UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


QUARTERLY
PERIOD ENDED June 30,
2010





Commission
File Number: 000-33243





Huntington
Preferred Capital, Inc.





Ohio
              31-1356967(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)





41
South High Street, Columbus, Ohio  43287





Registrant's
telephone number (614)
480-8300





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.  x
Yes    ̈ No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).     ̈
Yes    ̈ No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer   x (Do not check if
      a smaller reporting company)
              Smaller
      reporting company  ̈





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


 ̈Yes   xNo





As of
July 31, 2010, 14,000,000 shares of common stock without par value were
outstanding, all of which were held by affiliates of the
registrant.





HUNTINGTON
PREFERRED CAPITAL, INC.





INDEX





Part
      1.
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements (Unaudited)Condensed
      Balance Sheets at June 30, 2010, December 31, 2009, and June 30,
      2009
                3Condensed
      Statements of Income for the three months and six months ended June 30,
      2010 and 2009
                4Condensed
      Statements of Changes in Shareholders’ Equity for the six months
      ended  June 30, 2010 and 2009
                5Condensed
      Statements of Cash Flows for the six months ended June 30, 2010 and
      2009
                6Notes
      to Unaudited Condensed Financial Statements
                7Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                15Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                29Item
      4.
                Controls
      and Procedures
                29PART
      II.
                OTHER
      INFORMATIONItem
      6.
                Exhibits
                29Signatures
                31




2





Part
I. Financial Information


Item
1. Financial Statements


Huntington
Preferred Capital, Inc.


Condensed
Balance Sheets


(Unaudited)


June 30,
                                          
                                          
                                          December 31,
                                          
                                          
                                          June 30,(in thousands, except share data)
                                          
                                          2010
                                          
                                          
                                          2009
                                          
                                          
                                          2009AssetsCash
      and interest bearing deposits with The Huntington National
      Bank
                                          
                                          $
                                          452,023
                                          
                                          
                                          $
                                          715,663
                                          
                                          
                                          $
                                          540,104Due
      from The Huntington National Bank
                                          
                                          
                                          40,823
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          51,527Loan
      participation interests:Commercial
      real estate
                                          
                                          
                                          2,984,364
                                          
                                          
                                          
                                          3,129,026
                                          
                                          
                                          
                                          3,134,805Consumer
      and residential real estate
                                          
                                          
                                          660,764
                                          
                                          
                                          
                                          744,627
                                          
                                          
                                          
                                          838,811Total
      loan participation interests
                                          
                                          
                                          3,645,128
                                          
                                          
                                          
                                          3,873,653
                                          
                                          
                                          
                                          3,973,616Allowance
      for loan participation losses
                                          
                                          
                                          (144,097
                                          )
                                          
                                          
                                          (156,431
                                          )
                                          
                                          
                                          (95,748
                                          )Net
      loan participation interests
                                          
                                          
                                          3,501,031
                                          
                                          
                                          
                                          3,717,222
                                          
                                          
                                          
                                          3,877,868Accrued
      income and other assets
                                          
                                          
                                          10,103
                                          
                                          
                                          
                                          10,470
                                          
                                          
                                          
                                          10,608Total
      assets
                                          
                                          $
                                          4,003,980
                                          
                                          
                                          $
                                          4,443,355
                                          
                                          
                                          $
                                          4,480,107Liabilities
      and shareholders' equityLiabilitiesAllowance
      for unfunded loan participation commitments
                                          
                                          $
                                          1,610
                                          
                                          
                                          $
                                          1,607
                                          
                                          
                                          $
                                          2,280Dividends
      and distributions payable
                                          
                                          
                                          626
                                          
                                          
                                          
                                          500,000
                                          
                                          
                                          
                                          2,669Due
      to The Huntington National Bank
                                          
                                          
                                          —
                                          
                                          
                                          
                                          8,640
                                          
                                          
                                          
                                          —Other
      liabilities
                                          
                                          
                                          54
                                          
                                          
                                          
                                          74
                                          
                                          
                                          
                                          67Total
      liabilities
                                          
                                          
                                          2,290
                                          
                                          
                                          
                                          510,321
                                          
                                          
                                          
                                          5,016Shareholders'
      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
                                          
                                          
                                          
                                          1,000
                                          
                                          
                                          
                                          1,000Preferred
      securities, Class B, variable-rate, noncumulative, andconditionally
      exchangeable; $1,000 par and liquidationvalue
      per share; authorized 500,000 shares; 400,000shares
      issued and outstanding
                                          
                                          
                                          400,000
                                          
                                          
                                          
                                          400,000
                                          
                                          
                                          
                                          400,000Preferred
      securities, Class C, 7.875% noncumulative andconditionally
      exchangeable; $25 par and liquidation valueper
      share; 2,000,000 shares authorized, issued, and
outstanding
                                          
                                          
                                          50,000
                                          
                                          
                                          
                                          50,000
                                          
                                          
                                          
                                          50,000Preferred
      securities, Class D, variable-rate, noncumulative, andconditionally
      exchangeable; $25 par and liquidation valueper
      share; 14,000,000 shares authorized, issued, and
    outstanding
                                          
                                          
                                          350,000
                                          
                                          
                                          
                                          350,000
                                          
                                          
                                          
                                          350,000Preferred
      securities, $25 par, 10,000,000 sharesauthorized;
      no shares issued or outstanding
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Common
      stock - without par value; 14,000,000 shares authorized,issued,
      and outstanding
                                          
                                          
                                          3,160,217
                                          
                                          
                                          
                                          3,160,217
                                          
                                          
                                          
                                          3,660,217Retained
      earnings (deficit)
                                          
                                          
                                          40,473
                                          
                                          
                                          
                                          (28,183
                                          )
                                          
                                          
                                          13,874Total
      shareholders' equity
                                          
                                          
                                          4,001,690
                                          
                                          
                                          
                                          3,933,034
                                          
                                          
                                          
                                          4,475,091Total
      liabilities and shareholders' equity
                                          
                                          $
                                          4,003,980
                                          
                                          
                                          $
                                          4,443,355
                                          
                                          
                                          $
                                          4,480,107





See
notes to unaudited condensed financial statements.




3





Huntington
Preferred Capital, Inc.


Condensed
Statements of Income


(Unaudited)


Three Months Ended
                          
                          
                          Six Months EndedJune 30,
                          
                          
                          June 30,(inthousands)
                          
                          2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Interest
      and fee incomeInterest
      on loan participation interests:Commercial
      real estate
                          
                          $
                          26,857
                          
                          
                          $
                          27,071
                          
                          
                          $
                          53,418
                          
                          
                          
                          56,397Consumer
      and residential real estate
                          
                          
                          10,994
                          
                          
                          
                          14,278
                          
                          
                          
                          22,600
                          
                          
                          
                          29,754Total
      loan participation interest income
                          
                          
                          37,851
                          
                          
                          
                          41,349
                          
                          
                          
                          76,018
                          
                          
                          
                          86,151Fees
      from loan participation interests
                          
                          
                          427
                          
                          
                          
                          290
                          
                          
                          
                          918
                          
                          
                          
                          559Interest
      on deposits with The Huntington National Bank
                          
                          
                          272
                          
                          
                          
                          284
                          
                          
                          
                          431
                          
                          
                          
                          386Total
      interest and fee income
                          
                          
                          38,550
                          
                          
                          
                          41,923
                          
                          
                          
                          77,367
                          
                          
                          
                          87,096Provision
      (reduction in allowances) for credit losses
                          
                          
                          (1,182
                          )
                          
                          
                          40,497
                          
                          
                          
                          (575
                          )
                          
                          
                          59,485Interest
      income after provision (reduction in allowances) for credit
      losses
                          
                          
                          39,732
                          
                          
                          
                          1,426
                          
                          
                          
                          77,942
                          
                          
                          
                          27,611Noninterest
      income:Rental
      income
                          
                          
                          17
                          
                          
                          
                          16
                          
                          
                          
                          34
                          
                          
                          
                          32Collateral
      fees
                          
                          
                          524
                          
                          
                          
                          640
                          
                          
                          
                          1,080
                          
                          
                          
                          1,317Total
      noninterest income
                          
                          
                          541
                          
                          
                          
                          656
                          
                          
                          
                          1,114
                          
                          
                          
                          1,349Noninterest
      expense:Servicing
      costs
                          
                          
                          2,024
                          
                          
                          
                          2,387
                          
                          
                          
                          4,141
                          
                          
                          
                          4,938Other
                          
                          
                          180
                          
                          
                          
                          235
                          
                          
                          
                          343
                          
                          
                          
                          400Total
      noninterest expense
                          
                          
                          2,204
                          
                          
                          
                          2,622
                          
                          
                          
                          4,484
                          
                          
                          
                          5,338Income
      (loss) before provision for income taxes
                          
                          
                          38,069
                          
                          
                          
                          (540
                          )
                          
                          
                          74,572
                          
                          
                          
                          23,622Provision
      for income taxes
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Net
      income (loss)
                          
                          $
                          38,069
                          
                          
                          $
                          (540
                          )
                          
                          $
                          74,572
                          
                          
                          $
                          23,622Dividends
      declared on preferred securities
                          
                          
                          (2,953
                          )
                          
                          
                          (4,613
                          )
                          
                          
                          (5,916
                          )
                          
                          
                          (9,748
                          )Net
      income (loss) applicable to common shares
                          
                          $
                          35,116
                          
                          
                          $
                          (5,153
                          )
                          
                          $
                          68,656
                          
                          
                          $
                          13,874





See
notes to unaudited condensed financial statements.




4





Huntington
Preferred Capital, Inc.


Condensed
Statements of Changes in Shareholders' Equity


(Unaudited)





Preferred,ClassA
                                    
                                    
                                    Preferred,ClassB
                                    
                                    
                                    Preferred,ClassC(inthousands)
                                    
                                    Shares
                                    
                                    
                                    Amount
                                    
                                    
                                    Shares
                                    
                                    
                                    Amount
                                    
                                    
                                    Shares
                                    
                                    
                                    AmountSix
      Months Ended June 30, 2009:Balance,
      beginning of period
                                    
                                    
                                    1
                                    
                                    
                                    $
                                    1,000
                                    
                                    
                                    
                                    400
                                    
                                    
                                    $
                                    400,000
                                    
                                    
                                    
                                    2,000
                                    
                                    
                                    $
                                    50,000Comprehensive
      Income:Net
      incomeTotal
      comprehensive incomeBalance,
      end of the period
                                    
                                    
                                    1
                                    
                                    
                                    $
                                    1,000
                                    
                                    
                                    
                                    400
                                    
                                    
                                    $
                                    400,000
                                    
                                    
                                    
                                    2,000
                                    
                                    
                                    $
                                    50,000Six
      Months Ended June 30, 2010:Balance,
      beginning of period
                                    
                                    
                                    1
                                    
                                    
                                    $
                                    1,000
                                    
                                    
                                    
                                    400
                                    
                                    
                                    $
                                    400,000
                                    
                                    
                                    
                                    2,000
                                    
                                    
                                    $
                                    50,000Comprehensive
      Income:Net
      incomeTotal
      comprehensive incomeBalance,
      end of the period
                                    
                                    
                                    1
                                    
                                    
                                    $
                                    1,000
                                    
                                    
                                    
                                    400
                                    
                                    
                                    $
                                    400,000
                                    
                                    
                                    
                                    2,000
                                    
                                    
                                    $
                                    50,000





Preferred,ClassD
                      
                      
                      Preferred
                      
                      
                      Common
                      
                      
                      Retained(inthousands)
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Earnings
                      
                      
                      TotalSix
      Months Ended June 30, 2009:Balance,
      beginning of period
                      
                      
                      14,000
                      
                      
                      $
                      350,000
                      
                      
                      
                      —
                      
                      
                      $
                      —
                      
                      
                      
                      14,000
                      
                      
                      $
                      3,660,217
                      
                      
                      $
                      —
                      
                      
                      $
                      4,461,217Comprehensive
      Income:Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      23,622
                      
                      
                      
                      23,622Total
      comprehensive income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      23,622Dividends
      declared on Class A preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (80
                      )
                      
                      
                      (80
                      )Dividends
      declared on Class B preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,590
                      )
                      
                      
                      (2,590
                      )Dividends
      declared on Class C preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,968
                      )
                      
                      
                      (1,968
                      )Dividends
      declared on Class D preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (5,110
                      )
                      
                      
                      (5,110
                      )Balance,
      end of the period
                      
                      
                      14,000
                      
                      
                      $
                      350,000
                      
                      
                      
                      —
                      
                      
                      $
                      —
                      
                      
                      
                      14,000
                      
                      
                      $
                      3,660,217
                      
                      
                      $
                      13,874
                      
                      
                      $
                      4,475,091Six
      Months Ended June 30, 2010:Balance,
      beginning of period
                      
                      
                      14,000
                      
                      
                      $
                      350,000
                      
                      
                      
                      —
                      
                      
                      $
                      —
                      
                      
                      
                      14,000
                      
                      
                      $
                      3,160,217
                      
                      
                      $
                      (28,183
                      )
                      
                      $
                      3,933,034Comprehensive
      Income:Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      74,572
                      
                      
                      
                      74,572Total
      comprehensive income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      74,572Dividends
      declared on Class A preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (80
                      )
                      
                      
                      (80
                      )Dividends
      declared on Class B preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (546
                      )
                      
                      
                      (546
                      )Dividends
      declared on Class C preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,969
                      )
                      
                      
                      (1,969
                      )Dividends
      declared on Class D preferred securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (3,321
                      )
                      
                      
                      (3,321
                      )Balance,
      end of the period
                      
                      
                      14,000
                      
                      
                      $
                      350,000
                      
                      
                      
                      —
                      
                      
                      $
                      —
                      
                      
                      
                      14,000
                      
                      
                      $
                      3,160,217
                      
                      
                      
                      40,473
                      
                      
                      $
                      4,001,690





See
notes to unaudited condensed financial statements.




5





Huntington
Preferred Capital, Inc.


Condensed
Statements of Cash Flows


(Unaudited)


Six Months EndedJune 30,(inthousands)
                      
                      2010
                      
                      
                      2009Operating
      activitiesNet
      income
                      
                      $
                      74,572
                      
                      
                      $
                      23,622Adjustments
      to reconcile net income to netcash
      provided by operating activities:Provision
      (reduction in allowances) for credit losses
                      
                      
                      (575
                      )
                      
                      
                      59,485Change
      in due to/from The Huntington National Bank
                      
                      
                      384
                      
                      
                      
                      5,037Other,
      net
                      
                      
                      865
                      
                      
                      
                      3,510Net
      cash provided by operating activities
                      
                      
                      75,246
                      
                      
                      
                      91,654Investing
      activitiesParticipation
      interests acquired
                      
                      
                      (767,491
                      )
                      
                      
                      (724,528
                      )Sales
      and repayments of loans underlying participation interests
                      
                      
                      933,895
                      
                      
                      
                      1,112,048Net
      cash provided by investing activities
                      
                      
                      166,404
                      
                      
                      
                      387,520Financing
      activitiesDividends
      paid on preferred securities
                      
                      
                      (5,290
                      )
                      
                      
                      (7,079
                      )Dividends
      paid on common stock
                      
                      
                      —
                      
                      
                      
                      (224,258
                      )Return
      of capital to common shareholders
                      
                      
                      (500,000
                      )
                      
                      
                      (742
                      )Net
      cash used for financing activities
                      
                      
                      (505,290
                      )
                      
                      
                      (232,079
                      )Increase
      (decrease) in cash and cash equivalents
                      
                      
                      (263,640
                      )
                      
                      
                      247,095Cash
      and cash equivalents at beginning of period
                      
                      
                      715,663
                      
                      
                      
                      293,009Cash
      and cash equivalents at end of period
                      
                      $
                      452,023
                      
                      
                      $
                      540,104Supplemental
      information:Dividends
      and distributions declared, not paid
                      
                      $
                      626
                      
                      
                      $
                      2,669Non
      cash change in loan participation activity with The Huntington National
      Bank
                      
                      
                      49,847
                      
                      
                      
                      18,141





See
notes to unaudited condensed financial statements.




6


Notes
to Unaudited Condensed Financial Statements





Note
1 - Organization





Huntington
Preferred Capital, Inc. (HPCI or the Company) was organized under Ohio law in
1992 and designated as a real estate investment trust (REIT) in 1998. 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. Two related parties own HPCI’s common stock: Huntington
Preferred Capital II, Inc. (HPCII); and Huntington Preferred Capital Holdings,
Inc. (Holdings). On June 14, 2010, Huntington Capital Financing LLC (HCF) merged
into HPCII and the common stock previously owned by HCF is now owned by
HPCII.





HPCII and
Holdings are direct and indirect subsidiaries of The Huntington National Bank
(the Bank), a national banking association organized under the laws of the
United States and headquartered in Columbus, Ohio. The Bank is a wholly owned
subsidiary of Huntington Bancshares Incorporated (Huntington). Huntington is a
multi-state diversified financial holding company organized under Maryland law
and headquartered in Columbus, Ohio. At June 30, 2010, the Bank, on a
consolidated basis with its subsidiaries, accounted for over 99% of Huntington’s
consolidated total assets and essentially all of year-to-date net
income. Thus, for purposes of presenting consolidated financial statements for
the Bank, Management considers information for the Bank and for Huntington to be
substantially the same for these periods.





During
the first quarter of 2010, HPCI’s Board of Directors approved a proposal to
exchange HPCI’s preferred class D shares, currently held by HPCH, for newly
issued preferred class E shares. As of June 30, 2010, the exchange has not yet
occurred. Upon exchange, one new share of class E preferred stock will be issued
and exchanged for each ten shares of class D preferred stock. The newly issued
1,400,000 class E preferred shares will have the same terms as the class D
preferred stock. The per share liquidation value of the class E preferred stock
will be ten times ($250) that of the class D stock. The dividend rate and terms
will remain the same. The exchange would have no impact on HPCI’s financial
results since the liquidation value remains at $350,000,000.





In
conjunction with applicable accounting standards, all material subsequent events
have been either recognized in the financial statements or disclosed in the
notes to the financial statements.





Note
2 - Basis of Presentation and New Accounting Pronouncements





The
accompanying unaudited condensed financial statements of HPCI reflect all
adjustments consisting of normal recurring accruals, which are, in the opinion
of Management, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. These unaudited
condensed financial statements have been prepared according to the rules and
regulations of the Securities and Exchange Commission (SEC) and, therefore,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States (GAAP) have been omitted. The Notes to the Consolidated
Financial Statements appearing in HPCI’s Annual Report on Form 10-K for the year
ended December 31, 2009 (Form 10-K), which include descriptions of significant
accounting policies, as updated by the information contained in this report,
should be read in conjunction with these interim financial
statements.





HPCI
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 federal income taxes.





All of
HPCI’s common stock is owned by affiliates; therefore, net income per common
share information is not presented.





Cash and
cash equivalents used in the Statement of Cash Flows is defined as “Cash and
Interest bearing deposits with The Huntington National Bank.”




7





Accounting Standards Update (ASU)
2010-6 – Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements.The ASU amends Subtopic 820-10
with new disclosure requirements and clarification of existing disclosure
requirements.  New disclosures required include the amount of
significant transfers in and out of levels 1 and 2 fair value measurements and
the reasons for the transfers.  In addition, the reconciliation for
level 3 activity will be required on a gross rather than net
basis.  The ASU provides additional guidance related to the level of
disaggregation in determining classes of assets and liabilities and disclosures
about inputs and valuation techniques.  The amendments are effective
for annual or interim reporting periods beginning after December 15, 2009,
except for the requirement to provide the reconciliation for level 3 activity on
a gross basis which will be effective for fiscal years beginning after December
15, 2010.  The adoption of this guidance had no impact on HPCI’s
condensed financial statements.





Accounting Standards Update (ASU)
2010-20 – Receivables (Topic 310): Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses.The
ASU will require more information about the credit quality of the loan portfolio
in the disclosures to financial statements, such as aging information and credit
quality indicators.  Both new and existing disclosures must be
disaggregated by portfolio segment or class.  The disaggregation of
information is based on how a company develops its allowance for credit losses
and how it manages its credit exposure.  The disclosures related to
period-end balances are effective for annual or interim reporting periods ending
after December 15, 2010 and the disclosures of activity that occurs during the
reporting period are effective for annual or interim reporting periods beginning
after December 15, 2010.





Note
3 – Lending Concentrations and Participations in Non-Performing Assets and Past
Due Loans





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. Loans
made to borrowers in the five states of Ohio, Michigan, Indiana, Pennsylvania
and Kentucky comprised approximetly 94%, 94%, and 93% of the portfolio at June
30, 2010, December 31, 2009, and  June 30, 2009,
respectively.





Participations
in loans on non-accrual status and loans past due 90 days or more and still
accruing interest were as follows:





June 30,
                  
                  
                  December 31,
                  
                  
                  June 30,(in thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2009Commercial
      real estate
                  
                  $
                  123,205
                  
                  
                  $
                  165,184
                  
                  
                  $
                  166,810Consumer
      and residential real estate
                  
                  
                  5,263
                  
                  
                  
                  5,554
                  
                  
                  
                  6,588Total
      participations in non-performing assets
                  
                  $
                  128,468
                  
                  
                  $
                  170,738
                  
                  
                  $
                  173,398Participations
      in accruing loans past due 90 days or more
                  
                  $
                  6,504
                  
                  
                  $
                  8,631
                  
                  
                  $
                  6,113





Note
4 - Allowance for Credit Losses (ACL)





The
allowance for credit losses (ACL) is comprised of the allowance for loan
participation losses (ALPL) and the allowance for unfunded loan participation
commitments (AULPC). Loan participations are acquired net of related ALPL. As a
result, the related ALPL is transferred to HPCI from the Bank and is reflected
as ALPL acquired, rather than HPCI having to record a provision expense for
ALPL. If credit quality deteriorates more than implied by the ALPL acquired, a
provision to the ALPL is made. If credit quality performance is better than
implied by the ALPL acquired, an ALPL reduction is recorded. As loan
participations mature, refinance, or other such actions occur, any allowance not
absorbed by loan losses is released through the reduction in ALPL.




8


The
following table reflects activity in the ACL for the three-month and six-month
periods ended June 30, 2010 and 2009:





Three Months Ended
                
                
                Six Months EndedJune 30,
                
                
                June 30,(in thousands)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009ALPL
      balance, beginning of period
                
                $
                158,963
                
                
                $
                79,889
                
                
                $
                156,431
                
                
                $
                65,456ALPL
      for loan participations acquired
                
                
                11,058
                
                
                
                4,673
                
                
                
                24,946
                
                
                
                8,803Net
      loan losses
                
                
                (24,694
                )
                
                
                (29,523
                )
                
                
                (36,702
                )
                
                
                (38,017
                )Provision
      (reduction in allowances) for ALPL
                
                
                (1,230
                )
                
                
                40,709
                
                
                
                (578
                )
                
                
                59,506ALPL
      balance, end of period
                
                $
                144,097
                
                
                $
                95,748
                
                
                $
                144,097
                
                
                $
                95,748AULPC
      balance, beginning of period
                
                $
                1,562
                
                
                $
                2,492
                
                
                $
                1,607
                
                
                $
                2,301Provision
      (reduction in allowances) for AULPC
                
                
                48
                
                
                
                (212
                )
                
                
                3
                
                
                
                (21
                )AULPC
      balance, end of period
                
                $
                1,610
                
                
                $
                2,280
                
                
                $
                1,610
                
                
                $
                2,280Total
      ACL
                
                $
                145,707
                
                
                $
                98,028
                
                
                $
                145,707
                
                
                $
                98,028





As of
June 30, 2010, December 31, 2009, and June 30, 2009, HPCI’s unfunded loan
commitments totaled $236.8 million, $303.7 million, and $296.1 million,
respectively.





Note
5 – Preferred Dividends





Holders
of Class A preferred securities, a majority of which are held by Holdings and
the remainder by current and past employees of Huntington and 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 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 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, Holdings, 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.




9


A summary
of dividends declared by each class of preferred securities follows for the
periods indicated:





Three Months Ended
                        
                        
                        Six Months EndedJune 30,
                        
                        
                        June 30,(in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Class
      A preferred securities
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        80
                        
                        
                        $
                        80Class
      B preferred securities
                        
                        
                        292
                        
                        
                        
                        1,177
                        
                        
                        
                        546
                        
                        
                        
                        2,590Class
      C preferred securities
                        
                        
                        984
                        
                        
                        
                        984
                        
                        
                        
                        1,969
                        
                        
                        
                        1,968Class
      D preferred securities
                        
                        
                        1,677
                        
                        
                        
                        2,452
                        
                        
                        
                        3,321
                        
                        
                        
                        5,110Total
      dividends declared
                        
                        $
                        2,953
                        
                        
                        $
                        4,613
                        
                        
                        $
                        5,916
                        
                        
                        $
                        9,748





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.  Based on a
regulatory dividend limitation, the Bank could not have declared and paid a
dividend at June 30, 2010, without regulatory approval. As a subsidiary of the
Bank, HPCI is also restricted from declaring or paying dividends on Class A, B,
and C preferred securities without regulatory approval.  The Office of
the Comptroller of the Currency (OCC) has approved the payment of HPCI's
dividends on its preferred securities throughout 2009 and the first three
quarters of 2010. For the foreseeable future, management intends to request
approval for any future dividend; however, there can be no assurance that the
OCC will approve future dividends.





Note
6 - Related Party Transactions





HPCI is a
party to a Third Amended and Restated Loan Subparticipation Agreement with
Holdings and a Second 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 adhere to HPCI’s policies relating to the relationship between
HPCI and the Bank and to pay all expenses related to the performance of the
Bank’s duties under the participation and subparticipation agreements. All loan
participation interests to date were acquired directly or indirectly from the
Bank.





The Bank
performs the servicing of the commercial real estate, consumer, and residential
real estate loans underlying the participations held by HPCI in accordance with
normal industry practice under the amended participation and subparticipation
agreements.  In its capacity as servicer, the Bank collects and holds
the loan payments received on behalf of HPCI until the end of each
month.  Loan servicing costs totaled $2.0 million and $2.4 million for
the three-month periods ended June 30, 2010 and 2009, respectively. For the
respective six-month periods, the costs were $4.1 million and $4.9
million.





In 2010
and 2009, the annual servicing rates the Bank charged with respect to
outstanding principal balances were:




January 1, 2009throughJune 30, 2010Commercial
      real estate
                  
                  
                  0.125
                  %Consumer
                  
                  
                  0.650
                  %Residential
      real estate
                  
                  
                  0.267
                  %




10


Pursuant
to the existing participation and sub-participation 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.  In lieu of paying higher servicing costs to the Bank with
respect to commercial real estate loans, HPCI waived its right to receive any
origination fees associated with participation interests in commercial real
estate loans. The Bank and HPCI performed a review of loan servicing fees in
2010, and have agreed to retain current servicing rates for all loan
participation categories, including the continued waiver by HPCI of its right to
origination fees, until such time as servicing fees are reviewed in
2011.




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 $0.1 million for both
of the three-month periods ended June 30, 2010 and 2009, and are included in
other non-interest expense.  For both of the respective six-month
periods, the cost was $0.2 million.




The
following table represents the ownership of HPCI’s outstanding common and
preferred securities as of June 30, 2010:





Number ofCommon
                
                
                Number of Preferred SecuritiesShareholder:
                
                Shares
                
                
                Class A
                
                
                Class B
                
                
                Class C
                
                
                Class DHeld
      by related parties:HPCII
                
                
                11,130,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Holdings
                
                
                2,870,000
                
                
                
                895
                
                
                
                —
                
                
                
                —
                
                
                
                14,000,000HPC
      Holdings-II, Inc.
                
                
                —
                
                
                
                —
                
                
                
                400,000
                
                
                
                —
                
                
                
                —Total
      held by related parties
                
                
                14,000,000
                
                
                
                895
                
                
                
                400,000
                
                
                
                —
                
                
                
                14,000,000Other
      shareholders
                
                
                —
                
                
                
                105
                
                
                
                —
                
                
                
                2,000,000
                
                
                
                —Total
      shares outstanding
                
                
                14,000,000
                
                
                
                1,000
                
                
                
                400,000
                
                
                
                2,000,000
                
                
                
                14,000,000





As of
June 30, 2010, 10.5% of the Class A preferred securities were owned by current
and past employees of Huntington and its subsidiaries in addition to the 89.5%
owned by Holdings.  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 June 30, 2010, HPCI board members and
executive officers beneficially owned, in the aggregate, a total of 5,871
shares, or 0.294% of the Class C preferred securities.  All of the
Class D preferred securities are owned by Holdings.  Dividends
declared and accrued to the Class C shareholders for the first six months of
2010 were approximately $2.0 million.





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 D
preferred securities are currently redeemable and Class C preferred securities
are redeemable at HPCI’s option on or after December 31, 2021, with prior
consent of the OCC.  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 different than the
current market price of the Class C or Class D preferred
securities.




As only
related parties hold HPCI’s common stock, there is no established public trading
market for this class of stock.




HPCI had
a receivable from the Bank of $40.8 million at June 30, 2010, a payable to the
Bank of $8.6 million at December 31, 2009, and a receivable from the Bank of
$51.5 million at June 30, 2009.  The balances represent the net
settlement amounts due to, or from, the Bank for the last month of the period’s
activity.  Principal and interest payments on loan participations
remitted by customers are due from the Bank, while new loan participation
purchases are due to the Bank.




11


HPCI has
assets pledged in association with the Bank’s advances from the Federal Home
Loan Bank (FHLB).   For further information regarding this see
Note 8.





HPCI
maintains and transacts all of its cash activity through the
Bank.  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.





Note
7 - Fair Values of Assets and Liabilities





Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Fair value measurements are
classified within one of three levels in a valuation hierarchy based upon the
transparency of inputs used in the valuation of an asset or liability as of the
measurement date. The three levels are defined as follows:




Level 1 —
inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.





Level 2 —
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.





Level 3 —
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.





A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.





Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis





Certain
assets and liabilities may be required to be measured at fair value on a
nonrecurring basis in periods subsequent to their initial recognition. These
assets and liabilities are not measured at fair value on an ongoing basis;
however, they are subject to fair value adjustments in certain circumstances,
such as when there is evidence of impairment.





Impairment
of Loan Participation Interests





Periodically,
HPCI records nonrecurring adjustments of collateral-dependent loan participation
interest measured for impairment when establishing the allowance for credit
losses. Such amounts are generally based on the fair value of the underlying
collateral supporting the loan.  Appraisals are generally obtained to
support the fair value of the collateral and incorporate measures such as recent
sales prices for comparable properties and cost of construction.  HPCI
considers these fair values Level 3.  In cases where the carrying
value exceeds the fair value of the collateral less cost to sell, an impairment
charge is recognized.




12


For the
six months ended June 30, 2010, HPCI identified the following loans where the
carrying value exceeded the fair value of the underlying collateral for the
loan.  The fair value impairment was recorded within the provision for
credit losses.


Fair Value Measurements UsingSix Months
                    Ended
                  
                  
                  Quoted Prices in
                    Active Markets
                    for Identical
                    Assets
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                  
                  
                  Significant
                    Other
                    Unobservable
                    Inputs
                  
                  
                  Total
                    Gains/(in millions)
                  
                  June 30,
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  (Losses)2010Loan
      participation interests
                  
                  $
                  3.9
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  3.9
                  
                  
                  $
                  (1.1
                  )2009Loan
      participation interests
                  
                  $
                  56.3
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  56.3
                  
                  
                  $
                  (16.9
                  )





There were no changes in the valuation
techniques or related inputs used to measure similar assets in prior
periods.





Fair
Value of Financial Instruments





The
following methods and assumptions were used by HPCI to estimate the fair value
of the classes of financial instruments:





Cash and
interest-bearing deposits, and due from The Huntington National Bank — The
carrying value approximates fair value based on its highly liquid
nature.





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 and the credit risk associated in the
loan portfolio. As of June 30, 2010, the carrying amount of $3.6 billion
corresponded to a fair value of $3.0 billion. As of June 30, 2009, the carrying
value of $4.0 billion corresponded to a fair value of $3.3 billion. At June 30,
2010, the valuation of the loan portfolio reflected discounts that HPCI believed
are consistent with transactions occurring in the market place.





Note
8 - Commitments and Contingencies





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 asguarantor 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 the FHLB 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 collateralize
only one such facility.  The Bank has a line of credit from the FHLB,
limited to $2.3 billion as of June 30, 2010, based on the Bank’s holdings of
FHLB stock.  As of this same date, the Bank had borrowings of $0.6
billion under this facility. This was up from borrowings of $0.2 billion at
December 31, 2009.


13


HPCI has
entered into an Amended and Restated 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.  The pledge limit was established by
HPCI’s board at 25% of total assets, or approximately $1.0 billion as of June
30, 2010, as reflected in HPCI’s month-end management report. This pledge limit
may be changed in the future by the board of directors, including a majority of
HPCI’s independent directors.  The amount of HPCI’s participation
interests pledged was $0.6 billion at June 30, 2010.  In 2010, the
loans pledged consisted of 1-4 family residential mortgage loans.  The
agreement also provides that the Bank will pay HPCI a monthly fee based upon the
total loans pledged by HPCI.  The Bank paid HPCI a total of $0.5
million and $0.6 million for the three months ended June 30, 2010 and 2009,
respectively, as compensation for making such assets available to the
Bank.  The amounts paid to HPCI for the first six months of 2010 and
2009 were $1.1 million and $1.3 million, respectively. The fee represented
thirty-five basis points per year on total pledged loans.





Under the terms of the participation and
subparticipation agreements, HPCI is obligated to make funds or credit available
to the Bank, either directly or indirectly through Holdings, so that the Bank
may extend credit or pay letters of credit issued for those accounts for any of
HPCI’s loan participation interests, to the extent provided in the loan
agreements underlying HPCI’s participation interests. As of June 30, 2010,
December 31, 2009, and June 30, 2009, HPCI’s unfunded loan commitments totaled
$236.8 million, $303.7 million, and $296.1 million,
respectively.





Note
9 - 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.


14





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





INTRODUCTION





Huntington
Preferred Capital, Inc. (HPCI or the Company) 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 a Third Amended and Restated Loan Subparticipation Agreement with
Huntington Preferred Capital Holdings, Inc. (Holdings) and a Second Amended and
Restated Loan Participation Agreement with The Huntington National Bank (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 adhere to HPCI’s policies relating to the
relationship between HPCI and the Bank and to pay all expenses related to the
performance of the Bank’s duties under the participation and subparticipation
agreements. All of these participation interests to date were acquired directly
or indirectly from the Bank.





The
following discussion and analysis provides information the Company believes is
necessary for understanding the financial condition, changes in financial
condition, results of operations, and cash flows and should be read in
conjunction with the financial statements, notes, and other information
contained in this report. The Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) appearing in HPCI’s Annual Report
on Form 10-K for the year ended December 31, 2009 (Form 10-K) should be read in
conjunction with this interim MD&A.





Forward-looking
Statements





This
report, including this MD&A, contains forward-looking statements about HPCI.
These include descriptions of products or services, plans, or objectives of
Management for future operations, and forecasts of revenues, earnings, cash
flows, or other measures of economic performance. Forward-looking statements can
be identified by the fact that they do not relate strictly to historical or
current facts.





By their
nature, forward-looking statements are subject to numerous assumptions, risks,
and uncertainties. A number of factors could cause actual conditions, events, or
results to differ significantly from those described in the forward-looking
statements. These factors include, but are not limited to, those set forth under
the heading “Risk Factors” included in Item 1A of HPCI’s Form 10-K and other
factors described in this report and from time to time in 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 assumes
no obligation to update forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements were made or to
reflect the occurrence of unanticipated events.




15


Risk
Factors





HPCI is
subject to a number of risks that may adversely affect its financial condition
or results of operation, many of which are outside of the Company’s direct
control, though efforts are made to manage those risks while optimizing returns.
Credit risk related to single family homebuilders is of particular concern in
the current economy.  See “Credit Risk’ section of this report.
Additionally, more information on risk is set forth under the heading “Risk
Factors” included in Item 1A of HPCI’s Form 10-K, and subsequent filings with
the SEC.




Critical
Accounting Policies





HPCI’s
financial statements were prepared in accordance with accounting principles
generally accepted in the United States (GAAP). The preparation of financial
statements in conformity with GAAP requires the Company to establish critical
accounting policies and make accounting estimates, assumptions, and judgments
that affect amounts recorded and reported in our financial statements. Note 1 to
HPCI’s consolidated financial statements included in its Form 10-K lists
significant accounting policies used in the development and presentation of its
financial statements. This MD&A, 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 HPCI, its financial position, results of
operations, and cash flows.





Use
of Significant 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 the
Company’s 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. Readers of this interim report should
understand that estimates are made under facts and circumstances at a point in
time and changes in those facts and circumstances could produce actual results
that differ from when those estimates were made. HPCI’s Management has
identified the most significant accounting estimates and their related
application in its Form 10-K.





Allowances for Credit Losses
(ACL)





The
allowance for credit losses (ACL) is comprised of the allowance for loan
participation losses (ALPL) and the allowance for unfunded loan participation
commitments (AULPC). The amount of the ACL was determined by judgments regarding
the quality of each individual loan portfolio and loan
commitments.  All known relevant internal and external factors that
affected loan collectability were considered, including analysis of historical
charge-off experience, migration patterns, changes in economic conditions, and
changes in loan collateral values.  Such factors are subject to
regular review and may change to reflect updated performance trends and
expectations, particularly in times of severe stress. 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 ALPL and AULPC.  The Bank’s methodology to
determine the adequacy of the ALPL relies on a number of analytical tools and
benchmarks. No single statistic or measurement, in itself, determines the
adequacy of the allowance. HPCI believes the Bank’s process for determining the
ACL considers all of the potential factors that could result in credit
losses.  However, the process includes judgmental and quantitative
elements that may be subject to significant change.  There is no
certainty that the ACL will be adequate over time to cover credit losses in the
portfolio because of continued adverse changes in the economy, market
conditions, or events adversely affecting specific customers, industries or
markets.   To the extent actual outcomes differ from our
estimates, the credit quality of our customer base materially decreases, the
risk profile of a market, industry, or group of customers changes materially, or
if the ACL is determined to not be adequate, additional provision for credit
losses could be required, which could adversely affect our business, financial
condition, liquidity, capital, and results of operations in future
periods.





The ACL
of $145.7 million at June 30, 2010, was 4.00% of total loan participation
interests.  To illustrate the potential effect on the financial
statements of our estimates of the ACL, a 50 basis point, or 12.5%, increase
would have required $18.2 million in additional reserves (requiring additional
provision for credit losses), which would have negatively impacted the net
income of the first three-month period of 2010 by approximately $18.2
million.  The ACL of $145.7 million at June 30, 2010, represented a
7.7% decrease from $158.0 million at December 31, 2009.




16


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 June 30, 2010, HPCI met all of the quarterly asset
tests.





Also, a
REIT must annually satisfy two gross income tests: (1) 75% of its gross income
must be from qualifying income closely connected with real estate activities;
and (2) 95% of its gross income must be derived from sources qualifying for the
75% test plus dividends, interest, and gains from the sale of
securities.  In addition, a REIT must distribute 90% of the REIT’s
taxable income for the taxable year, excluding any net capital gains, to
maintain its non-taxable status for federal income tax purposes.  For
tax year 2009, 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 June 30, 2010, 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





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 securities are considered
equity and, therefore, the dividends are not reflected as interest
expense.





Net
income for the second quarter 2010 was $38.1 million, up $38.6 million from a
net loss of $0.5 million in the second quarter 2009.  Net income
applicable to common shares was $35.1 million for the second quarter of 2010, an
increase of $40.3 million from net loss applicable to common shares of $5.2
million in the second quarter of 2009.  The increase in net income for
the second quarter of 2010, compared with same period of 2009, was primarily the
result of lower provision for credit losses, partially offset by lower interest
and fee income.


17





Table 1 - Quarterly Statements of Income2010
                          
                          
                          2009
                          
                          
                          2Q10vs2Q09(in thousands)
                          
                          Second
                          
                          
                          First
                          
                          
                          Fourth
                          
                          
                          Third
                          
                          
                          Second
                          
                          
                          $Chg
                          
                          
                          % ChgInterest
      and fee incomeInterest
      on loan participation interests:Commercial
      real estate
                          
                          $
                          26,857
                          
                          
                          $
                          26,561
                          
                          
                          $
                          26,321
                          
                          
                          $
                          26,575
                          
                          
                          $
                          27,071
                          
                          
                          $
                          (214
                          )
                          
                          
                          (0.8
                          )%Consumer
      and residential real estate
                          
                          
                          10,994
                          
                          
                          
                          11,606
                          
                          
                          
                          12,576
                          
                          
                          
                          13,392
                          
                          
                          
                          14,278
                          
                          
                          
                          (3,284
                          )
                          
                          
                          (23.0
                          )Total
      loan participation interest income
                          
                          
                          37,851
                          
                          
                          
                          38,167
                          
                          
                          
                          38,897
                          
                          
                          
                          39,967
                          
                          
                          
                          41,349
                          
                          
                          
                          (3,498
                          )
                          
                          
                          (8.5
                          )Fees
      from loan participation interests
                          
                          
                          427
                          
                          
                          
                          491
                          
                          
                          
                          297
                          
                          
                          
                          379
                          
                          
                          
                          290
                          
                          
                          
                          137
                          
                          
                          
                          47.2Interest
      on deposits with the Bank
                          
                          
                          272
                          
                          
                          
                          159
                          
                          
                          
                          454
                          
                          
                          
                          395
                          
                          
                          
                          284
                          
                          
                          
                          (12
                          )
                          
                          
                          (4.2
                          )Total
      interest and fee income
                          
                          
                          38,550
                          
                          
                          
                          38,817
                          
                          
                          
                          39,648
                          
                          
                          
                          40,741
                          
                          
                          
                          41,923
                          
                          
                          
                          (3,373
                          )
                          
                          
                          (8.0
                          )Provision
      (reduction in allowances) for credit losses
                          
                          
                          (1,182
                          )
                          
                          
                          607
                          
                          
                          
                          84,740
                          
                          
                          
                          27,701
                          
                          
                          
                          40,497
                          
                          
                          
                          (41,679
                          )
                          
                          N.M.Interest
      income after provision (reduction in allowances) for credit
      losses
                          
                          
                          39,732
                          
                          
                          
                          38,210
                          
                          
                          
                          (45,092
                          )
                          
                          
                          13,040
                          
                          
                          
                          1,426
                          
                          
                          
                          38,306
                          
                          
                          N.M.Noninterest
      income:Rental
      income
                          
                          
                          17
                          
                          
                          
                          17
                          
                          
                          
                          16
                          
                          
                          
                          17
                          
                          
                          
                          16
                          
                          
                          
                          1
                          
                          
                          
                          6Collateral
      fees
                          
                          
                          524
                          
                          
                          
                          556
                          
                          
                          
                          578
                          
                          
                          
                          609
                          
                          
                          
                          640
                          
                          
                          
                          (116
                          )
                          
                          
                          (18.1
                          )Total
      noninterest income
                          
                          
                          541
                          
                          
                          
                          573
                          
                          
                          
                          594
                          
                          
                          
                          626
                          
                          
                          
                          656
                          
                          
                          
                          (115
                          )
                          
                          
                          (17.5
                          )Non-interest
      expense:Servicing
      costs
                          
                          
                          2,024
                          
                          
                          
                          2,117
                          
                          
                          
                          2,180
                          
                          
                          
                          2,264
                          
                          
                          
                          2,387
                          
                          
                          
                          (363
                          )
                          
                          
                          (15.2
                          )Other
                          
                          
                          180
                          
                          
                          
                          163
                          
                          
                          
                          172
                          
                          
                          
                          162
                          
                          
                          
                          235
                          
                          
                          
                          (55
                          )
                          
                          
                          (23.4
                          )Total
      noninterest expense
                          
                          
                          2,204
                          
                          
                          
                          2,280
                          
                          
                          
                          2,352
                          
                          
                          
                          2,426
                          
                          
                          
                          2,622
                          
                          
                          
                          (418
                          )
                          
                          
                          (15.9
                          )Net
      income (loss)
                          
                          $
                          38,069
                          
                          
                          $
                          36,503
                          
                          
                          $
                          (46,850
                          )
                          
                          $
                          11,240
                          
                          
                          $
                          (540
                          )
                          
                          $
                          38,609
                          
                          
                          N.M.Dividends
      declared on preferred securities
                          
                          
                          (2,953
                          )
                          
                          
                          (2,963
                          )
                          
                          
                          (2,940
                          )
                          
                          
                          (3,507
                          )
                          
                          
                          (4,613
                          )
                          
                          
                          1,660
                          
                          
                          
                          36.0Net income (loss)
      applicable to common shares (1)
                          
                          $
                          35,116
                          
                          
                          $
                          33,540
                          
                          
                          $
                          (49,790
                          )
                          
                          $
                          7,733
                          
                          
                          $
                          (5,153
                          )
                          
                          $
                          40,269
                          
                          
                          N.M.
                          %


(1) All of
HPCI’s common stock is owned by HPCII and Holdings and, therefore, net income
per share is not presented.





N.M. -
Not a meaningful value.





Net
income for the six-months ended June 30, 2010 was $74.6 million, up $51.0
million, from the same period in 2009.  Net income applicable to
common shares for the six-months ended June 30, 2010 was $68.7 million, an
increase of $54.8 million, compared to the same period in 2009.  The
increase in net income for the first six-months of 2010, compared to the same
period of 2009, was primarily the result of much lower provision for credit
losses, offset by lower interest income.


18





Table 2 - Year-To-Date Statements of IncomeSix Months Ended June 30,
                      
                      
                      2010 vs 2009(in thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      $ Chg
                      
                      
                      % ChgInterest
      and fee incomeInterest
      on loan participation interests:Commercial
      real estate
                      
                      $
                      53,418
                      
                      
                      $
                      56,397
                      
                      
                      $
                      (2,979
                      )
                      
                      
                      (5.3
                      )%Consumer
      and residential real estate
                      
                      
                      22,600
                      
                      
                      
                      29,754
                      
                      
                      
                      (7,154
                      )
                      
                      
                      (24.0
                      )Total
      loan participation interest income
                      
                      
                      76,018
                      
                      
                      
                      86,151
                      
                      
                      
                      (10,133
                      )
                      
                      
                      (11.8
                      )Fees
      from loan participation interests
                      
                      
                      918
                      
                      
                      
                      559
                      
                      
                      
                      359
                      
                      
                      
                      64.2Interest
      on deposits with The Bank
                      
                      
                      431
                      
                      
                      
                      386
                      
                      
                      
                      45
                      
                      
                      
                      11.7Total
      interest and fee income
                      
                      
                      77,367
                      
                      
                      
                      87,096
                      
                      
                      
                      (9,729
                      )
                      
                      
                      (11.2
                      )Provision
      (reduction in allowances) for credit losses
                      
                      
                      (575
                      )
                      
                      
                      59,485
                      
                      
                      
                      (60,060
                      )
                      
                      N.M.Interest
      income after provision (reduction in allowances) for credit
      losses
                      
                      
                      77,942
                      
                      
                      
                      27,611
                      
                      
                      
                      50,331
                      
                      
                      N.M.Non-interest
      income:Rental
      income
                      
                      
                      34
                      
                      
                      
                      32
                      
                      
                      
                      2
                      
                      
                      
                      6.3Collateral
      fees
                      
                      
                      1,080
                      
                      
                      
                      1,317
                      
                      
                      
                      (237
                      )
                      
                      
                      (18.0
                      )Total
      non-interest income
                      
                      
                      1,114
                      
                      
                      
                      1,349
                      
                      
                      
                      (235
                      )
                      
                      
                      (17.4
                      )Non-interest
      expense:Servicing
      costs
                      
                      
                      4,141
                      
                      
                      
                      4,938
                      
                      
                      
                      (797
                      )
                      
                      
                      (16.1
                      )Other
                      
                      
                      343
                      
                      
                      
                      400
                      
                      
                      
                      (57
                      )
                      
                      
                      (14.3
                      )Total
      non-interest expense
                      
                      
                      4,484
                      
                      
                      
                      5,338
                      
                      
                      
                      (854
                      )
                      
                      
                      (16.0
                      )Net
      income
                      
                      $
                      74,572
                      
                      
                      $
                      23,622
                      
                      
                      $
                      50,950
                      
                      
                      N.M.
                      %Dividends
      declared on preferred securities
                      
                      
                      (5,916
                      )
                      
                      
                      (9,748
                      )
                      
                      
                      3,832
                      
                      
                      
                      39.3Net
      income applicable to common shares (1)
                      
                      $
                      68,656
                      
                      
                      $
                      13,874
                      
                      
                      $
                      54,782
                      
                      
                      N.M.
                      %





(1) All of
HPCI’s common stock is owned by HPCII and Holdings and therefore, net income per
share is not presented.


N.M. -
Not a meaningful value.





Interest and Fee
Income





HPCI’s
primary source of revenue is interest and fee income on its participation
interests in loans.  At June 30, 2010 and 2009, 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.


19


The
tables below show HPCI’s average balances, interest and fee income, and yields
for the three-month and six-month periods ended June 30, 2010 and
2009:





Table 3 - Interest and Fee IncomeThree Months Ended June 30,2010
                      
                      
                      2009Average
                      
                      
                      
                      
                      
                      
                      
                      
                      Average(in millions)
                      
                      Balance
                      
                      
                      Income(1)
                      
                      
                      Yield
                      
                      
                      Balance
                      
                      
                      Income(1)
                      
                      
                      YieldLoan
      participation interests:Commercial
      real estate
                      
                      $
                      3,017.7
                      
                      
                      $
                      27.2
                      
                      
                      
                      3.62
                      %
                      
                      $
                      3,194.5
                      
                      
                      $
                      27.2
                      
                      
                      
                      3.42
                      %Consumer
      and residential real estate
                      
                      
                      683.1
                      
                      
                      
                      11.0
                      
                      
                      
                      6.48
                      
                      
                      
                      871.3
                      
                      
                      
                      14.4
                      
                      
                      
                      6.62Total
      loan participations
                      
                      
                      3,700.8
                      
                      
                      
                      38.2
                      
                      
                      
                      4.15
                      
                      
                      
                      4,065.8
                      
                      
                      
                      41.6
                      
                      
                      
                      4.11Interest
      bearing deposits in the Bank
                      
                      
                      399.5
                      
                      
                      
                      0.3
                      
                      
                      
                      0.27
                      
                      
                      
                      449.7
                      
                      
                      
                      0.3
                      
                      
                      
                      0.25Total
                      
                      $
                      4,100.3
                      
                      
                      $
                      38.5
                      
                      
                      
                      3.77
                      %
                      
                      $
                      4,515.5
                      
                      
                      $
                      41.9
                      
                      
                      
                      3.72
                      %


(1) Income
includes interest and fees.




Table 4 - Year-To-Date Interest and Fee IncomeSix Months Ended June 30,2010
                            
                            
                            2009Average
                            
                            
                            
                            
                            
                            
                            
                            
                            Average(in millions)
                            
                            Balance
                            
                            
                            Income(1)
                            
                            
                            Yield
                            
                            
                            Balance
                            
                            
                            Income(1)
                            
                            
                            YieldLoan
      participation interests:Commercial
      real estate
                            
                            $
                            3,055.7
                            
                            
                            $
                            54.2
                            
                            
                            
                            3.58
                            %
                            
                            $
                            3,288.4
                            
                            
                            $
                            56.7
                            
                            
                            
                            3.48
                            %Consumer
      and residential real estate
                            
                            
                            709.3
                            
                            
                            
                            22.7
                            
                            
                            
                            6.46
                            
                            
                            
                            905.6
                            
                            
                            
                            30.0
                            
                            
                            
                            6.68Total
      loan participations
                            
                            
                            3,765.0
                            
                            
                            
                            76.9
                            
                            
                            
                            4.12
                            
                            
                            
                            4,194.0
                            
                            
                            
                            86.7
                            
                            
                            
                            4.17Interest
      bearing deposits in the Bank
                            
                            
                            327.6
                            
                            
                            
                            0.4
                            
                            
                            
                            0.26
                            
                            
                            
                            313.8
                            
                            
                            
                            0.4
                            
                            
                            
                            0.24Total
                            
                            $
                            4,092.6
                            
                            
                            $
                            77.4
                            
                            
                            
                            3.81
                            %
                            
                            $
                            4,507.8
                            
                            
                            $
                            87.1
                            
                            
                            
                            3.90
                            %


(1) Income
includes interest and fees.





Interest
and fee income was $38.5 million for the three-months ended June 30, 2010,
compared with $41.9 million for the year ago quarter. As shown in Table 3, the
decrease in interest and fee income was the result of lower overall loan
balances, offset by a slight increase in rates.  For the three-months
ended June 30, 2010 and 2009, the yield increased 5 basis points to 3.77%, while
average earning asset balances decreased $415.2 million, or 9.2%.  For
the six-months ended June 30, 2010 and 2009, interest and fee income was $77.4
million and $87.1 million, respectively.  As shown in Table 4, the
decrease in interest and fee income was the result of lower yields and lower
earning asset balances.  At June 30, 2010, December 31, 2009, and June
30, 2009, approximately 73%, 72%, and 70%, respectively, of the portfolio was
comprised of variable interest rate loan participations.  The table
above includes interest received on participations in loans that are on a
non-accrual status in the individual portfolios.





Provision (reduction in
allowance) for credit losses





The
provision (reduction in allowance) for credit losses is the charge (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. Loan
participations are acquired net of related allowance for loan participation
losses (ALPL).  As a result, this ALPL is transferred to HPCI from the
Bank and is reflected as ALPL acquired, rather than HPCI having to record a
provision expense for ALPL. If credit quality deteriorates more than implied by
the ALPL acquired, a provision to the ALPL is made. If credit quality
performance is better than implied by the ALPL acquired, an ALPL reduction is
recorded. As loan participations mature, refinance, or other such actions occur,
any allowance not absorbed by loan losses is released through the reduction in
ALPL. Such adjustments for the quarter ended June 30, 2010 resulted in a
reduction in allowance for credit losses of $1.2 million compared to a provision
for credit losses of $40.5 million for the year-ago quarter.  For the
six months ended June 30, 2010, the reduction in allowance for credit losses was
$0.6 million, compared with a provision for credit losses of $59.5 million in
the same period of the prior year. The decrease in provision during 2010 was
primarily related to the moderate improvement in HPCI’s delinquency levels, and
reduced levels of non-performing assets. See additional discussion in Allowance for Credit Losses
(ACL).




20


Noninterest Income and
Noninterest Expense





Noninterest
income included 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 $0.5 million and $0.6 million for the three-months ended June 30,
2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009,
non-interest income was $1.1 million and $1.3 million, respectively.(See Note 8to the unaudited condensed financial
statements for more information regarding use of HPCI’s assets as collateral for
the Bank’s advances from the FHLB.)





Noninterest
expense for the second quarter of 2010 was $2.2 million compared with $2.6
million for the same period last year. For the six months ended June 30, 2010
and 2009, non-interest expense was $4.5 million and $5.3 million, respectively.
The predominant component of HPCI’s noninterest expense is the fee paid to the
Bank for servicing the loans underlying the participation
interests.  For the second quarter 2010, servicing costs amounted to
$2.0 million, compared with $2.4 million for the comparable quarter of the prior
year.  The servicing costs for the six-month period ended June 30,
2010 and 2009 totaled $4.1 million and $4.9 million, respectively. The annual
servicing rates the Bank charged with respect to outstanding principal balances
in 2010 and 2009 were:





January 1, 2009throughJune 30, 2010Commercial
      real estate
                  
                  
                  0.125
                  %Consumer
                  
                  
                  0.650
                  %Residential
      real estate
                  
                  
                  0.267
                  %





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.  In lieu of paying higher servicing costs to the Bank with
respect to commercial real estate loans, HPCI waived its right to receive any
origination fees associated with participation interests in commercial real
estate loans.  The Bank and HPCI performed a review of loan servicing
fees in 2010, and agreed to retain current servicing rates for all loan
participation categories, including the continued waiver by HPCI of its right to
origination fees, until such time as servicing fees are reviewed in
2011.





Provision for 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 federal income taxes.





CREDIT
EXPOSURE MIX





HPCI’s
largest credit exposure was commercial real estate loan participation interests,
which totaled $3.0 billion and represented 82% of total loan participation
interests at June 30, 2010, compared with 79% at June 30,
2009.   Total consumer and residential real estate loan
participation interests were $0.7 billion and represented 18% of total loan
participations at June 30, 2010, compared with 21% at June 30, 2009. These
portfolios are discussed in greater detail below in the “Commercial Real Estate
Credit” and “Consumer Credit” sections of this report.





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 ALPL is transferred from
the Bank to HPCI on loans underlying the participations at the time the
participations are acquired.




21


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 aging information for the loans underlying HPCI’s loan
participations at June 30, 2010, December 31, 2009, and June 30,
2009.





Table 5 - Loan Participation Interests Aging(1)June 30, 2010
                      
                      
                      December 31, 2009
                      
                      
                      June 30, 2009Percentage by
                      
                      
                      
                      
                      
                      
                      
                      
                      Percentage by
                      
                      
                      
                      
                      
                      
                      
                      
                      Percentage byTotal
                      
                      
                      Aggregate
                      
                      
                      Aggregate
                      
                      
                      Total
                      
                      
                      Aggregate
                      
                      
                      Aggregate
                      
                      
                      Total
                      
                      
                      Aggregate
                      
                      
                      AggregateNumber
                      
                      
                      Principal
                      
                      
                      Principal
                      
                      
                      Number
                      
                      
                      Principal
                      
                      
                      Principal
                      
                      
                      Number
                      
                      
                      Principal
                      
                      
                      Principal(dollars in thousands)
                      
                      of Loans
                      
                      
                      Balance
                      
                      
                      Balance
                      
                      
                      of Loans
                      
                      
                      Balance
                      
                      
                      Balance
                      
                      
                      of Loans
                      
                      
                      Balance
                      
                      
                      BalanceCurrent
                      
                      
                      17,669
                      
                      
                      $
                      3,315,846
                      
                      
                      
                      90.9
                      %
                      
                      
                      19,206
                      
                      
                      $
                      3,506,912
                      
                      
                      
                      90.5
                      %
                      
                      
                      21,035
                      
                      
                      $
                      3,602,898
                      
                      
                      
                      90.6
                      %1 to
      30 days past due
                      
                      
                      1,217
                      
                      
                      
                      213,293
                      
                      
                      
                      5.9
                      
                      
                      
                      1,343
                      
                      
                      
                      201,739
                      
                      
                      
                      5.2
                      
                      
                      
                      1,541
                      
                      
                      
                      208,838
                      
                      
                      
                      5.331
      to 60 days past due
                      
                      
                      228
                      
                      
                      
                      23,727
                      
                      
                      
                      0.7
                      
                      
                      
                      291
                      
                      
                      
                      43,760
                      
                      
                      
                      1.1
                      
                      
                      
                      253
                      
                      
                      
                      31,886
                      
                      
                      
                      0.861
      to 90 days past due
                      
                      
                      112
                      
                      
                      
                      10,849
                      
                      
                      
                      0.3
                      
                      
                      
                      135
                      
                      
                      
                      17,612
                      
                      
                      
                      0.5
                      
                      
                      
                      151
                      
                      
                      
                      32,049
                      
                      
                      
                      0.8over
      90 days past due
                      
                      
                      324
                      
                      
                      
                      81,413
                      
                      
                      
                      2.2
                      
                      
                      
                      397
                      
                      
                      
                      103,630
                      
                      
                      
                      2.7
                      
                      
                      
                      341
                      
                      
                      
                      97,945
                      
                      
                      
                      2.5Total
                      
                      
                      19,550
                      
                      
                      $
                      3,645,128
                      
                      
                      
                      100.0
                      %
                      
                      
                      21,372
                      
                      
                      $
                      3,873,653
                      
                      
                      
                      100.0
                      %
                      
                      
                      23,321
                      
                      
                      $
                      3,973,616
                      
                      
                      
                      100.0
                      %


(1)
Includes non-accrual loans.





Commercial
Real Estate 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.





In
commercial lending, ongoing credit management is dependent on the type and
nature of the loan. Loans within commercial lending include both owner-occupied
and non-owner occupied loans secured by real estate.  In general,
significant credit exposures are monitored quarterly. Internal risk ratings are
revised and updated with each periodic monitoring event. There is also extensive
macro portfolio management analysis on an ongoing basis.  Huntington
continually reviews and adjusts credit criteria based on actual experience,
which may result in further changes to such criteria, in future
periods.


22


Commercial
real estate loan participation interests outstanding by property type and
location at June 30, 2010 were as follows:





Table
      6 - Commercial Real Estate Loans by Property Type and Property
      LocationAt
      June 30, 2010Geographic
      Region
                          
                          
                          Total
                          
                          
                          Percent
      ofOhio
                          
                          
                          Michigan
                          
                          
                          Indiana
                          
                          
                          Pennsylvania
                          
                          
                          Kentucky
                          
                          
                          Other
                          
                          
                          Amount
                          
                          
                          TotalIndustrial
      and warehouse
                          
                          $
                          385,316
                          
                          
                          $
                          150,249
                          
                          
                          $
                          67,829
                          
                          
                          $
                          12,894
                          
                          
                          $
                          13,520
                          
                          
                          $
                          21,489
                          
                          
                          $
                          651,297
                          
                          
                          
                          21.8
                          %Retail
      properties
                          
                          
                          336,885
                          
                          
                          
                          98,923
                          
                          
                          
                          54,556
                          
                          
                          
                          30,952
                          
                          
                          
                          22,228
                          
                          
                          
                          66,694
                          
                          
                          
                          610,238
                          
                          
                          
                          20.5Office
                          
                          
                          338,691
                          
                          
                          
                          132,614
                          
                          
                          
                          15,703
                          
                          
                          
                          32,097
                          
                          
                          
                          7,189
                          
                          
                          
                          26,820
                          
                          
                          
                          553,114
                          
                          
                          
                          18.5Raw
      land and other land uses
                          
                          
                          179,301
                          
                          
                          
                          80,034
                          
                          
                          
                          25,154
                          
                          
                          
                          7,538
                          
                          
                          
                          14,238
                          
                          
                          
                          17,335
                          
                          
                          
                          323,600
                          
                          
                          
                          10.8Health
      care
                          
                          
                          166,545
                          
                          
                          
                          65,466
                          
                          
                          
                          1,462
                          
                          
                          
                          17,356
                          
                          
                          
                          160
                          
                          
                          
                          14,499
                          
                          
                          
                          265,488
                          
                          
                          
                          8.9Multi
      family
                          
                          
                          123,121
                          
                          
                          
                          7,605
                          
                          
                          
                          67,288
                          
                          
                          
                          10,761
                          
                          
                          
                          35,222
                          
                          
                          
                          10,477
                          
                          
                          
                          254,474
                          
                          
                          
                          8.5Single
      family home builders
                          
                          
                          116,686
                          
                          
                          
                          29,571
                          
                          
                          
                          11,715
                          
                          
                          
                          12,654
                          
                          
                          
                          1,484
                          
                          
                          
                          647
                          
                          
                          
                          172,757
                          
                          
                          
                          5.8Other
                          
                          
                          71,002
                          
                          
                          
                          36,929
                          
                          
                          
                          5,077
                          
                          
                          
                          5,740
                          
                          
                          
                          1,047
                          
                          
                          
                          33,601
                          
                          
                          
                          153,396
                          
                          
                          
                          5.1Total
                          
                          $
                          1,717,547
                          
                          
                          $
                          601,391
                          
                          
                          $
                          248,784
                          
                          
                          $
                          129,992
                          
                          
                          $
                          95,088
                          
                          
                          $
                          191,562
                          
                          
                          $
                          2,984,364
                          
                          
                          
                          100.0
                          %% of
      total portfolio
                          
                          
                          58
                          %
                          
                          
                          20
                          %
                          
                          
                          8
                          %
                          
                          
                          4
                          %
                          
                          
                          3
                          %
                          
                          
                          7
                          %





HPCI’s
commercial real estate loan participation interests are diversified by customer,
as well as throughout the Bank’s lending area of Ohio, Michigan, Indiana,
Kentucky, and Pennsylvania.  However, the following components are
noteworthy.





Retail
properties





HPCI’s
portfolio of commercial real estate loans secured by retail properties totaled
$0.6 billion, or approximately 22% of total commercial real estate loans, and
had an ALPL associated with these loans of $29.3 million at June 30, 2010.
Credit approval in this loan segment is generally dependant on pre-leasing
requirements, and net operating income from the project must cover interest
expense by specified percentages when the loan is fully funded.





The
weakness of the economic environment in the Bank’s geographic regions
significantly impacted the projects that secure the loans in this portfolio
segment.  Increased unemployment levels compared with prior years, and
the expectation that these levels will continue to increase for the foreseeable
future, are expected to adversely affect the borrowers’ ability to repay these
loans.  The Bank has increased the level of credit risk management
analysis that is applied to this portfolio. The Bank also performed a detailed
analysis of the retail property loans in much greater detail by combining
property type, geographic location, tenants, and other data, to assess and
manage credit concentration risks.





Single
family homebuilders





HPCI’s
portfolio of commercial real estate loans secured by builders of single family
homes totaled $0.2 billion or approximately 6% of total commercial loans, and
had an ALPL associated with these loans of $8.3 million at June 30,
2010.





The
housing market across the Bank’s geographic footprint remained stressed,
reflecting relatively lower sales activity, declining prices, and excess
inventories of houses to be sold, particularly impacting borrowers in the East
Michigan and northern Ohio regions.  Further, a portion of the loans
extended to borrowers located within the Bank’s geographic regions was to
finance projects outside of its geographic regions.  Based on
portfolio management processes, including charge-off activity, over the
past 30 months, we believe that we have substantially addressed the credit
issues in this portfolio. We do not anticipate any future significant
credit impact from this portfolio segment.




23




Consumer
and Residential Real Estate





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.





Non-Performing Assets
(NPAs)





NPAs
consist of participation interests in underlying loans that are no longer
accruing interest. Underlying 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 consumer and residential real estate loans are generally placed on
non-accrual status when they became 180 days past due.  When interest
accruals are suspended, accrued interest income is reversed with current year
accruals charged to earnings and prior year amounts generally charged off as a
credit loss.





The
following table shows NPAs at the end of the most recent five
quarters:





Table 7 - Quarterly Non-Performing
      Assets2010
                    
                    
                    2009(in thousands)
                    
                    Second
                    
                    
                    First
                    
                    
                    Fourth
                    
                    
                    Third
                    
                    
                    SecondParticipation
      interests in non-accrual loansCommercial
      real estate
                    
                    $
                    123,205
                    
                    
                    $
                    149,997
                    
                    
                    $
                    165,184
                    
                    
                    $
                    192,661
                    
                    
                    $
                    166,810Consumer
      and residential real estate
                    
                    
                    5,263
                    
                    
                    
                    5,916
                    
                    
                    
                    5,554
                    
                    
                    
                    5,467
                    
                    
                    
                    6,588Total
      Non-Performing Assets
                    
                    $
                    128,468
                    
                    
                    $
                    155,913
                    
                    
                    $
                    170,738
                    
                    
                    $
                    198,128
                    
                    
                    $
                    173,398Participations
      in Accruing LoansPast
      Due 90 Days or More
                    
                    $
                    6,504
                    
                    
                    $
                    4,326
                    
                    
                    $
                    8,631
                    
                    
                    $
                    10,294
                    
                    
                    $
                    6,113NPAs
      as a % of total participation interests
                    
                    
                    3.52
                    %
                    
                    
                    4.15
                    %
                    
                    
                    4.41
                    %
                    
                    
                    5.13
                    %
                    
                    
                    4.36
                    %ALPL
      as a % of NPAs
                    
                    
                    112
                    
                    
                    
                    102
                    
                    
                    
                    92
                    
                    
                    
                    49
                    
                    
                    
                    55ACL
      as a % of NPAs
                    
                    
                    113
                    
                    
                    
                    103
                    
                    
                    
                    93
                    
                    
                    
                    50
                    
                    
                    
                    57





Total
NPAs decreased to $128.5 million at June 30, 2010, from $170.7 million at
December 31, 2009, and from $173.4 million at June 30, 2009, representing 3.52%,
4.41%, and 4.36% of total loan participation interests,
respectively.  The decrease in 2010 was principally related to the
commercial real estate loan participations and was spread across the different
property types of that portfolio.





The
following table presents a coverage ratio analysis at the end of the most recent
five quarters:


24





Table 8 - Quarterly ALPL / Loan Participation
      Coverage Ratio Analysis2010
                        
                        
                        2009(in
      thousands)
                        
                        Second
                        
                        
                        First
                        
                        
                        Fourth
                        
                        
                        Third
                        
                        
                        SecondLoan
      participation interests ending balances:Accruing
                        
                        $
                        3,516,660
                        
                        
                        $
                        3,598,796
                        
                        
                        $
                        3,702,915
                        
                        
                        $
                        3,665,990
                        
                        
                        $
                        3,800,218Impaired
      evaluated on a pool basis
                        
                        
                        32,910
                        
                        
                        
                        36,365
                        
                        
                        
                        40,040
                        
                        
                        
                        40,838
                        
                        
                        
                        44,008Impaired evaluated
      under ASC 310 (1)
                        
                        
                        95,558
                        
                        
                        
                        119,548
                        
                        
                        
                        130,698
                        
                        
                        
                        157,290
                        
                        
                        
                        129,390Total
      non-accrual
                        
                        
                        128,468
                        
                        
                        
                        155,913
                        
                        
                        
                        170,738
                        
                        
                        
                        198,128
                        
                        
                        
                        173,398Total
      loan participation interests
                        
                        $
                        3,645,128
                        
                        
                        $
                        3,754,709
                        
                        
                        $
                        3,873,653
                        
                        
                        $
                        3,864,118
                        
                        
                        $
                        3,973,616Allowance
      for loan participation interests (ALPL):Accruing
                        
                        $
                        114,753
                        
                        
                        $
                        122,824
                        
                        
                        $
                        127,405
                        
                        
                        $
                        69,449
                        
                        
                        $
                        66,661ALPL
      associated with impaired evaluatedon
      a pool basis
                        
                        
                        8,600
                        
                        
                        
                        9,689
                        
                        
                        
                        10,270
                        
                        
                        
                        3,109
                        
                        
                        
                        3,707ALPL determined in
      accordance with ASC 310 (1)
                        
                        
                        20,744
                        
                        
                        
                        26,450
                        
                        
                        
                        18,756
                        
                        
                        
                        24,773
                        
                        
                        
                        25,380Total
      non-accrual
                        
                        
                        29,344
                        
                        
                        
                        36,139
                        
                        
                        
                        29,026
                        
                        
                        
                        27,882
                        
                        
                        
                        29,087Total
      ALPL
                        
                        $
                        144,097
                        
                        
                        $
                        158,963
                        
                        
                        $
                        156,431
                        
                        
                        $
                        97,331
                        
                        
                        $
                        95,748ALPL
      as a % of loan participation intererstsAccruing
                        
                        
                        3.26
                        %
                        
                        
                        3.41
                        %
                        
                        
                        3.44
                        %
                        
                        
                        1.89
                        %
                        
                        
                        1.75
                        %Impaired
      evaluated on a pool basis
                        
                        
                        26.13
                        
                        
                        
                        26.64
                        
                        
                        
                        25.65
                        
                        
                        
                        7.61
                        
                        
                        
                        8.42Impaired evaluated
      under ASC 310 (1)
                        
                        
                        21.71
                        
                        
                        
                        22.13
                        
                        
                        
                        14.35
                        
                        
                        
                        15.75
                        
                        
                        
                        19.62Total
      non-accrual
                        
                        
                        22.84
                        
                        
                        
                        23.18
                        
                        
                        
                        17.00
                        
                        
                        
                        14.07
                        
                        
                        
                        16.77Total
      loan participation interests
                        
                        
                        3.95
                        %
                        
                        
                        4.23
                        %
                        
                        
                        4.04
                        %
                        
                        
                        2.52
                        %
                        
                        
                        2.41
                        %


(1)Accounting Standards Codification Topic 310, "Receivables"





Under
the participation and subparticipation agreements, the Bank may, in accordance
with HPCI’s guidelines, dispose of any underlying loan that has an internal
credit grade of substandard or lower, 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 agreements. 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.





For a
further discussion of “Credit Quality,” see HPCI’s Form 10-K for the year ended
December 31, 2009.





Allowance
for Credit Losses (ACL)





The
allowance for credit losses (ACL) is comprised of the allowance for loan
participation losses (ALPL) and the allowance for unfunded loan participation
commitments (AULPC). Loan participations are acquired net of related ALPL. As a
result, this ALPL is transferred to HPCI from the Bank and is reflected as ALPL
acquired, rather than HPCI having to record a provision expense for ALPL. If
credit quality deteriorates more than implied by the ALPL acquired, a provision
to the ALPL is made. If credit quality performance is better than implied by the
ALPL acquired, an ALPL reduction is recorded. As loan participations mature,
refinance, or other such actions occur, any allowance not absorbed by loan
losses is released through the reduction in ALPL.





The
following table shows the activity in HPCI’s ALPL and AULPC for the last five
quarters ended June 30, 2010 and for the six months ended June 30, 2010 and
2009:


25





Table 9 - Allowances for Credit Loss Activity2010
                        
                        
                        2009(in thousands)
                        
                        Second
                        
                        
                        First
                        
                        
                        Fourth
                        
                        
                        Third
                        
                        
                        SecondALPL
      balance, beginning of period
                        
                        $
                        158,963
                        
                        
                        $
                        156,431
                        
                        
                        $
                        97,331
                        
                        
                        $
                        95,748
                        
                        
                        $
                        79,889Allowance
      of loan participations acquired
                        
                        
                        11,058
                        
                        
                        
                        13,888
                        
                        
                        
                        15,499
                        
                        
                        
                        9,331
                        
                        
                        
                        4,673Net
      loan lossesCommercial
      real estate
                        
                        
                        (22,141
                        )
                        
                        
                        (7,360
                        )
                        
                        
                        (37,480
                        )
                        
                        
                        (32,138
                        )
                        
                        
                        (26,901
                        )Consumer
      and residential real estate
                        
                        
                        (2,553
                        )
                        
                        
                        (4,648
                        )
                        
                        
                        (3,700
                        )
                        
                        
                        (3,942
                        )
                        
                        
                        (2,622
                        )Total
      net loan losses
                        
                        
                        (24,694
                        )
                        
                        
                        (12,008
                        )
                        
                        
                        (41,180
                        )
                        
                        
                        (36,080
                        )
                        
                        
                        (29,523
                        )Provision
      for (reduction in) ALPL
                        
                        
                        (1,230
                        )
                        
                        
                        652
                        
                        
                        
                        84,782
                        
                        
                        
                        28,332
                        
                        
                        
                        40,709Reserve
      transfer from AULPC
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —ALPL
      balance, end of period
                        
                        $
                        144,097
                        
                        
                        $
                        158,963
                        
                        
                        $
                        156,431
                        
                        
                        $
                        97,331
                        
                        
                        $
                        95,748AULPC
      balance, beginning of period
                        
                        $
                        1,562
                        
                        
                        $
                        1,607
                        
                        
                        $
                        1,649
                        
                        
                        $
                        2,280
                        
                        
                        $
                        2,492Provision
      for (reduction in) AULPC
                        
                        
                        48
                        
                        
                        
                        (45
                        )
                        
                        
                        (42
                        )
                        
                        
                        (631
                        )
                        
                        
                        (212
                        )Reserve
      transfer to ALPL
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —AULPC
      balance, end of period
                        
                        $
                        1,610
                        
                        
                        $
                        1,562
                        
                        
                        $
                        1,607
                        
                        
                        $
                        1,649
                        
                        
                        $
                        2,280Total
      Allowance for Credit Losses
                        
                        $
                        145,707
                        
                        
                        $
                        160,525
                        
                        
                        $
                        158,038
                        
                        
                        $
                        98,980
                        
                        
                        $
                        98,028ALPL
      as a % of total participation interests
                        
                        
                        3.95
                        %
                        
                        
                        4.23
                        %
                        
                        
                        4.04
                        %
                        
                        
                        2.52
                        %
                        
                        
                        2.41
                        %ACL
      as a % of total participation interests
                        
                        
                        4.00
                        
                        
                        
                        4.28
                        
                        
                        
                        4.08
                        
                        
                        
                        2.56
                        
                        
                        
                        2.47





Six Months EndedJune 30,(in thousands)
                  
                  2010
                  
                  
                  2009ALPL
      balance, beginning of period
                  
                  $
                  156,431
                  
                  
                  $
                  65,456Allowance
      for loan participations acquired
                  
                  
                  24,946
                  
                  
                  
                  8,803Net
      loan lossesCommercial
      real estate
                  
                  
                  (29,501
                  )
                  
                  
                  (33,643
                  )Consumer
      and residential real estate
                  
                  
                  (7,201
                  )
                  
                  
                  (4,374
                  )Total
      net loan losses
                  
                  
                  (36,702
                  )
                  
                  
                  (38,017
                  )Provision
      for (reduction in) ALPL
                  
                  
                  (578
                  )
                  
                  
                  59,506Economic
      reserve transfer to AULPC
                  
                  
                  —
                  
                  
                  
                  —ALPL
      balance, end of period
                  
                  $
                  144,097
                  
                  
                  $
                  95,748AULPC
      balance, beginning of period
                  
                  $
                  1,607
                  
                  
                  $
                  2,301Provision
      for (reduction in) AULPC
                  
                  
                  3
                  
                  
                  
                  (21
                  )AULPC
      balance, end of period
                  
                  $
                  1,610
                  
                  
                  $
                  2,280Total
      Allowance for Credit Losses
                  
                  $
                  145,707
                  
                  
                  $
                  98,028





The
decrease in allowance and provision during 2010 was primarily related to
moderate reduction of HPCI‘s delinquency levels, as well as reduced levels of
non-performing assets. In Management’s judgment, both the ALPL and the AULPC
were adequate at June 30, 2010, to cover credit losses inherent in the loan
participation portfolio and portfolio of loan participation
commitments.  Additional information regarding asset quality appears
in the "Credit Quality" section of the Form 10-K.





MARKET
RISK





The
predominate market risk to which HPCI is exposed is the risk of loss due to a
decline in interest rates.  If there is a decline in market interest
rates, HPCI may experience a reduction in interest income from its loan
participation interests and a corresponding decrease in funds available to be
distributed to shareholders.  When rates rise, HPCI is exposed to
declines in the economic value of equity since approximately 27% of its loan
participation portfolio at June 30, 2010 was fixed rate.




26


Huntington
conducts its monthly interest rate risk management on a centralized basis and
does not manage HPCI’s interest rate risk separately.  Two broad
approaches to modeling interest rate risk are employed: income simulation and
economic value analysis.  An income simulation analysis was used to
measure the sensitivity of forecasted interest income to changes in market rates
over a one-year horizon.  The economic value analysis was conducted by
subjecting the period-end balance sheet to changes in interest rates and
measuring the impact of the changes in the value of the assets.  The
models used for these measurements assume, among other things, no new loan
participation volume.





Using the
income simulation model for HPCI as of June 30, 2010, interest income for the
next 12-month period would be expected to increase by $14.9 million, or 13.2%,
based on a gradual 200 basis point increase in rates above the forward rates
implied in the yield curve.  Interest income would be expected to
decline $8.4 million, or 7.4%, in the event of a gradual 200 basis point decline
in rates from the forward rates implied in the yield curve.  The
gradual 200 basis point decline in market rates over the next 12-month period
assumes market interest rates would reach a bottom and not fall below historical
levels.





Using the
economic value analysis model for HPCI as of June 30, 2010, the fair value of
loan participation interests over the next 12 month period would be expected to
increase $3.8 million, or 0.1%, based on an immediate 200 basis point decline in
rates above the forward rates implied in the yield curve.   Many
of HPCI’s variable rate loans are based on  LIBOR interest
rates.  Because the gradual 200 basis point decline in market rates
over the next 12 month period assumes market interest rates would not fall below
0%, the fair value would be expected to decline only to $55.0 million, or
1.3%.





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 or indirectly
through Holdings so that the Bank may extend credit or pay letters of credit
issued for those accounts for any of HPCI’s loan participation interests, to the
extent provided in the loan agreements underlying HPCI’s participation
interests. At June 30, 2010, December 31, 2009, and June 30, 2009, HPCI’s
unfunded commitments totaled $236.8 million, $303.7 million, and $296.1 million,
respectively.  It is expected that the existing cash balances and cash
flows generated by the existing portfolio will be sufficient to meet these
obligations.





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 June
30, 2010, December 31, 2009, and June 30, 2009, HPCI maintained interest bearing
and non-interest bearing cash balances with the Bank totaling $452.0 million,
$715.7 million, and $540.1 million, respectively.  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 June
30, 2010, HPCI had no material liabilities or contractual obligations, other
than unfunded loan commitments of $236.8 million, with a weighted average
remaining maturity of 1.2 years. In addition to anticipated cash flows, as noted
above, HPCI has interest bearing and non-interest bearing cash balances with the
bank totaling $452.0 million to supplement the funding of  these
liabilities and contractual commitments.




27


As of
June 30, 2010 and December 31, 2009, shareholders’ equity was $4.0 billion and
$3.9 billion, respectively. Shareholders’ equity as of June 30, 2009 was $4.5
billion.





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.  Based on a
regulatory dividend limitation, the Bank could not have declared and paid a
dividend at June 30, 2010, without regulatory approval.  As a
subsidiary of the Bank, HPCI is also restricted from declaring or paying
dividends without regulatory approval.  The OCC has approved the
payment of HPCI's dividends on its preferred securities throughout 2009 and the
first three quarters of 2010. For the foreseeable future, management intends to
request approval for any future dividends; however, there can be no assurance
that the OCC will approve future dividends.





Regulatory
capital ratios are the primary metrics used by regulators in assessing the
“safety and soundness” of banks.  At June 30, 2010, the Bank met all
capital adequacy requirements and had regulatory capital ratios in excess of the
levels established for “well-capitalized” institutions.  The capital
ratios for Huntington and the Bank at the end of the most recent five quarters
are as follows:





Table 10 - Regulatory
      Capital Ratios2010
                      
                      
                      2009Second
                      
                      
                      First
                      
                      
                      Fourth
                      
                      
                      Third
                      
                      
                      SecondTier
      1 Leverage Ratio (5.00% "well-capitalized")Huntington
                      
                      
                      10.45
                      %
                      
                      
                      10.05
                      %
                      
                      
                      10.09
                      %
                      
                      
                      11.30
                      %
                      
                      
                      10.62
                      %Bank
                      
                      
                      6.54
                      
                      
                      
                      5.99
                      
                      
                      
                      5.59
                      
                      
                      
                      6.48
                      
                      
                      
                      6.46Tier
      1 Risk-based Capital Ratio (6.00% "well-capitalized")Huntington
                      
                      
                      12.51
                      
                      
                      
                      11.97
                      
                      
                      
                      12.03
                      
                      
                      
                      13.04
                      
                      
                      
                      11.85Bank
                      
                      
                      7.80
                      
                      
                      
                      7.11
                      
                      
                      
                      6.66
                      
                      
                      
                      7.46
                      
                      
                      
                      7.14Total
      Risk-based Capital Ratio (10.00% "well-capitalized")Huntington
                      
                      
                      14.79
                      
                      
                      
                      14.28
                      
                      
                      
                      14.41
                      
                      
                      
                      16.23
                      
                      
                      
                      14.94Bank
                      
                      
                      12.23
                      
                      
                      
                      11.53
                      
                      
                      
                      11.08
                      
                      
                      
                      11.75
                      
                      
                      
                      11.35





During
2008, Huntington received $1.4 billion of equity capital by issuing to the U.S.
Department of Treasury 1.4 million shares of its Series B Preferred Stock as a
result of its participation in the Troubled Asset Relief Program (TARP)
voluntary Capital Purchase Plan (CPP). During the 2008 fourth quarter and the
2009 fourth quarter, Huntington contributed $500 million and $400 million,
respectively, of capital received to the Bank in the form of subordinated debt
qualified as Tier 2 capital. During the 2009 second and third quarters,
Huntington also contributed a total of $500 million of Tier 1 capital to the
Bank.  Huntington has also contributed $375.5 million to the bank as
Tier 1 capital thus far in 2010, of which $75.5 million was contributed after
June 30, 2010. These actions had a positive impact on the Bank’s capital
ratios.





Participation
in the CPP requires companies to adopt certain standards and conditions on
executive compensation, restrictions on the payment of dividends and the
repurchase of common stock.  HPCI does not believe these standards and
conditions adopted by Huntington will have a significant impact on HPCI’s
financial condition or results of operations.


28


Item
3.   Quantitative and Qualitative Disclosures about Market
Risk





Quantitative
and qualitative disclosures for the current period can be found in the Market
Risk section of this report, which includes changes in market risk exposures
from disclosures presented in HPCI's Form 10-K.





Item
4.   Controls and Procedures





HPCI
maintains disclosure controls and procedures designed to ensure that the
information disclosed in its filings with the Securities and Exchange Commission
is recorded, processed, summarized, and reported appropriately and on a timely
basis.  HPCI's management, with the participation of its President
(principal executive officer) and the Vice President (principal financial
officer), evaluated the effectiveness of HPCI’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 HPCI’s internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the quarter ended June 30, 2010, to which this report relates, that
have materially affected, or are reasonably likely to materially affect, HPCI's
internal control over financial reporting.




PART
II. OTHER INFORMATION





In
accordance with the instructions to Part II, the other specified items in this
part have been omitted because they are not applicable or the information has
been previously reported.





Item
6.     Exhibits





This
report incorporates by reference the documents listed below that HPCI has
previously filed with the SEC.  The SEC allows incorporation by
reference in this document.  The information incorporated by reference
is considered to be a part of this document, except for any information that is
superseded by information that is included directly in this
document.





This
information may be read and copied at the Public Reference Room of the SEC at
100 F Street, N.E., Washington, D.C. 20549.  The SEC also maintains an
Internet 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.  The
reports and other information filed by HPCI with the SEC are also available at
Huntington’s Internet web site.  The address of the site is http://www.huntington.com.  Except
as specifically incorporated by reference into this Quarterly Report on Form
10-Q, information on those web sites is not part of this
report.  Reports, proxy statements, and other information about HPCI
can also be inspected at the offices of the NASDAQ National Market at 33
Whitehall Street, New York, New York.





(a)


3.1.
            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.)





3.2.
            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.)





4.1
            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.


29


31.1.
            Rule
      13a – 14(a) Certification – President (chief executive
      officer).




31.2.
            Rule
      13a – 14(a) Certification – Vice President (chief financial
      officer).




32.1.
            Section
      1350 Certification – President (chief executive
  officer).




32.2.
            Section
      1350 Certification – Vice President (chief financial
    officer).





99.1.
            Unaudited
      Condensed Consolidated Financial Statements of Huntington Bancshares
      Incorporated as of and for the three month and six month periods ended
      June 30, 2010 and 2009.


30


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 13th day of August, 2010.





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)


31