiliates of the Bank.
During 2004, 2003, and 2002, dividends of $263.8 million, $289.6 million and $382.8 million were
paid to common shareholders, respectively. These dividends were either accrued or paid by 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. HPCI did not sell any unregistered equity securities during the year ended December 31, 2004.
Neither HPCI nor any affiliated purchaser (as defined by Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934) repurchased any equity securities of HPCI in any month within the fourth
quarter ended December 31, 2004. 17




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##### Table of Contents



Item 6: Selected Financial Data The table below represents selected financial data relative to HPCI as of and for the years
ended December 31, 2004, 2003, 2002, 2001, and 2000. Table 4 - Selected Financial Data(in thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000STATEMENTS OF INCOME:Interest and fee income
    
    $
    262,215
    
    
    $
    274,401
    
    
    $
    347,754
    
    
    $
    526,445
    
    
    $
    549,718(Reduction) provision in allowance for credit
losses
    
    
    (31,591
    )
    
    
    (41,219
    )
    
    
    (161
    )
    
    
    48,510
    
    
    
    2,293Non-interest income
    
    
    7,249
    
    
    
    6,901
    
    
    
    6,759
    
    
    
    1,646
    
    
    
    Non-interest expense
    
    
    16,260
    
    
    
    13,886
    
    
    
    13,282
    
    
    
    10,015
    
    
    
    7,983Net income
    
    
    284,542
    
    
    
    308,539
    
    
    
    341,437
    
    
    
    469,540
    
    
    
    539,442Dividends declared on preferred securities
    
    
    20,744
    
    
    
    18,911
    
    
    
    23,814
    
    
    
    21,827
    
    
    
    80Net income applicable
to common shares
    
    
    263,798
    
    
    
    289,628
    
    
    
    317,623
    
    
    
    447,713
    
    
    
    539,362Dividends declared on common stock
    
    
    263,798
    
    
    
    289,628
    
    
    
    382,840
    
    
    
    539,170
    
    
    
    458,335BALANCE SHEET HIGHLIGHTS:At period end:Net loan participation interests
    
    $
    4,828,127
    
    
    $
    5,218,536
    
    
    $
    4,893,137
    
    
    $
    5,203,286
    
    
    $
    5,744,822All other assets
    
    
    845,464
    
    
    
    187,442
    
    
    
    623,884
    
    
    
    745,473
    
    
    
    1,153,451Total assets
    
    
    5,673,591
    
    
    
    5,405,978
    
    
    
    5,517,021
    
    
    
    5,948,759
    
    
    
    6,898,273Total shareholders equity
    
    
    5,069,776
    
    
    
    5,405,978
    
    
    
    5,516,351
    
    
    
    5,948,728
    
    
    
    6,898,273Average balances:Loan participation interests, net
of allowance for loan losses
    
    $
    5,075,815
    
    
    $
    5,027,857
    
    
    $
    5,098,098
    
    
    $
    6,261,235
    
    
    $
    5,997,188Total assets
    
    
    5,530,253
    
    
    
    5,647,772
    
    
    
    6,052,136
    
    
    
    7,044,550
    
    
    
    6,610,388Total shareholders equity
    
    
    5,497,479
    
    
    
    5,643,692
    
    
    
    6,044,404
    
    
    
    7,043,309
    
    
    
    6,610,389KEY RATIOS AND STATISTICS:Net interest margin
    
    
    4.74
    %
    
    
    4.77
    %
    
    
    5.82
    %
    
    
    7.46
    %
    
    
    8.28
    %Return on average assets
    
    
    5.15
    
    
    
    5.46
    
    
    
    5.64
    
    
    
    6.67
    
    
    
    8.16Return on average equity
    
    
    5.18
    
    
    
    5.47
    
    
    
    5.65
    
    
    
    6.67
    
    
    
    8.16Dividend payout ratio
    
    
    100.00
    
    
    
    100.00
    
    
    
    121.00
    
    
    
    121.00
    
    
    
    85.00Average shareholders equity to
average assets
    
    
    99.41
    
    
    
    99.93
    
    
    
    99.87
    
    
    
    99.98
    
    
    
    100.00Preferred dividend coverage ratio
    
    
    13.72
    x
    
    
    16.32
    x
    
    
    14.34
    x
    
    
    21.51
    x
    
    N.M.
 N.M., Not a meaningful value. All of HPCIs common stock is owned by Huntington, HPCII, and HPCH-III and, therefore, net
income 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. 18




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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 the Second Amended and Restated Loan Subparticipation Agreement with
Holdings, an Amended and Restated Loan Subparticipation Agreement with HPCH-III, and an Amended and
Restated Loan Participation Agreement with the Bank. The Bank is required, under the 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 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. Formal Regulatory Supervisory Agreements On March 1, 2005, Huntington announced that it had entered into formal written agreements with
its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the
Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance
its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. They call for independent third-party reviews, as well as the
submission of written plans and progress reports by Huntingtons management. These written
agreements remain in effect until terminated by the banking regulators. Huntingtons management has been working with its banking regulators over the past several
months and has been taking actions and devoting significant resources to address all of the issues
raised. Huntingtons management believes that the changes that it has already made, and is in the
process of making, will address these issues fully and comprehensively. No assurances, however, can
be provided as to the ultimate timing or outcome of these matters, including any effects on HPCI. 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 19




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##### Table of Contents



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 allowances for credit losses (ACL) as the most significant accounting
estimate. At December 31, 2004, the ACL was $64.9 million and represented the sum of the allowance
for loan losses (ALL) and allowance for unfunded loan participation commitments (AULPC). The ACL
represents Managements estimate as to the level of allowances considered appropriate to absorb
probable inherent credit losses in the loan participation portfolio, as well as unfunded loan
participation commitments. Many factors affect the ACL, some quantitative, some subjective.
Management believes the process for determining the ACL considers the potential factors that could
result in credit losses. However, the process includes judgment and quantitative elements that 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. At December 31, 2004, the ACL as a percent of total loan
participation commitments was 1.33%. Based on the December 31, 2004 balance sheet, a 10 basis point
increase in this ratio to 1.43% would require $4.9 million in additional provision for credit
losses, and would also negatively impact 2004 net income by approximately $4.9 million. A
discussion about the process used to estimate the ACL is presented in the Credit Risk section of
Managements Discussion and Analysis in this report. Summary Discussion of Results 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 $284.5 million for 2004, $308.5 million
for 2003, and $341.4 million for 2002. Net income available to common shares was $263.8 million,
$289.6 million, and $317.6 million for the same respective periods. Return on average assets (ROA)
was 5.1 5% for 2004, 5.46% for 2003, and 5.64% for 2002. Return on average equity (ROE) was 5.18%
for 2004, 5.47% for 2003, and 5.65% for 2002. HPCI had total assets of $5.7 billion at December 31, 2004, a slight increase compared to the
December 31, 2003 balance of $5.4 billion,
primarily related to larger cash balances due to timing of the common
dividend payment and capital distribution.
 At December 31, 2004 and 2003, an aggregate of $4.9
billion and $5.3 billion, respectively, consisted of participation interests in loans. 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 - Loan Participation Interests% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total(in thousands of dollars)
    
    2004
    
    
    Assets
    
    
    2003
    
    
    Assets
    
    
    2002
    
    
    Assets
    
    
    2001
    
    
    Assets
    
    
    2000
    
    
    AssetsAt December 31,Commercial
    
    $
    106,179
    
    
    
    1.9
    %
    
    $
    147,211
    
    
    
    2.7
    %
    
    $
    344,858
    
    
    
    6.3
    %
    
    $
    646,509
    
    
    
    10.9
    %
    
    $
    614,956
    
    
    
    8.9

    %Commercial real estate
    
    
    3,738,930
    
    
    
    65.9
    
    
    
    4,245,092
    
    
    
    78.5
    
    
    
    3,922,467
    
    
    
    71.1
    
    
    
    3,678,061
    
    
    
    61.8
    
    
    
    3,894,527
    
    

    
    56.5Consumer
    
    
    819,250
    
    
    
    14.4
    
    
    
    622,575
    
    
    
    11.5
    
    
    
    612,357
    
    
    
    11.1
    
    
    
    783,735
    
    
    
    13.2
    
    
    
    971,594
    
    

    
    14.1Residential real estate
    
    
    224,914
    
    
    
    4.0
    
    
    
    288,190
    
    
    
    5.3
    
    
    
    153,808
    
    
    
    2.8
    
    
    
    270,671
    
    
    
    4.6
    
    
    
    355,571
    
    
    
    5.2Total
    
    $
    4,889,273
    
    
    
    86.2
    %
    
    $
    5,303,068
    
    
    
    98.0
    %
    
    $
    5,033,490
    
    
    
    91.3
    %
    
    $
    5,378,976
    
    
    
    90.5
    %
    
    $
    5,836,648
    
    
    
    84.7
    %
 20




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##### Table of Contents



HPCIs participation interests in commercial loans represented 1.9% and 2.7% of total
assets as of December 31, 2004 and 2003, respectively. The decrease was due to continued portfolio
run off and asset sales in June 2004 of approximately $21.8 million. This decline was partially
offset by the reclassification of commercial real estate loan participation interests to commercial
loan participation interests of $55.9 million during September 2004 and $62.6 million in February
2004. These reclassifications were made to better reflect the loan participation interests based on
the collateral underlying the loan. Participation interests in commercial real estate loans at
December 31, 2004, which represented 65.9% of total assets, decreased compared to the same period
last year primarily due to run off, reclassifications, and decreased new loan purchases during the
second and third quarters of 2004. Consumer loan participation interests, which include any loan
secured by an automobile, truck, equipment, or a first or junior mortgage on the borrowers primary
residence, were 14.4% of total assets at December 31, 2004, compared to 11.5% of total assets for
the same date in 2003. This increase was due to purchases of consumer home equity loan
participations and the $6.1 million reclassification from commercial real estate participations to
consumer loan participations in September 2004. Residential real estate loan participation
interests represented 4.0% and 5.3% of total assets as of December 31, 2004 and 2003, respectively.
The balance decline of $63.3 million was related to portfolio run off as there were no additional
loan purchases in 2004. 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. 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. In lieu of paying higher servicing fees to the Bank with
respect to commercial and commercial real estate loans, HPCI waived its right to receive any
origination fees associated with participation interests in commercial and commercial real estate
loans transferred on or after July 1, 2004, until such time as loan servicing fees are reviewed in
2005. Interest-bearing and non-interest bearing cash balances on deposit with the Bank totaled
$800.3 million and $124.1 million at December 31, 2004 and 2003, respectively. The increased cash
balances reflect accumulation of cash for common share dividend and capital distributions for 2004
that were paid on January 3, 2005. Typically, cash is invested with the Bank in an interest-bearing
account. These interest-bearing balances are invested overnight or may be invested in Eurodollar
deposits with the Bank for a term of not more than 30 days at market rates. At December 31, 2004 and 2003, amounts due from affiliates and the Bank were $175 thousand,
and $13.7 million, respectively. The decline was related to a payment of accrued rents due between
the Bank and HPCLI during the second quarter of 2004. Total liabilities were $603.8 million at
December 31, 2004, which were primarily due to accrued dividends payable on common stock. Shareholders equity was $5.1 billion at December 31, 2004, compared to the December 31, 2003
balance of $5.4 billion. This decline 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
partially offset by the $284.5 million of net income in 2004. 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, 2004, HPCI met all of the quarterly asset tests. 21




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##### Table of Contents



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. For the tax year 2004, HPCI 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, 2004, HPCI was 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. RESULTS OF OPERATIONS Interest and Fee Income HPCIs primary source of revenue is the interest and fee income on its participation interests
in loans. At December 31, 2004 and 2003, HPCI did not have any interest-bearing liabilities or
related interest expense. Interest income is impacted by changes in the levels of interest rates
and earning assets. The yield on earning assets is the percentage of interest income to average
earning assets. The table below shows HPCIs average annual balances, interest and fee income, and yields for
the twelve-month periods ending December 31: Table 6 - Interest and Fee Income 2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Average(in millions of dollars)
    
    Balance
    
    
    Income(1)
    
    
    Yield
    
    
    Balance
    
    
    Income(1)
    
    
    Yield
    
    
    Balance
    
    
    Income(1)
    
    
    YieldLoan participation interests:Commercial
    
    $
    157.7
    
    
    $
    7.8
    
    
    
    4.97
    %
    
    $
    249.3
    
    
    $
    11.4
    
    
    
    4.53
    %
    
    $
    503.2
    
    
    $
    25.8
    
    
    
    5.13
    %Commercial real estate
    
    
    4,033.5
    
    
    
    183.5
    
    
    
    4.55
    
    
    
    4,066.2
    
    
    
    191.7
    
    
    
    4.65
    
    
    
    3,846.6
    
    
    
    219.4
    
    
    
    5.70Consumer
    
    
    702.6
    
    
    
    51.4
    
    
    
    7.31
    
    
    
    575.1
    
    
    
    50.8
    
    
    
    8.84
    
    
    
    697.5
    
    
    
    75.2
    
    
    
    10.78Residential real estate
    
    
    257.8
    
    
    
    13.5
    
    
    
    5.23
    
    
    
    254.4
    
    
    
    14.2
    
    
    
    5.55
    
    
    
    211.3
    
    
    
    15.0
    
    
    
    7.10Total loan participations
    
    
    5,151.6
    
    
    
    256.2
    
    
    
    4.97
    
    
    
    5,145.0
    
    
    
    268.1
    
    
    
    5.16
    
    
    
    5,258.6
    
    
    
    335.4
    
    
    
    6.38Interest on deposits
with the Bank
    
    
    376.3
    
    
    
    6.0
    
    
    
    1.60
    
    
    
    546.3
    
    
    
    6.3
    
    
    
    1.14
    
    
    
    716.6
    
    
    
    12.3
    
    
    
    1.72Total
    
    $
    5,527.9
    
    
    $
    262.2
    
    
    
    4.74
    %
    
    $
    5,691.3
    
    
    $
    274.4
    
    
    
    4.77
    %
    
    $
    5,975.2
    
    
    $
    347.7
    
    
    
    5.82
    %
   (1)
    
    Income includes interest and fees. Interest and fee income for the twelve months ended December 31, 2004 and 2003 was $262.2
million and $274.4 million, respectively. The decline in interest and fee income was related to
lower commercial and commercial real estate average loan participation balances, partially offset
by higher interest income on variable rate loans in the last two quarters of 2004. For the
twelve-months ended December 31, 2004 and 2003, the yield declined from 4.77% to 4.74%, while
average participation balances slightly increased by $6.6 million. The tables above include
interest received on participations in loans that are on a non-accrual status in the individual
portfolios. 22




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##### Table of Contents



The Provision (Reduction) in Allowance for Credit Losses The provision (reduction) in allowance for credit losses is the charge (or credit) to earnings
necessary to maintain the ACL at a level adequate to absorb Managements estimate of inherent
probable losses in the loan portfolio. The reduction in allowance for credit losses was a credit of $31.6
million for 2004, versus a credit of $41.2 million and $0.2 million for 2003 and 2002,
respectively. The continued reduction in the allowance was indicative
of lower charge-offs, and lower non-performing asset (NPA) balances at December 31, 2004. Non-Interest Income and Non-Interest Expense Non-interest income was $7.2 million, $6.9 million, and $6.8 million in 2004, 2003, and 2002,
respectively. This income primarily represents rental income received from the Bank related to
leasehold improvements owned by HPCLI. Also, non-interest income includes fees from the Bank for
use of HPCIs assets as collateral for the Banks advances from the Federal Home Loan Bank (FHLB).
These fees totaled $0.7 million, $0.7 million, and $0.6 million in 2004, 2003, and 2002,
respectively. 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 FHLB. Non-interest expense was $16.3 million, $13.9 million, and $13.3 million in 2004, 2003, and
2002, respectively. The predominant components of HPCIs non-interest expense are the fees paid to
the Bank for servicing the loans underlying the participation interests and depreciation and
amortization on its premises and equipment. The servicing costs for the twelve-month period ended
December 31, 2004, 2003 and 2002 totaled $9.9 million,
$7.6 million, and $6.7 million, respectively.
The increases were due to higher service fee rates on loan participation balances. Depreciation and
amortization expenses totaled $5.3 million, $5.5 million, and $5.8 million for the years ended
December 31, 2004, 2003, and 2002, respectively. As of July 1, 2004, the annual servicing rates the Bank charged with respect to outstanding
principal balances were:  
    0.125% of the underlying commercial and commercial real estate loans,
    0.750% of the underlying consumer loans, and
    0.267% of the underlying residential real estate loans. Annual servicing rates the Bank charged for the periods prior to July 1, 2004, were:  
    0.125% of the underlying commercial and commercial real estate loans,
    0.320% of the underlying consumer loans, and
    0.2997% of the underlying residential real estate loans. Pursuant to the existing participation and subparticipation agreements, the amount and terms
of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time to
time during the terms of the agreements. Effective July 1, 2004, in lieu of paying higher servicing
costs to the Bank with respect to commercial and commercial real estate loans, HPCI waived its
right to receive any origination fees associated with participation interests in commercial and
commercial real estate loans transferred on or after July 1, 2004, until such time as loan
servicing fees are reviewed in 2005. 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. 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. Assuming a gradual decline in market interest rates by 100 basis points 23




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##### Table of Contents



over the next 12 months, interest income would be expected to decline by roughly 4.1%.
Huntington conducts its interest rate risk management on a centralized basis and does not manage
HPCIs interest rate risk separately. 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, 2004, and assuming no
new loan participation volumes, interest income for the next 12 month period would be expected to
increase by 8.1% based on a gradual 200 basis point increase in rates above the forward rates
implied in the December 31, 2004 yield curve. Interest income would be expected to decline 8.2% in
the event of a gradual 200 basis point decline in rates from the forward rates implied in the
December yield curve. As of December 31, 2004, approximately 73% of the loan participation
portfolio had variable rates. The following table shows data with respect to interest rates of the loans underlying HPCIs
loan participations at December 31, 2004 and 2003, respectively. Table 7 - Total Loan Participation Interests by Interest Rates December 31, 2004
    
    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%
    
    
    1,108
    
    
    $
    98,962
    
    
    
    7.5
    %
    
    
    2,087
    
    
    $
    2,185,158
    
    
    
    61.1
    %5.00% to 5.99%
    
    
    4,757
    
    
    
    398,757
    
    
    
    30.3
    
    
    
    2,293
    
    
    
    939,245
    
    
    
    26.36.00% to 6.99%
    
    
    4,990
    
    
    
    351,767
    
    
    
    26.7
    
    
    
    1,456
    
    
    
    289,217
    
    
    
    8.17.00% to 7.99%
    
    
    4,142
    
    
    
    212,507
    
    
    
    16.2
    
    
    
    610
    
    
    
    116,826
    
    
    
    3.38.00% to 8.99%
    
    
    4,178
    
    
    
    134,303
    
    
    
    10.2
    
    
    
    239
    
    
    
    37,489
    
    
    
    1.09.00% to 9.99%
    
    
    2,809
    
    
    
    66,015
    
    
    
    5.0
    
    
    
    58
    
    
    
    5,294
    
    
    
    0.210.00% to 10.99%
    
    
    1,434
    
    
    
    31,183
    
    
    
    2.4
    
    
    
    8
    
    
    
    441
    
    
    
    0.011.00% to 11.99%
    
    
    540
    
    
    
    10,541
    
    
    
    0.8
    
    
    
    1
    
    
    
    17
    
    
    
    0.012.00% and over
    
    
    2,251
    
    
    
    11,490
    
    
    
    0.9
    
    
    
    1
    
    
    
    61
    
    
    
    0.0Total
    
    
    26,209
    
    
    $
    1,315,525
    
    
    
    100.0
    %
    
    
    6,753
    
    
    $
    3,573,748
    
    
    
    100.0
    %
 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
    %
 24




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##### Table of Contents



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 HPCI on loans underlying the
participations at the time the participations are acquired. 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, 2004. Table 8 - Loan Participation Interests Delinquencies Percentage byTotal
    
    
    Aggregate
    
    
    AggregateNumber
    
    
    Principal
    
    
    Principal(in thousands of dollars)
    
    of Loans
    
    
    Balance
    
    
    BalanceCurrent
    
    
    28,744
    
    
    $
    4,610,573
    
    
    
    94.3
    %1 to 30 days past due
    
    
    2,952
    
    
    
    225,076
    
    
    
    4.631 to 60 days past due
    
    
    656
    
    
    
    20,328
    
    
    
    0.461 to 90 days past due
    
    
    244
    
    
    
    11,607
    
    
    
    0.3over 90 days past due (1)
    
    
    366
    
    
    
    21,689
    
    
    
    0.4Total
    
    
    32,962
    
    
    $
    4,889,273
    
    
    
    100.0
    %
   (1)
    
    Includes non-accrual loans. 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 192 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 25




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##### Table of Contents



loss-in-event-of-default is rated on a 1-16 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 and 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 specialized credit workout group 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 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. Allowances for Credit Losses (ACL) HPCI maintains two reserves, both of which are available to absorb probable credit losses: the
allowance for loan losses (ALL) and the allowance for unfunded loan participation commitments
(AULPC). When summed together, these reserves constitute the total allowances for credit losses
(ACL). The ALL represents the estimate of probable losses inherent in the loan portfolio at the
balance sheet date. Additions to the ALL and AULPC result primarily from an allocation of the
purchase price of participations acquired. It is HPCIs policy to rely on the Banks detailed analysis as of the end of each quarter to
estimate the required level of the ALL and AULPC. The Banks methodology to determine the adequacy
of the ALL relies on a number of analytical tools and benchmarks. No single statistic or
measurement, in itself, determines the adequacy of the allowance. For determination purposes, the
allowance is comprised of three components: the transaction reserve, specific reserve, and the
economic reserve. Transaction Reserve The transaction reserve component represents an estimate of loss based on
characteristics of each commercial and consumer loan in the portfolio. Each loan is assigned
a probability-of-default and a loss-in-event-of-default factor that are used to calculate the
transaction reserve. 26




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##### Table of Contents



For commercial and commercial real estate loans, the calculation involves the use of a
standardized loan grading system that is applied on an individual loan level and updated on a
continuous basis. The reserve factors applied to these portfolios were developed based on
internal credit migration models that track historical movements of loans between loan
ratings over time and a combination of long-term average loss experience of the Banks own
portfolio and external industry data. For consumer loans and residential real estate loans, the determination of the
transaction component is conducted at an aggregate, or pooled, level. For such portfolios,
the development of the reserve factors includes the use of forecasting models to measure
inherent loss in these portfolios. Models and analyses are updated frequently to capture the recent behavioral
characteristics of the subject portfolios, as well as any changes in the loss mitigation or
credit origination strategies. Adjustments to the reserve factors are made as needed based on
observed results of the portfolio analytics. Specific Reserve The specific reserve component is associated only with the commercial and commercial
real estate loans and is the result of credit-by-credit reserve decisions for individual
loans when it is determined that the calculated transaction reserve component is insufficient
to cover the estimated losses. Individual non-performing and substandard loans over $250,000
are analyzed for impairment and possible assignment of a specific reserve. The impairment
tests are done in accordance with applicable accounting standards and regulations. Economic Reserve Changes in the economic environment are a significant judgmental factor Management
considers in determining the appropriate level of the ACL. The economic reserve incorporates
Managements determination of the impact of risks associated with the general economic
environment on the portfolio. The economic reserve is designed to address economic
uncertainties and is determined based on a variety of economic factors that are correlated to
the historical performance of the loan portfolio. Because of this more quantitative approach
to recognizing risks in the general economy, the economic reserve may fluctuate from
period-to-period. In an effort to be as quantitative as possible in the ALL calculation, Management developed a
revised methodology for calculating the economic reserve portion of the ALL for implementation in
2004. The revised methodology is specifically tied to economic indices that have a high correlation
to the Companys historic charge-off variability. The indices currently in the model consist of the
U.S. Index of Leading Economic Indicators, U.S. Profits Index, U.S. Unemployment Index, and the
University of Michigan Current Consumer Confidence Index. Beginning in 2004, the calculated
economic reserve was determined based upon the variability of credit losses over a credit cycle.
The indices and time frame may be adjusted as actual portfolio performance changes over time.
Management has the capability to judgmentally adjust the calculated economic reserve amount by a
maximum of +/ 20% to reflect, among other factors, differences in local versus national economic
conditions. This adjustment capability is deemed necessary given the newness of the model and the
continuing uncertainty of forecasting economic environment changes. This change in methodology allows for a more meaningful discussion of the Banks view of the
current economic conditions and the potential impact on HPCIs credit losses. The continued use
of quantitative methodologies for the transaction reserve and the introduction of the quantitative
methodology for the economic component may have the impact of more period-to-period fluctuation in
the absolute and relative level of the reserve than exhibited in prior-period results. The levels of the ALL and AULPC are adjusted based on the results of the above-mentioned
detailed quarterly analysis. This adjustment may be either an increase (provision) or a reduction.
Such adjustments for the twelve-month period ended December 31, 2004 resulted in reductions of the
allowance of $31.6 million. These reductions compared to reductions of $41.2 million for the
twelve-month period ended December 31, 2003. The continued reduction of the allowances for credit
losses was indicative of Managements judgement regarding the adequacy of those allowances
particularly in light of lower net loan losses in the current year, lower non-performing asset
(NPA) balances at December 31, 2004, and an improving economic environment. 27




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##### Table of Contents



The following table shows the activity in HPCIs ALL and AULPC for the last five years: Table 9 - Allowances for Credit Loss Activity (in thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000ALL balance, beginning of period
    
    $
    84,532
    
    
    $
    140,353
    
    
    $
    175,690
    
    
    $
    91,826
    
    
    $
    104,151Allowance of loan participations acquired, net
    
    
    21,201
    
    
    
    45,397
    
    
    
    37,020
    
    
    
    113,291
    
    
    
    (9,434
    )Distribution of participations in Florida-related
loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,604
    )
    
    
    Net loan (losses) recoveriesCommercial
    
    
    1,594
    
    
    
    (20,973
    )
    
    
    (29,686
    )
    
    
    (32,959
    )
    
    
    (1,274
    )Commercial real estate
    
    
    (5,032
    )
    
    
    (13,525
    )
    
    
    (21,599
    )
    
    
    (7,574
    )
    
    
    (1,321
    )Consumer
    
    
    (5,458
    )
    
    
    (22,999
    )
    
    
    (20,911
    )
    
    
    (18,800
    )
    
    
    (2,589
    )Residential real estate
    
    
    (335
    )
    
    
    (2,502
    )
    
    
    
    
    
    
    
    
    
    
    Total net loan losses
    
    
    (9,231
    )
    
    
    (59,999
    )
    
    
    (72,196
    )
    
    
    (59,333
    )
    
    
    (5,184
    )(Reduction) provision in allowance for credit losses
    
    
    (31,591
    )
    
    
    (41,219
    )
    
    
    (161
    )
    
    
    48,510
    
    
    
    2,293Net change in AULPC
    
    
    (3,765
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ALL balance, end of period
    
    $
    61,146
    
    
    $
    84,532
    
    
    $
    140,353
    
    
    $
    175,690
    
    
    $
    91,826AULPC balance, beginning of period
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Net Change
    
    
    3,765
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AULPC balance, end of period
    
    $
    3,765
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Allowances for Credit Losses
    
    $
    64,911
    
    
    $
    84,532
    
    
    $
    140,353
    
    
    $
    175,690
    
    
    $
    91,826ALLs as a % of total participation interests
    
    
    1.25
    %
    
    
    1.59
    %
    
    
    2.79
    %
    
    
    3.27
    %
    
    
    1.57
    %ACLs as a % of total participation interests
    
    
    1.33
    
    
    
    1.59
    
    
    
    2.79
    
    
    
    3.27
    
    
    
    1.57
 Effective March 31, 2004, HPCI reclassified $4.3 million of its ALL to a separate liability on
the balance sheet titled AULPC. The AULPC is based on expected losses derived from historical
experience. HPCI believes that this reclassification better reflects the nature of this reserve and
represents improved financial statement disclosure. Prior period financial statements have not been
revised due to immateriality. Since March 31, 2004, AULPC has declined by $560 thousand due to
lower unfunded loan participation commitment balances. In Managements judgment, both the ALL and the AULPC are adequate at December 31, 2004, to
cover probable credit losses inherent in the loan participation portfolio and loan commitments. 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 probable 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. 28




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##### Table of Contents



The
following table shows the allocation in HPCIs ALL and AULPC: Table 10 - Allowance for Credit Losses by Product 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands of dollars)Commercial
    
    $
    10,563
    
    
    
    2.2
    %
    
    $
    25,375
    
    
    
    2.8
    %
    
    $
    75,264
    
    
    
    6.9
    %
    
    $
    103,119
    
    
    
    12.0
    %
    
    $
    38,327
    
    
    
    10.5
    %Consumer
    
    
    6,279
    
    
    
    16.8
    
    
    
    8,096
    
    
    
    11.7
    
    
    
    9,979
    
    
    
    12.2
    
    
    
    17,030
    
    
    
    14.6
    
    
    
    25,793
    
    
    
    16.6Real estateCommercial
    
    
    46,455
    
    
    
    76.4
    
    
    
    47,561
    
    
    
    80.1
    
    
    
    26,605
    
    
    
    77.8
    
    
    
    33,886
    
    
    
    68.4
    
    
    
    12,381
    
    
    
    66.8Residential
    
    
    1,614
    
    
    
    4.6
    
    
    
    3,500
    
    
    
    5.4
    
    
    
    2,883
    
    
    
    3.1
    
    
    
    1,766
    
    
    
    5.0
    
    
    
    1,305
    
    
    
    6.1Total Allocated
    
    
    64,911
    
    
    
    100.0
    %
    
    
    84,532
    
    
    
    100.0
    %
    
    
    114,731
    
    
    
    100.0
    %
    
    
    155,801
    
    
    
    100.0
    %
    
    
    77,806
    
    
    
    100.0
    %Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,622
    
    
    
    
    
    
    
    19,889
    
    
    
    
    
    
    
    14,020
    
    
    
    Total
    
    $
    64,911
    
    
    
    100.0
    %
    
    $
    84,532
    
    
    
    100.0
    %
    
    $
    140,353
    
    
    
    100.0
    %
    
    $
    175,690
    
    
    
    100.0
    %
    
    $
    91,826
    
    
    
    100.0
    %
 Net Charge-offs Total net charge-offs were $9.2 million, or 0.18% of total average loan participations, for
the year ended December 31, 2004, down from $60.0 million, or 1.17%, for the year ended December
31, 2003. The decline in net charge-offs reflects the improvements made in underwriting, the
origination of higher quality loans, and the success in lowering individual concentrations in
larger commercial and commercial real estate credits. 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)
    
    2004
    
    
    Part.
    
    
    2003
    
    
    Part.
    
    
    2002
    
    
    Part.
    
    
    2001
    
    
    Part.
    
    
    2000
    
    
    Part.Commercial
    
    $
    (1,594
    )
    
    
    (1.01
    )%
    
    $
    20,973
    
    
    
    8.41
    %
    
    $
    29,686
    
    
    
    5.90
    %
    
    $
    32,959
    
    
    
    5.88
    %
    
    $
    1,274
    
    
    
    0.18
    %Commercial real estate
    
    
    5,032
    
    
    
    0.12
    
    
    
    13,525
    
    
    
    0.33
    
    
    
    21,599
    
    
    
    0.56
    
    
    
    7,574
    
    
    
    0.18
    
    
    
    1,321
    
    
    
    0.03Consumer
    
    
    5,458
    
    
    
    0.78
    
    
    
    22,999
    
    
    
    4.00
    
    
    
    20,911
    
    
    
    3.00
    
    
    
    18,800
    
    
    
    1.76
    
    
    
    2,589
    
    
    
    0.30Residential real estate
    
    
    335
    
    
    
    0.13
    
    
    
    2,502
    
    
    
    0.98
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Net Charge-offs
    
    $
    9,231
    
    
    
    0.18
    
    
    $
    59,999
    
    
    
    1.17
    
    
    $
    72,196
    
    
    
    1.37
    
    
    $
    59,333
    
    
    
    0.93
    
    
    $
    5,184
    
    
    
    0.09
 Non-Performing Assets (NPAs) NPAs consist of participation interests in underlying loans that are no longer accruing
interest. 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 or generally when
the underlying loan is 90 days past due. Underlying residential real estate loans are generally
placed on non-accrual status within 180 days past due as to principal and 210 days past due as to
interest. 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 are placed on non-accrual status within 180 days past due. At September 30, 2004,
HPCI adopted a new policy of placing consumer home equity loan participations on non-accrual status
when they exceed 180 days past due. Prior practice was to continue to accrue interest until
collection or resolution of the loan participations. Such loan participations were previously
classified as accruing loans past due 90 days or more. 29




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##### Table of Contents



The following table shows NPAs at the end of the most recent five years: Table 12 - Non-Performing Assets At December 31,(in thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Participation interests in non-accrual loansCommercial
    
    $
    425
    
    
    $
    5,176
    
    
    $
    57,112
    
    
    $
    156,874
    
    
    $
    16,025Commercial Real Estate
    
    
    6,990
    
    
    
    12,987
    
    
    
    32,979
    
    
    
    32,492
    
    
    
    19,638Consumer (1)
    
    
    2,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential Real Estate
    
    
    4,205
    
    
    
    4,157
    
    
    
    6,455
    
    
    
    8,232
    
    
    
    6,271Total Non-Performing Assets
    
    $
    14,312
    
    
    $
    22,320
    
    
    $
    96,546
    
    
    $
    197,598
    
    
    $
    41,934NPAs as a % of total participation interests
    
    
    0.29
    %
    
    
    0.42
    %
    
    
    1.92
    %
    
    
    3.67
    %
    
    
    0.72
    %ALL as a % of NPAs
    
    
    427
    
    
    
    379
    
    
    
    145
    
    
    
    89
    
    
    
    219ACL as a % of NPAs
    
    
    454
    
    
    
    379
    
    
    
    145
    
    
    
    89
    
    
    
    219
   (1)
    
    At September 30, 2004, HPCI adopted a new policy of placing
consumer home equity loan participations on non-accrual status when they exceed
180 days past due. Prior practice was to continue to accrue interest until
collection or resolution of the loan participations. Such loan participations
were previously classified as accruing loans past due 90 days or more. Total NPAs declined to $14.3 million at the end of 2004 from $22.3 million at December
31, 2003, representing 0.29% and 0.42% of total participation interests, respectively. The increase
in commercial non-accrual loans in 2001 was due to the acquisition of participation interests in
performing and non-performing loans in the fourth quarter 2001, in exchange for preferred equity.
In addition, the participation interests were acquired at a time when credit quality trends were
deteriorating, particularly in the commercial and commercial real estate 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 NPA portfolio sales in 2002, 2003, and 2004. As a
result, the 0.29% NPA ratio at the end of 2004 represented the lowest level since 1998. The Bank
expects NPAs in 2005 to be comparable with year-end 2004 levels. Underlying loans past due ninety days or more but continuing to accrue interest were $11.7
million at the end of 2004 and $13.4 million at December 31, 2003. 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. 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 HPCH-III, so that the Bank may 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. At December 31, 2004 and 2003, unfunded
commitments totaled $761.4 million and $923.7 million, respectively. It is expected that cash flows
generated by the existing portfolio will be sufficient to meet these obligations. 30




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES The objective of HPCIs liquidity management is to ensure the availability of sufficient cash
flows to fund its existing loan participation commitments, to acquire additional participation
interests, and to pay operating expenses and dividends. Unfunded commitments and additional
participation interests in loans are funded with the proceeds from repayment of principal balances
by individual borrowers, utilization of existing cash and cash equivalent funds, and if necessary,
new capital contributions. Payment of operating expenses and dividends will be funded through cash
generated by operations. In
managing liquidity, HPCI takes into account forecasted principal and interest
payments on loan participations as well as various legal limitations placed on a REIT. To the
extent that additional funding is required, HPCI may
raise such funds through retention of cash flow, debt financings, additional equity offerings, 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. At December 31, 2004 and 2003, HPCI maintained interest bearing and non-interest
bearing cash balances with the Bank totaling $800.3 million and $124.1 million, respectively. The
increase in interest bearing and non-interest bearing cash from 2003 to 2004, was a result of the
dividend on common stock and return of capital declared in 2004, but not payable until January
2005. HPCI maintains and transacts all of its cash activity with the Bank and may invest available
funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates. At December 31, 2004, HPCI had no material
liabilities
 other than unfunded loan commitments and dividends payable. 31




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##### Table of Contents



RESULTS FOR THE FOURTH QUARTER Table 13 - Quarterly Statements of Income 2004
    
    
    2003
    
    
    
    

4Q04
vs 4Q03(in thousands of dollars)
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    Fourth
    
    
    
    
    $ Chg
    
    
    % ChgInterest and fee incomeInterest on loan participation interests:Commercial
    
    $
    1,679
    
    
    $
    2,136
    
    
    $
    1,901
    
    
    $
    2,094
    
    
    $
    2,191
    
    
    
    
    $
    (512
    )
    
    
    (23.4
    )%Commercial real estate
    
    
    46,931
    
    
    
    45,305
    
    
    
    44,751
    
    
    
    45,060
    
    
    
    46,321
    
    
    
    
    
    610
    
    
    
    1.3Consumer
    
    
    13,208
    
    
    
    12,353
    
    
    
    12,969
    
    
    
    12,013
    
    
    
    12,027
    
    
    
    
    
    1,181
    
    
    
    9.8Residential real estate
    
    
    3,069
    
    
    
    3,247
    
    
    
    3,475
    
    
    
    3,683
    
    
    
    4,155
    
    
    
    
    
    (1,086
    )
    
    
    (26.1
    )Total loan participation interest income
    
    
    64,887
    
    
    
    63,041
    
    
    
    63,096
    
    
    
    62,850
    
    
    
    64,694
    
    
    
    
    
    193
    
    
    
    0.3Fees from loan participation interests
    
    
    605
    
    
    
    469
    
    
    
    652
    
    
    
    611
    
    
    
    828
    
    
    
    
    
    (223
    )
    
    
    (26.9
    )Interest on deposits with the Bank
    
    
    3,736
    
    
    
    1,781
    
    
    
    198
    
    
    
    289
    
    
    
    1,193
    
    
    
    
    
    2,543
    
    
    
    N.M.Total interest and fee income
    
    
    69,228
    
    
    
    65,291
    
    
    
    63,946
    
    
    
    63,750
    
    
    
    66,715
    
    
    
    
    
    2,513
    
    
    
    3.8Reduction in allowance for credit losses
    
    
    (13,153
    )
    
    
    (6,874
    )
    
    
    (9,301
    )
    
    
    (2,263
    )
    
    
    (7,301
    )
    
    
    
    
    (5,852
    )
    
    
    (80.2
    )Interest income after reduction of
allowances for credit losses
    
    
    82,381
    
    
    
    72,165
    
    
    
    73,247
    
    
    
    66,013
    

    
    
    74,016
    
    
    
    
    
    8,365
    
    
    
    11.3Non-interest income:Rental income
    
    
    1,591
    
    
    
    1,590
    
    
    
    1,853
    
    
    
    1,469
    
    
    
    1,456
    
    
    
    
    
    135
    
    
    
    9.3Collateral fees
    
    
    177
    
    
    
    180
    
    
    
    192
    
    
    
    197
    
    
    
    200
    
    
    
    
    
    (23
    )
    
    
    (11.5
    )Total non-interest income
    
    
    1,768
    
    
    
    1,770
    
    
    
    2,045
    
    
    
    1,666
    
    
    
    1,656
    
    
    
    
    
    112
    
    
    
    6.8Non-interest expense:Servicing costs
    
    
    2,735
    
    
    
    2,854
    
    
    
    2,199
    
    
    
    2,135
    
    
    
    2,131
    
    
    
    
    
    604
    
    
    
    28.3Depreciation
    
    
    1,235
    
    
    
    1,339
    
    
    
    1,346
    
    
    
    1,353
    
    
    
    1,377
    
    
    
    
    
    (142
    )
    
    
    (10.3
    )Loss on disposal of fixed assets
    
    
    155
    
    
    
    
    
    
    
    26
    
    
    
    37
    
    
    
    11
    
    
    
    
    
    144
    
    
    
    N.M.Other
    
    
    170
    
    
    
    196
    
    
    
    374
    
    
    
    106
    
    
    
    121
    
    
    
    
    
    49
    
    
    
    40.5Total non-interest expense
    
    
    4,295
    
    
    
    4,389
    
    
    
    3,945
    
    
    
    3,631
    
    
    
    3,640
    
    
    
    
    
    655
    
    
    
    18.0Income before provision for income taxes
    
    
    79,854
    
    
    
    69,546
    
    
    
    71,347
    
    
    
    64,048
    
    
    
    72,032
    
    
    
    
    
    7,822
    
    
    
    10.9Provision for income taxes
    
    
    58
    
    
    
    88
    
    
    
    84
    
    
    
    23
    
    
    
    24
    
    
    
    
    
    34
    
    
    
    N.M.Net income
    
    $
    79,796
    
    
    $
    69,458
    
    
    $
    71,263
    
    
    $
    64,025
    
    
    $
    72,008
    
    
    
    
    $
    7,788
    
    
    
    10.8Dividends declared on preferred securities
    
    
    (6,208
    )
    
    
    (5,406
    )
    
    
    (4,488
    )
    
    
    (4,642
    )
    
    
    (4,562
    )
    
    
    
    
    (1,646
    )
    
    
    (36.1
    )Net income applicable to
common shares(1)
    
    $
    73,588
    
    
    $
    64,052
    
    
    $
    66,775
    
    
    $
    59,383
    
    
    $
    67,446
    
    
    
    
    $
    6,142
    
    
    
    9.1
    %
   (1)
All of HPCIs common stock is owned by Huntington, HPCII, and
HPCH-III and therefore, net income per share is not presented.
N.M., Not a meaningful value. Net income for the fourth quarter 2004 was $79.8 million, up 10.8% from $72.0 million for the
fourth quarter 2003. Net income applicable to common shares was $73.6 million for the fourth
quarter of 2004, an increase from $67.4 million, or 9.1%, compared to the fourth quarter of 2003.
Dividend declarations on preferred stock increased by 36.1% in the most recent quarter to $6.2
million compared to $4.6 million for the fourth quarter 2003, due to higher three-month LIBOR rates
on which payments on Class B and Class D preferred shares are based. Interest and fee income for the recent quarter was $69.2 million, which was up from $66.7
million for the prior year quarter, due to higher interest rates on variable rate loans, increased
consumer loan balances, and interest income from deposits with the Bank. The yield on earning
assets increased to 4.89% from 4.54% for the same respective quarterly periods. 32




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##### Table of Contents



Total assets increased to $5.7 billion at the end of 2004, up from $5.4 billion at December
31, 2003. HPCI paid its fourth quarter preferred dividends to its shareholders on December 31,
2004. The Corporation returned capital to its common shareholders and paid accrued common dividends
aggregating to $600 million on January 3, 2005. The ALL decreased to 1.25% of total loan participation interests at December 31, 2004, from
1.59% at the end of the prior year quarter. Net charge-offs in the fourth quarter of 2004 were $2.0
million, versus $13.3 million for the fourth quarter of 2003. This represents 0.17% and 0.99% of
average loan participations for the same respective quarterly periods. HPCLI received from the Bank rent of $1.6 million and $1.5 million in the fourth quarters of
2004 and 2003, which is reflected in non-interest income. Non-interest expense included
depreciation and amortization expense for all premises and equipment, which amounted to $1.2 and
$1.4 million for the fourth quarters of 2004 and 2003. Servicing fees paid by HPCI were $2.7
million for the fourth quarter of 2004, while $2.1 million was paid in the fourth quarter of 2003.
HPCLI is a taxable REIT subsidiary and therefore provisions of $58,000 and $24,000 for income taxes
applied to its taxable income are reflected in the fourth quarters of 2004 and 2003, 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, 2004 and 2003 and for
the years ended December 31, 2004, 2003, and 2002 are included in this report at the pages
indicated. Quarterly statements of income are found on page 32 of this report. PageReport of Management
    
    34Report of Independent Registered Public Accounting Firm
    
    35Consolidated Balance Sheets
    
    36Consolidated Statements of Income
    
    37Consolidated Statement of Changes in Shareholders Equity
    
    38Consolidated Statements of Cash Flows
    
    39Notes to Consolidated Financial Statements
    
    40
 33




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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 2004, the Audit Committee of the Board of Directors met with
management, Huntingtons internal auditors, and the independent auditors, Deloitte & Touche 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. HPCI has 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. By:
    
    /s/ Donald R. Kimble
    
    
    
    By:
    
    /s/ Thomas P. ReedDonald R. Kimble
President
(Principal Executive Officer)
    
    
    
    
    
    Thomas P. Reed
Vice President
(Principal Financial and Accounting Officer)
 34




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
Huntington Preferred Capital, Inc.
Columbus, Ohio We have audited the accompanying consolidated balance sheet of Huntington Preferred Capital, Inc.
and subsidiary (the Company) as of December 31, 2004, and the related consolidated statements of
income, changes in shareholders equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements of
the Company for the years ended December 31, 2003 and 2002 were audited by other auditors whose
report, dated March 19, 2004, expressed an unqualified opinion on those statements. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (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. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion. In our opinion, such 2004 consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2004, and the results of its
operations and its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Deloitte & Touche LLP
Columbus, Ohio
March 24, 2005 35




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##### Table of Contents



Huntington Preferred Capital, Inc.
Consolidated Balance Sheets 
 December 31,
    
    
    December 31,(in thousands of dollars, except share data)
    
    2004
    
    
    2003AssetsCash with The Huntington National Bank
    
    $
    48,253
    
    
    $
    124,085Interest bearing deposits with The Huntington National Bank
    
    
    752,000
    
    
    
    Due from affiliates
    
    
    175
    
    
    
    13,652Loan participation interests:Commercial
    
    
    106,179
    
    
    
    147,211Commercial real estate
    
    
    3,738,930
    
    
    
    4,245,092Consumer
    
    
    819,250
    
    
    
    622,575Residential real estate
    
    
    224,914
    
    
    
    288,190Total loan participation interests
    
    
    4,889,273
    
    
    
    5,303,068Allowance for loan losses
    
    
    (61,146
    )
    
    
    (84,532
    )Net loan participation interests
    
    
    4,828,127
    
    
    
    5,218,536Premises and equipment
    
    
    26,635
    
    
    
    32,126Accrued income and other assets
    
    
    18,401
    
    
    
    17,579Total Assets
    
    $
    5,673,591
    
    
    $
    5,405,978LiabilitiesAllowance for unfunded loan participation commitments
    
    $
    3,765
    
    
    $
    Dividends
and distributions payable
    
    
    600,000
    
    
    
    Other liabilities
    
    
    50
    
    
    
    Total Liabilities
    
    
    603,815
    
    
    
    Shareholders 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, 10,000,000 shares
authorized; no shares issued or outstanding
    
    
    
    
    
    
    Common stock  without par value; 14,000,000 shares authorized,
issued and outstanding
    
    
    4,268,776
    
    
    
    4,604,978Retained earnings
    
    
    
    
    
    
    Total Shareholders Equity
    
    
    5,069,776
    
    
    
    5,405,978Total Liabilities and Shareholders Equity
    
    $
    5,673,591
    
    
    $
    5,405,978
 See notes to consolidated financial statements. 36




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##### Table of Contents



Huntington Preferred Capital, Inc.
Consolidated Statements of Income 
 Year EndedDecember 31,(in thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002Interest and fee incomeInterest on loan participation interests:Commercial
    
    $
    7,810
    
    
    $
    11,042
    
    
    $
    24,904Commercial real estate
    
    
    182,047
    
    
    
    185,750
    
    
    
    212,633Consumer
    
    
    50,543
    
    
    
    49,523
    
    
    
    73,962Residential real estate
    
    
    13,474
    
    
    
    14,095
    
    
    
    14,621Total loan participation interest income
    
    
    253,874
    
    
    
    260,410
    
    
    
    326,120Fees from loan participation interests
    
    
    2,337
    
    
    
    7,736
    
    
    
    9,301Interest on deposits with The Huntington National Bank
    
    
    6,004
    
    
    
    6,255
    
    
    
    12,333Total
interest and fee income
    
    
    262,215
    
    
    
    274,401
    
    
    
    347,754Reduction in allowance for credit losses
    
    
    (31,591
    )
    
    
    (41,219
    )
    
    
    (161
    )Interest
income after reduction in allowance for credit losses
    
    
    293,806
    
    
    
    315,620
    
    
    
    347,915Non-interest income:Rental income
    
    
    6,503
    
    
    
    6,183
    
    
    
    6,118Collateral fees
    
    
    746
    
    
    
    718
    
    
    
    641Total non-interest income
    
    
    7,249
    
    
    
    6,901
    
    
    
    6,759Non-interest expense:Servicing costs
    
    
    9,923
    
    
    
    7,559
    
    
    
    6,715Depreciation and amortization
    
    
    5,273
    
    
    
    5,527
    
    
    
    5,767Loss on disposal of fixed assets
    
    
    218
    
    
    
    336
    
    
    
    483Other
    
    
    846
    
    
    
    464
    
    
    
    317Total non-interest expense
    
    
    16,260
    
    
    
    13,886
    
    
    
    13,282Income before provision for income taxes
    
    
    284,795
    
    
    
    308,635
    
    
    
    341,392Provision for income taxes
    
    
    253
    
    
    
    96
    
    
    
    (45
    )Net income
    
    $
    284,542
    
    
    $
    308,539
    
    
    $
    341,437Dividends declared on preferred securities
    
    
    (20,744
    )
    
    
    (18,911
    )
    
    
    (23,814
    )Net income applicable to common shares
    
    $
    263,798
    
    
    $
    289,628
    
    
    $
    317,623
 See notes to consolidated financial statements. 37




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##### Table of Contents



Huntington Preferred Capital, Inc.
Consolidated Statements of Changes in Shareholders
Equity

Years Ended December 31, 2004, 2003 and 2002 
 Preferred, Class A
    
    
    Preferred, Class B
    
    
    Preferred, Class C(in thousands)
    
    Shares
    
    
    Securities
    
    
    Shares
    
    
    Securities
    
    
    Shares
    
    
    SecuritiesBalance - January 1, 2002
    
    
    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
    
    
    $
    50,000Comprehensive Income:Net incomeTotal comprehensive incomeBalance - December 31, 2004
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000
 Preferred, Class D
    
    
    Preferred
    
    
    Common
    
    
    Retained(in thousands)
    
    Shares
    
    
    Securities
    
    
    Shares
    
    
    Securities
    
    
    Shares
    
    
    Stock
    
    
    Earnings
    
    
    TotalBalance - January 1, 2002
    
    
    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 stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (289,628
    )
    
    
    (289,628
    )Return of Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110,373
    )
    
    
    
    
    
    
    (110,373
    )Balance - December 31, 2003
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,604,978
    
    
    $
    
    
    
    $
    5,405,978Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    284,542
    
    
    
    284,542Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    284,542Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,887
    )
    
    
    (5,887
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,938
    )
    
    
    (3,938
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,839
    )
    
    
    (10,839
    )Dividends declared on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (263,798
    )
    
    
    (263,798
    )Return of Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336,202
    )
    
    
    
    
    
    
    (336,202
    )Balance - December 31, 2004
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,268,776
    
    
    $
    
    
    
    $
    5,069,776
 See notes to consolidated financial statements. 38




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##### Table of Contents



Huntington Preferred Capital, Inc.
Consolidated Statements of Cash Flows 
 Year EndedDecember 31,(in thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002Operating ActivitiesNet Income
    
    $
    284,542
    
    
    $
    308,539
    
    
    $
    341,437Adjustments to reconcile net income to net
cash provided by operating activities:Reduction of allowances for credit losses
    
    
    (31,591
    )
    
    
    (41,219
    )
    
    
    (161
    )Depreciation and amortization
    
    
    5,273
    
    
    
    5,527
    
    
    
    5,767Deferred income tax benefit
    
    
    (1,307
    )
    
    
    (84
    )
    
    
    (688
    )Loss on disposal of fixed assets
    
    
    218
    
    
    
    336
    
    
    
    483Decrease in accrued income and other assets
    
    
    2,936
    
    
    
    22,002
    
    
    
    3,072Decrease (increase) in due from affiliates
    
    
    13,477
    
    
    
    (6,212
    )
    
    
    286,369Increase (decrease) in other liabilities
    
    
    50
    
    
    
    (670
    )
    
    
    639Net Cash Provided by Operating Activities
    
    
    273,598
    
    
    
    288,219
    
    
    
    636,918Investing ActivitiesParticipation interests acquired
    
    
    (4,273,356
    )
    
    
    (5,967,359
    )
    
    
    (4,868,942
    )Sales and repayments on loans underlying
participation interests
    
    
    4,696,670
    
    
    
    5,687,784
    
    
    
    5,174,877Proceeds from the sale of fixed assets
    
    
    
    
    
    
    99
    
    
    
    303Net Cash Provided by (Used for) Investing Activities
    
    
    423,314
    
    
    
    (279,476
    )
    
    
    306,238Financing ActivitiesDividends paid on preferred securities
    
    
    (20,744
    )
    
    
    (18,911
    )
    
    
    (23,814
    )Dividends paid on common stock
    
    
    
    
    
    
    (289,628
    )
    
    
    (382,840
    )Return of capital to common shareholders
    
    
    
    
    
    
    (110,373
    )
    
    
    (367,160
    )Net Cash Used for Financing Activities
    
    
    (20,744
    )
    
    
    (418,912
    )
    
    
    (773,814
    )Change in Cash and Cash Equivalents
    
    
    676,168
    
    
    
    (410,169
    )
    
    
    169,342Cash and Cash Equivalents:at
Beginning of Year
    
    
    124,085
    
    
    
    534,254
    
    
    
    364,912at End of
Year
    
    $
    800,253
    
    
    $
    124,085
    
    
    $
    534,254Supplemental information:Income taxes paid
    
    $
    1,886
    
    
    $
    611
    
    
    $
    Dividends and return of capital declared, not paid
    
    
    600,000
    
    
    
    
    
    
    
    
 See notes to consolidated financial statements. 39




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##### Table of Contents



Notes to Consolidated Financial Statements Note 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, results of
operations, and cash flows for the periods presented. All significant intercompany accounts and
transactions have been eliminated in consolidation. Business:Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in 1992 and
designated as a real estate investment trust (REIT) in 1998. At December 31, 2004, HPCIs common
stock was 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
wholly owned subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for
the purpose of holding certain assets (primarily leasehold improvements). 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 are purchased 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.
The purchase price paid approximates fair value on the date the loan
participations are purchased.
 Participation
interests are categorized based on the collateral securing the underlying loan. HPCI does not
purchase loan participation interests in loans made to Huntingtons directors or executive officers. 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 charged off in accordance with regulatory statutes governing the Bank. At September 30,
2004, HPCI adopted a new policy of placing consumer home equity loan participations on non-accrual
status when they
exceed 180 days past due. Prior practice was to continue to accrue interest until collection
or resolution of the loan participations. Such loan participations were previously classified as
accruing loans past due 90 days or more. 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 be deferred and amortized
over the estimated life of the asset. 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. 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 40




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) 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 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 estimated 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. Allowances for Credit Losses (ACL):The ACL is comprised of the allowance for loan losses (ALL) and
the allowance for unfunded loan participation commitments (AULPC). The ACL represents Managements
estimate as to the level of reserves considered appropriate to absorb
inherent probable credit losses in the
loan portfolio, as well as unfunded loan participation commitments. 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. ALL is
transferred to HPCI through Holdings from the Bank on loans underlying the participations at the
time the participations are acquired. When necessary, the allowance for loan losses will be
adjusted through either a provision for credit losses charged to
earnings, or a reduction in allowance for credit losses credited to
earnings. Credit 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 ALL consists of three components: the transaction reserve, specific reserve, and economic
reserve. Loan losses related to transaction and specific reserves are recognized and measured
pursuant to Statement No. 5, Accounting for Contingenciesand Statement No. 114, Accounting by
Creditors for Impairment of a Loan, while losses related to the economic reserve are recognized and
measured pursuant to Statement No. 5. The three components are more fully described below. Transaction Reserve The transaction reserve component represents an estimate of loss based on
characteristics of each commercial and consumer loan in the portfolio. Each loan is assigned
a probability-of-default and a loss-in-event-of-default factor that are used to calculate the
transaction reserve. For commercial and commercial real estate loans, the calculation involves the use of a
standardized loan grading system that is applied on an individual loan level and updated on a
continuous basis. The reserve factors applied to these portfolios were developed based on
internal credit migration models that track historical movements of loans between loan
ratings over time and a combination of long-term average loss experience of the Banks own
portfolio and external industry data. For consumer loans and residential real estate loans, the determination of the
transaction component is conducted at an aggregate, or pooled, level. For such portfolios,
the development of the reserve factors includes the use of forecasting models to measure
inherent loss in these portfolios. Models and analyses are updated frequently to capture the recent behavioral
characteristics of the subject portfolios, as well as any changes in the loss mitigation or
credit origination strategies. Adjustments to the reserve factors are made as needed based on
observed results of the portfolio analytics. Specific Reserve The specific reserve component is associated only with the commercial and commercial
real estate loans and is the result of credit-by-credit reserve decisions for individual
loans when it is determined that the calculated transaction reserve component is insufficient
to cover the estimated losses. Individual non-performing and substandard loans over $250,000
are analyzed for impairment and possible assignment of a specific reserve. The impairment
tests are done in accordance with applicable accounting standards and regulations. Economic Reserve Changes in the economic environment are a significant judgmental factor Management
considers in determining the appropriate level of the ACL. The economic reserve incorporates
Managements determination 41




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) of the impact of risks associated with the general economic environment on the
portfolio. The economic reserve is designed to address economic uncertainties and is
determined based on a variety of economic factors that are correlated to the historical
performance of the loan portfolio. Because of this more quantitative approach to recognizing
risks in the general economy, the economic reserve may fluctuate from period-to-period. In an effort to be as quantitative as possible in the ALL calculation, Management developed a

revised methodology for calculating the economic reserve portion of the ALL for implementation in
2004. The revised methodology is specifically tied to economic indices that have a high correlation
to the Companys historic charge-off variability. The indices currently in the model consist of the
U.S. Index of Leading Economic Indicators, U.S. Profits Index, U.S. Unemployment Index, and the
University of Michigan Current Consumer Confidence Index. Beginning in 2004, the calculated
economic reserve was determined based upon the variability of credit losses over a credit cycle.
The indices and time frame may be adjusted as actual portfolio performance changes over time.
Management has the capability to judgmentally adjust the calculated economic reserve amount by a
maximum of +/ 20% to reflect, among other factors, differences in local versus national economic
conditions. This adjustment capability is deemed necessary given the newness of the model and the
continuing uncertainty of forecasting economic environment changes. 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. Net Income per Share:All of HPCIs common stock is owned by Huntington, HPCII, and HPCH-III and,
therefore, net income 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.
Deferred tax amounts relate primarily to depreciation of fixed assets. At December 31, 2004, net
deferred taxes are included in accrued income and other assets. Statement of Cash Flows:Cash, cash equivalents, and interest-bearing deposits are defined as Cash
and cash equivalents. Note 2 - New Accounting Pronouncements AICPA Statement of Position No. 03-3,Accounting for Certain Loans or Debt Securities Acquired
in a Transfer(SOP 03-3):In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 03-3, to address accounting for
differences between the contractual cash flows of certain loans and debt securities and the cash
flows expected to be collected when loans or debt securities are acquired in a transfer and those
cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3
applies to such loans and debt securities purchased or acquired in purchase business combinations
and does not apply to originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts, that may be recognized for certain loans and debt
securities prior to the receipt of cash. Additionally, SOP 03-3 requires that the excess of
contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be
recognized as an adjustment of yield or valuation allowance, such as the allowance for loan losses.
Subsequent to the initial investment, increases in expected cash flows generally should be
recognized prospectively through adjustment of the yield on the loan or debt security over its
remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is
effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004,
with early application encouraged. In the normal course of business, HPCI does not purchase loan
participation interests in loans that have exhibited a deterioration in credit quality since
origination. Therefore, the impact of this new pronouncement is not expected to materially impact
HPCIs financial condition, results of operations, or cash flows. 42




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) Note 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)
    
    2004
    
    
    2003Commercial
    
    $
    106,179
    
    
    $
    147,211Commercial real estate
    
    
    3,738,930
    
    
    
    4,245,092Consumer
    
    
    819,250
    
    
    
    622,575Residential real estate
    
    
    224,914
    
    
    
    288,190Total Loan Participations
    
    $
    4,889,273
    
    
    $
    5,303,068
 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 96.6% and 94.8% of the portfolio at December
31, 2004 and 2003, respectively. Participations in Non-Performing Loans and Past Due Loans At December 31, 2004 and 2003, 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)
    
    2004
    
    
    2003Commercial
    
    $
    425
    
    
    $
    5,176Commercial real estate
    
    
    6,990
    
    
    
    12,987Consumer(1)
    
    
    2,692
    
    
    
    Residential real estate
    
    
    4,205
    
    
    
    4,157Total Participations in Non-Accrual Loans
    
    $
    14,312
    
    
    $
    22,320Participations in Accruing Loans Past Due 90 Days or More
    
    $
    11,686
    
    
    $
    13,363
   (1) At September 30, 2004, HPCI adopted a new policy of placing consumer home
equity loan participations on non-accrual status when they exceed 180 days past due. Prior
practice was to continue to accrue interest until collection or resolution of the loan
participations. Such loan participations were previously classified as accruing loans past due
90 days or more. The amount of interest that would have been recorded under the original terms for
participations in loans classified as non-accrual was $0.9 million for 2004, $2.6 million for 2003,
and $8.6 million for 2002. Amounts actually collected and recorded as interest income for these
participations totalled $0.5 million, $1.2 million, and $3.5 million over the same respective
years. Note 4 - Allowances for Credit Losses (ACL) An allowance for credit losses (ACL) is transferred to HPCI from the Bank on loans underlying
the participations at the time the participations are acquired. The ACL is comprised of the
allowance for loan losses (ALL) and the allowance for unfunded loan participation commitments
(AULPC). 43




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) The following tables reflect activity in the ACL for the three years ended December 31: (in thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002ALL balance, beginning of period
    
    $
    84,532
    
    
    $
    140,353
    
    
    $
    175,690Allowance for loan participations acquired
    
    
    21,201
    
    
    
    45,397
    
    
    
    37,020Net loan losses
    
    
    (9,231
    )
    
    
    (59,999
    )
    
    
    (72,196
    )Reduction in allowance for credit losses
    
    
    (31,591
    )
    
    
    (41,219
    )
    
    
    (161
    )Net change in AULPC
    
    
    (3,765
    )
    
    
    
    
    
    
    ALL balance, end of period
    
    $
    61,146
    
    
    $
    84,532
    
    
    $
    140,353AULPC balance, beginning of period
    
    $
    
    
    
    $
    
    
    
    $
    Net change
    
    
    3,765
    
    
    
    
    
    
    
    AULPC balance, end of period
    
    $
    3,765
    
    
    $
    
    
    
    $
    Total Allowances for Credit Losses
    
    $
    64,911
    
    
    $
    84,532
    
    
    $
    140,353Recorded Balance of Impaired Loans, at end of year(1):With specific reserves assigned to the loan balances
    
    $
    6,047
    
    
    $
    18,162
    
    
    $
    90,091With no specific reserves assigned to the loan balances
    
    
    7,169
    
    
    
    
    
    
    
    Total
    
    $
    13,216
    
    
    $
    18,162
    
    
    $
    90,091Average Balance of Impaired Loans for the Year (1)
    
    $
    10,074
    
    
    $
    39,866
    
    
    $
    135,516Allowance for Loan Losses on Impaired Loans (1)
    
    $
    3,617
    
    
    $
    5,583
    
    
    $
    29,771
   (1)
    
    Includes impaired commercial and commercial real
estate loans.
 A loan is impaired when it is probable that Huntington will be
unable to collect all amounts due according to the contractual terms of the loan agreement.
The amount of interest recognized in
2004 on impaired loans while they were considered impaired was $0.2 million. There was no
interest recognized in 2003 or 2002 on impaired loans while they were considered impaired. Effective March 31, 2004, HPCI reclassified $4.3 million of its ALL to a separate
liability on the balance sheet titled AULPC. The AULPC is based on expected losses derived from
historical experience. HPCI believes that this reclassification better reflects the nature of this
reserve and represents improved financial statement disclosure. Prior period financial statements
have not been revised due to immateriality. Since March 31, 2004, AULPC has declined by $560
thousand due to lower unfunded loan participation commitment balances. Note 5 - Premises and Equipment At December 31, premises and equipment stated at cost were comprised of the following: (in thousands of dollars)
    
    2004
    
    
    2003Land and land improvements
    
    $
    365
    
    
    $
    365Buildings
    
    
    533
    
    
    
    533Leasehold improvements
    
    
    103,235
    
    
    
    106,747Total premises and equipment
    
    
    104,133
    
    
    
    107,645Accumulated depreciation and amortization
    
    
    (77,498
    )
    
    
    (75,519
    )Net Premises and Equipment
    
    $
    26,635
    
    
    $
    32,126
 Premises and equipment related depreciation and amortization, in the amounts of $5.3 million,
$5.5 million, and $5.8 million, were charged to expense in the years ended December 31, 2004, 2003,
and 2002, respectively. Note 6  Dividends Holders of Class A preferred securities, a majority of which are held by HPCH-III and the
remainder by current and past employees of the Bank, 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 44




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Notes to Consolidated Financial Statements (Continued) 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-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, 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)
    
    2004
    
    
    2003
    
    
    2002Class A preferred securities
    
    $
    80
    
    
    $
    80
    
    
    $
    80Class B preferred securities
    
    
    5,887
    
    
    
    4,910
    
    
    
    7,525Class C preferred securities
    
    
    3,938
    
    
    
    3,938
    
    
    
    3,937Class D preferred securities
    
    
    10,839
    
    
    
    9,983
    
    
    
    12,272Total preferred dividends declared
    
    $
    20,744
    
    
    $
    18,911
    
    
    $
    23,814
 As of December 31, 2004 and 2003, all declared dividends on preferred securities
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, 2004, 2003, and 2002,
were $263.8 million, $289.6 million, and $382.8 million, respectively. Note 7 - Related Party Transactions HPCI is a party to a Second Amended and Restated Loan Subparticipation Agreement with
Holdings, an Amended and Restated Loan Subparticipation Agreement with HPCH-III, and an Amended and
Restated Loan Participation Agreement with the Bank. The Bank is required, under the 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 collects and remits principal
and interest payments, maintains perfected collateral positions,
and submits and pursues insurance claims. In addition, the Bank provides accounting and
reporting services to HPCI. 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. 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. In its
capacity as servicer, the Bank collects and holds the 45




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) loan payments received on behalf of HPCI until the end of each month. Servicing costs
paid to the Bank totaled $9.9 million, $7.6 million, and $6.7 million for the respective years
ended 2004, 2003, and 2002. As of July 1, 2004, the annual servicing rates the Bank charged with respect to outstanding
principal balances were:  
    0.125% of the underlying commercial and commercial real estate loans,
    0.750% of the underlying consumer loans, and
    0.267% of the underlying residential real estate loans. Annual servicing rates the Bank charged for the periods prior to July 1, 2004, were:  
    0.125% of the underlying commercial and commercial real estate loans,
    0.320% of the underlying consumer loans, and
    0.2997% of the underlying residential real estate loans. Pursuant to the existing participation and subparticipation agreements, the amount and terms
of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time to
time during the terms of the agreements. Effective July 1, 2004, in lieu of paying higher
servicing costs to the Bank with respect to commercial and commercial real estate loans, HPCI
waived its right to receive any origination fees associated with participation interests in
commercial and commercial real estate loans transferred on or after July 1, 2004, until such time
as loan servicing fees are reviewed in 2005. Huntingtons 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 $0.6 million, $0.3
million, and $0.2 million for the years ended December 31, 2004, 2003, and 2002,
respectively and are recorded in other non-interest expense. The following table represents the ownership of HPCIs outstanding common and preferred
securities as of December 31, 2004: Number ofCommon
    
    
    Number of Preferred SecuritiesOwner at December 31, 2004:
    
    Shares
    
    
    Class A
    
    
    Class B
    
    
    Class C
    
    
    Class DHPC II
    
    
    4,550,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    HPCH-III
    
    
    9,431,333
    
    
    
    894
    
    
    
    
    
    
    
    
    
    
    
    14,000,000HPC Holdings II, Inc.
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    
    
    
    
    Huntington
    
    
    18,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total held by related parties
    
    
    14,000,000
    
    
    
    894
    
    
    
    400,000
    
    
    
    
    
    
    
    14,000,000Other shareholders
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    2,000,000
    
    
    
    Total shares outstanding
    
    
    14,000,000
    
    
    
    1,000
    
    
    
    400,000
    
    
    
    2,000,000
    
    
    
    14,000,000
 As of December 31, 2004, 10.6% of the Class A preferred securities were owned by current and
past employees of Huntington and its subsidiaries in addition to the 89.4% 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, 2004, HPCI board members and executive officers
beneficially owned, in the aggregate, a total of 4,713 shares, or 0.235%. All of the Class D
preferred securities are owned by HPCH-III. 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 preferred securities. 46




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##### Table of Contents



Notes to Consolidated Financial Statements (Continued) Both the Class C and Class D preferred securities are entitled to one-tenth of one vote per
share on all matters submitted to HPCI shareholders. The Class C and Class 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 if 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 only related parties hold HPCIs common stock, there is no established public trading
market for this class of 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 Bank for use of applicable facilities by the Bank. The amount of
rental income received by HPCLI was $6.5 million,
$6.2 million, and $6.1 million for years
ended December 31, 2004, 2003, and 2002, respectively. Rental income is reflected as a component
of non-interest income in the consolidated statements of income. HPCI had a non-interest bearing receivable from affiliates of $175 thousand at December 31,
2004, and $13.7 million at December 31, 2003. The Bank is eligible to obtain collateralized advances from various federal and
government-sponsored agencies such as the Federal Home Loan Bank. 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 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
qualification as a REIT, HPCI may invest available funds in Eurodollar deposits with the Bank for a
term of not more than 30 days at market rates. Note 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
    
    
    First2004Interest and fee income
    
    $
    69,228
    
    
    $
    65,291
    
    
    $
    63,946
    
    
    $
    63,750Reduction in allowance for credit losses
    
    
    (13,153
    )
    
    
    (6,874
    )
    
    
    (9,301
    )
    
    
    (2,263
    )Non-interest income
    
    
    1,768
    
    
    
    1,770
    
    
    
    2,045
    
    
    
    1,666Non-interest expense
    
    
    4,295
    
    
    
    4,389
    
    
    
    3,945
    
    
    
    3,631Income before provision for income taxes
    
    
    79,854
    
    
    
    69,546
    
    
    
    71,347
    
    
    
    64,048Provision for income taxes
    
    
    58
    
    
    
    88
    
    
    
    84
    
    
    
    23Net income
    
    
    79,796
    
    
    
    69,458
    
    
    
    71,263
    
    
    
    64,025Dividends declared on preferred securities
    
    
    (6,208
    )
    
    
    (5,406
    )
    
    
    (4,488
    )
    
    
    (4,642
    )Net income applicable to common shares
    
    $
    73,588
    
    
    $
    64,052
    
    
    $
    66,775
    
    
    $
    59,3832003Interest and fee income
    
    $
    66,715
    
    
    $
    67,687
    
    
    $
    68,870
    
    
    $
    71,129Reduction in allowance for credit 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 provision for income taxes
    
    
    72,032
    
    
    
    84,615
    
    
    
    82,251
    
    
    
    69,737Provision for income taxes
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24Net income
    
    
    72,008
    
    
    
    84,591
    
    
    
    82,227
    
    
    
    69,713Dividends declared on preferred securities
    
    
    (4,562
    )
    
    
    (4,488
    )
    
    
    (4,787
    )
    
    
    (5,074
    )Net income applicable to common shares
    
    $
    67,446
    
    
    $
    80,103
    
    
    $
    77,440
    
    
    $
    64,639
 47




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Notes to Consolidated Financial Statements (Continued) Note 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, interest-bearing deposits, and due from affiliates- The carrying value approximates the fair
value. 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 balance sheets approximate fair value. Note 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. Currently,
HPCIs assets have been used to secure only one such facility.
The Bank is currently eligible to obtain one or more collateralized advances from the FHLB
based upon the amount of FHLB capital stock owned by the Bank. As of December 31, 2004, the Banks
total borrowing capacity under this facility was $1.5 billion. As of this same date, the Bank had
borrowings of $1.3 billion under this facility. From time to time, HPCI may be asked to pledge
assets as collateral for a $18.2 million letter of credit provided by the FHLB to the Bank on
behalf of a Huntington customer. 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 dollar amount or aggregate percentage of such
assets established from time to time by HPCIs board of directors, including a majority of HPCIs
independent directors. Prior to October 31, 2004, the aggregate FHLB advance limit established by HPCIs board was $1.0
billion. Effective as of October 31, 2004, the limit was adjusted to 25% of total assets, or $1.4
billion as of December 31, 2004, as reflected in the Corporations month-end management report for
the previous month. This limit may be changed in the future by the board of directors, including a
majority of HPCIs independent directors. The agreement also provides that the Bank will pay HPCI a
monthly fee based upon the certified collateral held by HPCI. As of December 31, 2004, HPCIs total
loans pledged was limited to 1-4 family residential mortgage portfolio and consumer second mortgage
loans. As of that same date, HPCIs participation interests in 1-4 family residential mortgages and
second mortgage loans pledged, totaled $1.0 billion. The Bank paid HPCI a total of $0.7 million,
$0.7 million, and $0.6 million in the respective annual periods ended December 31, 2004, 2003, and
2002, representing twelve basis points per year on the certified collateral, as compensation
for making such assets available to the Bank. 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 HPCH III, so that the Bank may 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. As of December 31, 2004 and 2003, the
unfunded loan commitments totaled $761.4 million and $923.7 million, respectively. Note 11 - Formal Regulatory Supervisory Agreements On March 1, 2005, Huntington announced that it had entered into formal written agreements with
its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the
Comptroller of the Currency (OCC), 48




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Notes to Consolidated Financial Statements (Continued) providing for a comprehensive action plan designed to enhance
its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. They call for independent third-party reviews, as well as the
submission of written plans and progress reports by Huntingtons management. These written
agreements remain in effect until terminated by the banking regulators. Huntingtons management has been working with its banking regulators over the past several
months and has been taking actions and devoting significant resources to address all of the issues
raised. Huntingtons management believes that the changes that it has already made, and is in the
process of making, will address these issues fully and comprehensively. No assurances, however, can
be provided as to the ultimate timing or outcome of these matters, including the effects on HPCI. Note 12 - 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. 49




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Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure Not Applicable 
 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, 2004 to which this report relates that have materially affected, or are
reasonably likely to materially affect, HPCIs internal control over financial reporting. 
 Item 9B: Other Information Not applicable. 
 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 2005
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 2005 Information Statement and is incorporated herein by
reference. 
 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters No HPCI securities were issued under equity compensation plans. Additional information
required by this item is set forth under the caption Ownership of Voting Stock of HPCIs 2005
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 2005 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 2005 Information Statement and is incorporated
herein by reference. 
 Part IV 
 Item 15: Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report:  (1)
    The report of independent registered public accounting firm and consolidated financial
statements appearing in Item 8. 50




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(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 53 and 54 of this
Form 10- K. (b) The exhibits to this Form 10-K begin on page 55. (c) See Item 15 (a) (2) above. 51




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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 25th day of March, 2005. HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant) By:
    
    /s/ Donald R. Kimble
    
    By:
    
    /s/ Thomas P. ReedDonald R. Kimble
    
    
    
    Thomas P. ReedPresident 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 25th day of March, 2005. /s/ Richard A. Cheap *
    
    DirectorRichard A. Cheap/s/ Stephen E. Dutton *
    
    DirectorStephen E. Dutton/s/ R. Larry Hoover *
    
    DirectorR. Larry Hoover/s/ Edward J. Kane *
    
    DirectorEdward J. Kane/s/ Roger E. Kephart *
    
    DirectorRoger E. Kephart/s/ James D. Robbins *
    
    DirectorJames D. Robbins/s/ Karen D. Roggenkamp *
    
    DirectorKaren D. Roggenkamp* /s/ Donald R. KimbleDonald R. Kimble
 Attorney-in fact for each of the persons indicated. 52




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\

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. (previously filed as
Exhibit 10(a) to Annual Report on Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference).(b).
    
    Second Amended and Restated Loan Subparticipation Agreement, dated March 30, 2004,
between Huntington Preferred Capital Holdings, Inc. and Huntington Preferred Capital, Inc.
(previously filed as Exhibit 10(b) to Annual Report on Form 10-K for the year ended December
31, 2003, and incorporated herein by reference).(c).
    
    Amended and Restated Loan Subparticipation Agreement, dated March 30, 2004, between HPC
Holdings-III, Inc. and Huntington Preferred Capital, Inc. (previously filed as Exhibit 10(c)
to Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein
by reference).(d).
    
    Amended and Restated Loan Subparticipation Agreement, dated March 30, 2004, between
Huntington Preferred Capital Holdings, Inc. and HPC Holdings-III, Inc. (previously filed as
Exhibit 10(d) to Annual Report on Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference).(e).
    
    Amended and Restated Loan Participation Agreement, dated March 30, 2004, between The
Huntington National Bank and Huntington Preferred Capital, Inc. (previously filed as Exhibit
10(e) to Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated
herein by reference).(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).(h).
    
    Leasehold Improvements Lease dated August 12, 2004 between HPCLI, Inc. and The Huntington
National Bank (previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004, and incorporated herein by reference).(i).
    
    Limited Waiver of Contract Provision dated August 12, 2004 with Huntington Preferred
Capital Holdings, Inc., HPC Holdings  III, Inc., Huntington Preferred Capital, Inc., and
The Huntington National Bank (previously filed as Exhibit 10(b) to Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, and incorporated herein by reference).
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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.21.
    
    List of Subsidiaries.24.
    
    Power of Attorney.31.(a).
    
    Sarbanes-Oxley Act 302 Certification  signed by Donald R. Kimble, President.31.(b).
    
    Sarbanes-Oxley Act 302 Certification  signed by Thomas P. Reed, Vice President.32.(a).
    
    Sarbanes-Oxley Act 906
Certification - signed by Donald R. Kimble, President.32.(b).
    
    Sarbanes-Oxley Act 906
Certification - signed by Thomas P. Reed, Vice President.99.(a).
    
    Written Agreement between Huntington National Bank and the Office of the Comptroller of the
Currency dated February 28, 2005.99.(b).
    
    Written Agreement between Huntington Bancshares Incorporated and the Federal Reserve Bank
of Cleveland dated February 28, 2005.99.(c).
    
    Opinion of Ernst & Young LLP, Independent Auditors.
 54