##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED September 30, 2004 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. Yes  [X]    No  [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  [   ]    No  [X] As of October 31, 2004, 14,000,000 shares of common stock without par value
were outstanding, all of which were held by affiliates of the registrant.




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HUNTINGTON PREFERRED CAPITAL, INC. INDEX Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets -
At September 30, 2004, December 31, 2003, and September 30, 2003
    
    
    3Condensed Consolidated Statements of Income -
For the three-months and nine-months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Changes in Shareholders Equity -
For the nine-months ended September 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows -
For the nine-months ended September 30, 2004 and 2003
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    23Signatures
    
    
    24Exhibit 10(B)Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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##### Table of Contents



Part I. Financial Information 
 Item 1. Financial Statements
 Huntington Preferred Capital, Inc.
 
 Condensed Consolidated Balance Sheets
 September 30,
    
    December 31,
    
    September 30,(in thousands of dollars, except share data)
    
    2004
    
    2003
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)AssetsCash with The Huntington National Bank
    
    $
    102,123
    
    
    $
    124,085
    
    
    $
    39,932Interest bearing deposits with The Huntington National Bank
    
    
    686,026
    
    
    
    
    
    
    
    459,623Due from affiliates
    
    
    1,323
    
    
    
    13,652
    
    
    
    12,920Loan participation interests:Commercial
    
    
    151,787
    
    
    
    147,211
    
    
    
    194,712Commercial real estate
    
    
    3,746,356
    
    
    
    4,245,092
    
    
    
    4,195,813Consumer
    
    
    698,652
    
    
    
    622,575
    
    
    
    577,319Residential real estate
    
    
    239,547
    
    
    
    288,190
    
    
    
    305,797Total loan participation interests
    
    
    4,836,342
    
    
    
    5,303,068
    
    
    
    5,273,641Allowance for loan losses
    
    
    (67,668
    )
    
    
    (84,532
    )
    
    
    (94,738
    )Net loan participation interests
    
    
    4,768,674
    
    
    
    5,218,536
    
    
    
    5,178,903Premises and equipment
    
    
    28,025
    
    
    
    32,126
    
    
    
    33,531Accrued income and other assets
    
    
    17,146
    
    
    
    17,579
    
    
    
    18,046Total Assets
    
    $
    5,603,317
    
    
    $
    5,405,978
    
    
    $
    5,742,955LiabilitiesAllowance for unfunded loan participation commitments
    
    $
    3,151
    
    
    $
    
    
    
    $
    Dividends payable and other liabilities
    
    
    3,978
    
    
    
    
    
    
    
    4,422Total Liabilities
    
    
    7,129
    
    
    
    
    
    
    
    4,422Shareholders 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 and
conditionally exchangeable; $1,000 par and liquidation
value per share; authorized 500,000 shares; 400,000
shares issued and outstanding
    
    
    400,000
    
    
    
    400,000
    
    
    
    400,000Preferred securities, Class C, 7.875% noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 2,000,000 shares authorized, issued, and outstanding
    
    
    50,000
    
    
    
    50,000
    
    
    
    50,000Preferred securities, Class D, variable-rate noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 14,000,000 shares authorized, issued, and outstanding
    
    
    350,000
    
    
    
    350,000
    
    
    
    350,000Preferred securities, $25 par, 10,000,000 shares
authorized; no shares issued or outstanding
    
    
    
    
    
    
    
    
    
    
    Common stock  without par value; 14,000,000 shares authorized,
issued and outstanding
    
    
    4,604,978
    
    
    
    4,604,978
    
    
    
    4,715,351Retained earnings
    
    
    190,210
    
    
    
    
    
    
    
    222,182Total Shareholders Equity
    
    
    5,596,188
    
    
    
    5,405,978
    
    
    
    5,738,533Total Liabilities and Shareholders Equity
    
    $
    5,603,317
    
    
    $
    5,405,978
    
    
    $
    5,742,955
 See notes to unaudited condensed consolidated financial statements. 3




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Huntington Preferred Capital, Inc.
 
 Condensed Consolidated
Statements of Income  (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands of dollars)
    
    2004
    
    2003
    
    2004
    
    2003Interest and fee incomeInterest on loan participation interests:Commercial
    
    $
    2,136
    
    
    $
    1,917
    
    
    $
    6,131
    
    
    $
    8,850Commercial real estate
    
    
    45,305
    
    
    
    46,593
    
    
    
    135,116
    
    
    
    139,429Consumer
    
    
    12,353
    
    
    
    11,729
    
    
    
    37,335
    
    
    
    37,497Residential real estate
    
    
    3,247
    
    
    
    4,689
    
    
    
    10,405
    
    
    
    9,940Total loan participation interest income
    
    
    63,041
    
    
    
    64,928
    
    
    
    188,987
    
    
    
    195,716Fees from loan participation interests
    
    
    469
    
    
    
    1,566
    
    
    
    1,732
    
    
    
    6,908Interest on deposits with The Huntington
National Bank
    
    
    1,781
    
    
    
    1,193
    
    
    
    2,268
    
    
    
    5,062Total interest and fee income
    
    
    65,291
    
    
    
    67,687
    
    
    
    192,987
    
    
    
    207,686Reduction of allowances for credit losses
    
    
    (6,874
    )
    
    
    (18,918
    )
    
    
    (18,438
    )
    
    
    (33,918
    )Interest income after reduction of allowances for credit losses
    
    
    72,165
    
    
    
    86,605
    
    
    
    211,425
    
    
    
    241,604Non-interest income:Rental income
    
    
    1,590
    
    
    
    1,458
    
    
    
    4,912
    
    
    
    4,727Collateral fees
    
    
    180
    
    
    
    212
    
    
    
    569
    
    
    
    519Total non-interest income
    
    
    1,770
    
    
    
    1,670
    
    
    
    5,481
    
    
    
    5,246Non-interest expense:Servicing costs
    
    
    2,854
    
    
    
    2,101
    
    
    
    7,188
    
    
    
    5,427Depreciation
    
    
    1,339
    
    
    
    1,378
    
    
    
    4,038
    
    
    
    4,162Loss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    325Other
    
    
    196
    
    
    
    181
    
    
    
    676
    
    
    
    332Total non-interest expense
    
    
    4,389
    
    
    
    3,660
    
    
    
    11,965
    
    
    
    10,246Income before provision for income taxes
    
    
    69,546
    
    
    
    84,615
    
    
    
    204,941
    
    
    
    236,604Provision for income taxes
    
    
    88
    
    
    
    24
    
    
    
    195
    
    
    
    73Net income
    
    $
    69,458
    
    
    $
    84,591
    
    
    $
    204,746
    
    
    $
    236,531Dividends declared on preferred securities
    
    
    (5,406
    )
    
    
    (4,488
    )
    
    
    (14,536
    )
    
    
    (14,349
    )Net income applicable to common shares
    
    $
    64,052
    
    
    $
    80,103
    
    
    $
    190,210
    
    
    $
    222,182
 See notes to unaudited condensed consolidated financial statements. 4




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Huntington Preferred Capital, Inc.
 
 Condensed Consolidated Statements of Changes in Shareholders Equity
 Preferred, Class A
    
    Preferred, Class B
    
    Preferred, Class C(in thousands)
    
    Shares
    
    Securities
    
    Shares
    
    Securities
    
    Shares
    
    SecuritiesNine Months Ended September 30, 2003 (Unaudited):Balance, beginning of period
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000Comprehensive Income:Net incomeTotal comprehensive incomeBalance, end of period (Unaudited)
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000Nine Months Ended September 30, 2004 (Unaudited):Balance, beginning of period
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000Comprehensive Income:Net incomeTotal comprehensive incomeBalance, end of period(Unaudited)
    
    
    1
    
    
    $
    1,000
    
    
    
    400
    
    
    $
    400,000
    
    
    
    2,000
    
    
    $
    50,000
 Preferred, Class D
    
    Preferred
    
    Common
    
    Retained(in thousands)
    
    Shares
    
    Securities
    
    Shares
    
    Securities
    
    Shares
    
    Securities
    
    Earnings
    
    TotalNine Months Ended September 30, 2003 (Unaudited):Balance, beginning of period
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,715,351
    
    
    $
    
    
    
    $
    5,516,351Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236,531
    
    
    
    236,531Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    236,531Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,760
    )
    
    
    (3,760
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,953
    )
    
    
    (2,953
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,556
    )
    
    
    (7,556
    )Balance, end of period (Unaudited)
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,715,351
    
    
    $
    222,182
    
    
    $
    5,738,533Nine Months Ended September 30, 2004 (Unaudited):Balance, beginning of period
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,604,978
    
    
    $
    
    
    
    $
    5,405,978Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,746
    
    
    
    204,746Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,746Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,860
    )
    
    
    (3,860
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,953
    )
    
    
    (2,953
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,643
    )
    
    
    (7,643
    )Balance, end of period(Unaudited)
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,604,978
    
    
    $
    190,210
    
    
    $
    5,596,188
 See notes to unaudited condensed consolidated financial statements. 5




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Huntington Preferred Capital, Inc. 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months EndedSeptember 30(in thousands of dollars)
    
    2004
    
    2003Operating ActivitiesNet Income
    
    $
    204,746
    
    
    $
    236,531Adjustments to reconcile net income to net
cash provided by operating activities:Reduction of allowances for credit losses
    
    
    (18,438
    )
    
    
    (33,918
    )Depreciation
    
    
    4,038
    
    
    
    4,162Deferred income tax benefit
    
    
    (812
    )
    
    
    (434
    )Loss on disposal of fixed assets
    
    
    63
    
    
    
    325Decrease in accrued income and other assets
    
    
    2,777
    
    
    
    20,634Decrease (increase) in due from affiliates
    
    
    12,329
    
    
    
    (5,480
    )Increase (decrease) in other liabilities
    
    
    38
    
    
    
    (88
    )Net Cash Provided by Operating Activities
    
    
    204,741
    
    
    
    221,732Investing ActivitiesParticipation interests acquired
    
    
    (3,184,804
    )
    
    
    (4,438,760
    )Sales and repayments on loans underlying
participation interests
    
    
    3,654,723
    
    
    
    4,192,767Proceeds from the sale of fixed assets
    
    
    
    
    
    
    71Net Cash Provided by (Used for) Investing Activities
    
    
    469,919
    
    
    
    (245,922
    )Financing ActivitiesDividends paid on preferred stock
    
    
    (10,596
    )
    
    
    (10,509
    )Net Cash Used for Financing Activities
    
    
    (10,596
    )
    
    
    (10,509
    )Change in Cash and Cash Equivalents
    
    
    664,064
    
    
    
    (34,699
    )Cash and Cash Equivalents:at Beginning of Period
    
    
    124,085
    
    
    
    534,254at End of Period
    
    $
    788,149
    
    
    $
    499,555Supplemental information:Income taxes paid
    
    $
    1,496
    
    
    $
    161
 See notes to unaudited condensed consolidated financial statements. 6




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Notes to the Unaudited Condensed Consolidated Financial Statements Note 1  Organization Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in
1992 and designated as a real estate investment trust (REIT) in 1998. Three
related parties own HPCIs common stock: HPC Holdings-III, Inc. (HPCH-III),
Huntington Preferred Capital II, Inc. (HPCII), and Huntington Bancshares
Incorporated (Huntington). HPCI and HPCII are subsidiaries of HPCH-III, which
is a subsidiary of Huntington Preferred Capital Holdings, Inc. (Holdings).
Holdings is a subsidiary of The Huntington National Bank (the Bank), a national
banking association organized under the laws of the United States and
headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of
Huntington. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT
subsidiary formed in March 2001 for the purpose of holding certain assets
(primarily leasehold improvements). Note 2  Basis of Presentation and New Accounting Pronouncements The accompanying unaudited condensed consolidated 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
consolidated financial position, the results of operations, and cash flows for
the periods presented. These unaudited condensed consolidated financial
statements have been prepared according to the rules and regulations of the
Securities and Exchange Commission (SEC) 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 2003 Annual Report on Form 10-K (Form 10-K), which include
descriptions of significant accounting policies, as updated by the information
contained in this report, should be read in conjunction with these interim
financial statements. 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. HPCIs subsidiary,
HPCLI, elected to be treated as a taxable REIT subsidiary and, therefore, a
separate provision related to its income taxes is included in the accompanying
unaudited condensed consolidated financial statements. All of HPCIs common stock is owned by Huntington, HPCII, and HPCH-III
and, therefore, net income per common share information is not presented. Cash and cash equivalents used in the Statement of Cash Flows is defined
as the sum of Cash and Interest bearing deposits with The Huntington
National Bank. AICPA Statement of Position No. 03-3,Accounting for Certain Loans or Debt
Securities Acquired in a Transfer(SOP 03-3):In December 2003, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued SOP 03-3, to address accounting for differences between the
contractual cash flows of certain loans and debt securities and the cash flows
expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to such loans and debt securities
purchased or acquired in purchase business combinations and does not apply to
originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts, that may be recognized for
certain loans and debt securities prior to the receipt of cash. Additionally,
SOP 03-3 requires that the excess of contractual cash flows over cash flows
expected to be collected (nonaccretable difference) not be recognized as an
adjustment of yield or valuation allowance, such as the allowance for loan
losses. Subsequent to the initial investment, increases in expected cash flows
generally should be recognized prospectively through adjustment of the yield on
the loan or debt security over its remaining life. Decreases in expected cash
flows should be recognized as impairment. SOP 03-3 is effective for loans and
debt securities acquired in fiscal years beginning after December 15, 2004,
with early application encouraged. The impact of this new pronouncement is not
expected to be material to HPCIs financial condition, results of operations,
or cash flows. Note 3  Participations in Non-Performing Loans and Past Due Loans Participations in loans in non-accrual status and loans past due 90 days
or more and still accruing interest, were as follows: 7




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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) September 30,
    
    December 31,
    
    September 30,(in thousands of dollars)
    
    2004
    
    2003
    
    2003Commercial
    
    $
    973
    
    
    $
    5,176
    
    
    $
    11,677Commercial real estate
    
    
    10,460
    
    
    
    12,987
    
    
    
    25,302Consumer(1)
    
    
    2,692
    
    
    
    
    
    
    
    Residential real estate
    
    
    4,749
    
    
    
    4,157
    
    
    
    4,795Total Participations in Non-Accrual Loans
    
    $
    18,874
    
    
    $
    22,320
    
    
    $
    41,774Participations in Accruing Loans Past
Due 90 Days or More
    
    $
    8,466
    
    
    $
    13,363
    
    
    $
    17,252
 (1) At September 30, 2004, HPCI adopted a new policy of placing consumer home equity loan participations on
non-accrual status when they exceed 180 days past due. Prior practice was to continue to accrue interest until
collection or resolution of the loan participations. Such loan participations were previously classified as
accruing loans past due 90 days or more. 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 four states of Ohio, Michigan,
Indiana, and Kentucky comprised 96.3%, 94.8%, and 93.9%, of the portfolio at
September 30, 2004, December 31, 2003, and September 30, 2003, respectively. Note 4  Allowances for Credit Losses (ACL) The ACL is comprised of the allowance for loan losses (ALL) and the
allowance for unfunded loan participation commitments (AULPC). The following
tables reflect activity in the ACL for the three-month and nine-month periods
ended September 30, 2004 and 2003: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(in thousands of dollars)
    
    2004
    
    2003
    
    2004
    
    2003ALL balance, beginning of period
    
    $
    72,524
    
    
    $
    110,127
    
    
    $
    84,532
    
    
    $
    140,353Allowance for loan participations acquired
    
    
    2,738
    
    
    
    11,610
    
    
    
    11,916
    
    
    
    35,007Net loan losses
    
    
    (1,461
    )
    
    
    (8,081
    )
    
    
    (7,191
    )
    
    
    (46,704
    )Reduction of allowances for credit losses
    
    
    (6,874
    )
    
    
    (18,918
    )
    
    
    (18,438
    )
    
    
    (33,918
    )Net change in AULPC
    
    
    741
    
    
    
    
    
    
    
    (3,151
    )
    
    
    ALL balance, end of period
    
    $
    67,668
    
    
    $
    94,738
    
    
    $
    67,668
    
    
    $
    94,738AULPC balance, beginning of period
    
    $
    3,892
    
    
    $
    
    
    
    $
    
    
    
    $
    Net change
    
    
    (741
    )
    
    
    
    
    
    
    3,151
    
    
    
    AULPC balance, end of period
    
    $
    3,151
    
    
    $
    
    
    
    $
    3,151
    
    
    $
    
 Effective March 31, 2004, HPCI reclassified $4.3 million of its ALL to a
separate liability on the balance sheet titled AULPC. The AULPC is based on
expected loss derived from historical experience. HPCI believes that this
reclassification better reflects the nature of this reserve and represents
improved financial statement disclosure. Prior period financial statements
have not been revised due to immateriality. For the third quarter 2004, AULPC
was reduced by $741 thousand due to lower unfunded loan participation
commitment balances. Since March 31, 2004, AULPC has declined by $1.2 million. Note 5  Dividends Holders of Class A preferred securities, a majority of which are held by
HPCH-III and the remainder by current and past employees of the Bank, are
entitled to receive, if, when, and as declared by the Board of Directors of
HPCI out of funds legally available, dividends at a fixed rate of $80.00 per
share per annum. Dividends on the Class A preferred 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. 8




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##### Table of Contents



Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) The holder of the Class B preferred securities, HPC Holdings-II, Inc., a
direct non-bank subsidiary of Huntington, is entitled to receive, if, when, and
as declared by the Board of Directors of HPCI out of funds legally available,
dividends at a variable rate equal to the three-month LIBOR published on the
first day of each calendar quarter times par value. Dividends on the Class B
preferred securities, which are declared quarterly, are payable annually and
are non-cumulative. No dividend, except payable in common shares, may be
declared or paid upon Class B preferred securities unless dividend obligations
are satisfied on the Class A, Class C, and Class D preferred securities. Holders of Class C preferred securities are entitled to receive, if, when,
and as declared by the Board of Directors of HPCI out of funds legally
available, dividends at a fixed rate of 7.875% per annum, of the initial
liquidation preference of $25.00 per share, payable quarterly. Dividends
accrue in each quarterly period from the first day of each period, whether or
not dividends are paid with respect to the preceding period. Dividends are not
cumulative and if no dividend is paid on the Class C preferred securities for a
quarterly dividend period, the payment of dividends on HPCIs common stock and
other HPCI-issued securities ranking junior to the Class C preferred securities
(i.e., Class B preferred securities) will be prohibited for that period and at
least the following three quarterly dividend periods. The holder of Class D preferred securities, HPCH-III, is entitled to
receive, if, when, and as declared by the Board of Directors of HPCI out of
funds legally available, dividends at a variable rate established at the
beginning of each calendar quarter equal to three-month LIBOR published on the
first day of each calendar quarter, plus 1.625% times par value, payable
quarterly. Dividends accrue in each quarterly period from the first day of
each period, whether or not dividends are paid with respect to the preceding
period. Dividends are not cumulative and if no dividend is paid on the Class D
preferred securities for a quarterly dividend period, the payment of dividends
on HPCIs common stock and other HPCI-issued securities ranking junior to the
Class D preferred securities (i.e., Class B preferred securities) will be
prohibited for that period and at least the following three quarterly dividend
periods. A summary of dividends declared by each class of preferred securities
follows for the periods indicated: September 30,
    
    September 30,(in thousands of dollars)
    
    2004
    
    2003
    
    2004
    
    2003Class A preferred securities
    
    $
    
    
    
    $
    
    
    
    $
    80
    
    
    $
    80Class B preferred securities
    
    
    1,600
    
    
    
    1,110
    
    
    
    3,860
    
    
    
    3,760Class C preferred securities
    
    
    984
    
    
    
    984
    
    
    
    2,953
    
    
    
    2,953Class D preferred securities
    
    
    2,822
    
    
    
    2,394
    
    
    
    7,643
    
    
    
    7,556Total dividends declared
    
    $
    5,406
    
    
    $
    4,488
    
    
    $
    14,536
    
    
    $
    14,349
 Note 6  Related Party Transactions HPCI is a party to a Second Amended and Restated Loan Subparticipation
Agreement with Holdings, an Amended and Restated Loan Subparticipation
Agreement with HPCH-III, and an Amended and Restated Loan Participation
Agreement with the Bank. The Bank is required, under the participation and/or
subparticipation agreements, to service HPCIs loan portfolio in a manner
substantially the same as for similar work for transactions on its own behalf.
The Bank collects and remits principal and interest payments, maintains
perfected collateral positions, and submits and pursues insurance claims. In
addition, the Bank provides accounting and reporting services to HPCI. The Bank
is required to pay all expenses related to the performance of its duties under
the participation and subparticipation agreements. All of these participation
interests to date were acquired directly or indirectly from the Bank. The Bank performs the servicing of the commercial, commercial real estate,
residential real estate, and consumer loans underlying the participations held
by HPCI in accordance with normal industry practice under the amended
participation agreements and subparticipation agreements. In its capacity as
servicer, the Bank collects and holds the loan payments received on behalf of
HPCI until the end of each month. Servicing costs paid to the Bank totaled
$2.9 million and $2.1 million for the three-month periods ended September 30,
2004 and 2003, respectively. For the respective nine-month periods, the cost
was $7.2 million and $5.4 million. Pursuant to the existing participation and
subparticipation agreements, the amount and terms of the loan-servicing fee
between the Bank and HPCI are determined by mutual agreement from time to time
during the terms of the agreements. Effective July 1, 2004, the parties
revised the current servicing fee of 0.320% per annum on outstanding principal
balances of underlying consumer loan balances to 0.750% per annum, and on
residential real estate loans from 0.2997% per annum of the outstanding
principal balances to 0.2670% per annum. As of 9




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##### Table of Contents



Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) July 1, 2004, in lieu of paying
higher servicing costs to the Bank with respect to commercial and commercial
real estate loans, HPCI waived its right to receive any origination fees
associated with participation interests in commercial and commercial real
estate loans transferred on or after July 1, 2004, until such time as loan
servicing fees are reviewed in 2005. Huntingtons and the Banks personnel handle day-to-day operations of HPCI
such as financial analysis and reporting, accounting, tax reporting, and other
administrative functions. On a monthly basis, HPCI reimburses the Bank and
Huntington for the cost related to the time spent by employees for performing
these functions. These personnel costs totaled $112,000 and $92,000 for the
three-month periods ended September 30, 2004 and 2003, respectively. For the
respective nine-month periods, the cost was $466,000 and $190,000 recorded in
other non-interest expense. The following table represents the ownership of HPCIs outstanding common
and preferred securities as of September 30, 2004: Number ofCommon
    
    
    
    
    
    Number of Preferred SecuritiesShareholder:
    
    Shares
    
    Class A
    
    Class B
    
    Class C
    
    Class DHeld by related parties:HPC II
    
    
    4,550,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    HPCH-III
    
    
    9,431,333
    
    
    
    894
    
    
    
    
    
    
    
    
    
    
    
    14,000,000HPC Holdings II, Inc.
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    
    
    
    
    Huntington
    
    
    18,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total held by related parties
    
    
    14,000,000
    
    
    
    894
    
    
    
    400,000
    
    
    
    
    
    
    
    14,000,000Other shareholders
    
    
    
    
    
    
    106
    
    
    
    
    
    
    
    2,000,000
    
    
    
    Total shares outstanding
    
    
    14,000,000
    
    
    
    1,000
    
    
    
    400,000
    
    
    
    2,000,000
    
    
    
    14,000,000
 As of September 30, 2004, 10.6% of the Class A preferred securities were
owned by current and past employees of Huntington and its subsidiaries in
addition to the 89.4% owned by HPCH-III. The Class A preferred securities are
non-voting. All of the Class B preferred securities are owned by HPC Holdings
II, Inc., a non-bank subsidiary of Huntington and are non-voting. In 2001, the
Class C preferred securities were obtained by Holdings, who sold the securities
to the public. Various board members and executive officers of HPCI have
purchased a portion of the Class C preferred securities. At September 30,
2004, HPCI board members and executive officers beneficially owned, in the
aggregate, a total of 6,623 shares, or 0.331%. All of the Class D preferred
securities are owned by HPCH-III. In the event HPCI redeems its Class C or
Class D preferred securities, holders of such securities will be entitled to
receive $25.00 per share plus accrued and unpaid dividends on such shares. The
redemption amount may be significantly lower than the then current market price
of the Class C or Class D preferred securities. Dividends paid to the Class C
and Class D shareholders in the third quarter of 2004 were approximately $1.0
million and $2.8 million, respectively. Both the Class C and Class D preferred securities are entitled to
one-tenth of one vote per share on all matters submitted to HPCI shareholders.
The Class C and Class D preferred securities are exchangeable, without
shareholder
approval or any action of shareholders, for preferred securities of the
Bank with substantially equivalent terms as to dividends, liquidation
preference, and redemption if the Office of the Comptroller of the Currency
(OCC) so directs only if the Bank becomes, or may in the near term become,
undercapitalized or the Bank is placed in conservatorship or receivership. The
Class C and Class D preferred securities are redeemable at HPCIs option on or
after December 31, 2021, and December 31, 2006, respectively, with prior
consent of the OCC. As only related parties hold HPCIs common stock, there is no established
public trading market for this class of stock. HPCIs premises and equipment were acquired from the Bank through
Holdings. Leasehold improvements were subsequently contributed to HPCLI for
its common shares in the fourth quarter of 2001. HPCLI charges rent to the
Bank for use of applicable facilities by the Bank. The amount of rental income
received by HPCLI during the quarter ended September 30, 2004 and 2003 was $1.6
million and $1.5 million, respectively. The amount of rental income received
by HPCLI was $4.9 million and $4.7 million for nine-months ended September 30,
2004 and 2003, respectively. Rental income is reflected as a component of
non-interest income in the condensed consolidated statements of income. 10




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##### Table of Contents



Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) HPCI had a non-interest bearing receivable from affiliates of $1.3 million
at September 30, 2004, $13.7 million at December 31, 2003, and $12.9 million at
September 30, 2003. The Bank is eligible to obtain collateralized advances from various
federal and government-sponsored agencies such as the Federal Home Loan Bank.
From time to time, HPCI may be asked to act as guarantor of the Banks
obligations under such advances and/or pledge all or a portion of its assets in
connection with those advances. See Note 7 for further information regarding
the pledging of HPCIs assets in association with the Banks advances. HPCI maintains and transacts all of its cash activity through a
non-interest bearing demand deposit account with the Bank. In addition, to the
extent that it does not jeopardize qualification as a REIT, HPCI may invest
available funds in Eurodollar deposits with the Bank for a term of not more
than 30 days at market rates. Note 7  Commitments and Contingencies The Bank is eligible to obtain advances from various federal and
government-sponsored agencies such as the Federal Home Loan Bank (FHLB). From
time to time, HPCI may be asked to act as guarantor of the Banks obligations
under such advances and/or pledge all or a portion of its assets in connection
with those advances. Any such guarantee and/or pledge would rank senior to
HPCIs common and preferred securities upon liquidation. Accordingly, any
federal or government-sponsored agencies that make advances to the Bank where
HPCI has acted as guarantor or has pledged all or a portion of its assets as
collateral will have a liquidation preference over the holders of HPCIs
securities. Any such guarantee and/or pledge in connection with the Banks
advances from federal or government-sponsored agencies falls within the
definition of Permitted Indebtedness (as defined in HPCIs articles of
incorporation) and, therefore, HPCI is not required to obtain the consent of
the holders of its common or preferred securities for any such guarantee and/or
pledge. The Bank is currently eligible to obtain one or more collateralized
advances from the FHLB based upon the amount of FHLB capital stock owned by the
Bank. As of September 30, 2004, the Banks total borrowing capacity under this
facility was $1.5 billion. As of this same date, the Bank had borrowings of
$1.3 billion under this facility. In addition, the FHLB has separately issued a
standby letter of credit for the account of a customer of Huntington totaling
$18.2 million secured by loans which have been participated to HPCI. HPCI has entered into an agreement with the Bank with respect to the
pledge of HPCIs assets to collateralize the Banks borrowings from the FHLB.
The agreement provides that the Bank will not place at risk HPCIs assets in
excess of an aggregate amount or percentage of such assets established from
time to time by HPCIs board of directors, including a majority of HPCIs
independent directors. HPCIs board has set this limit at $1 billion, which
limit may be changed in the future by the board of directors, including a
majority of HPCIs independent directors. The agreement also provides that the
Bank will pay HPCI a monthly fee based upon the pledged collateral held by
HPCI. As of September 30, 2004, HPCIs pledged collateral was limited to 1-4
family residential mortgages and second mortgage loans. As of that same date,
HPCIs participation interests in 1-4 family residential mortgages and second
mortgage loans pledged as collateral, totalled $579.9 million. The Bank paid
$0.6 million to HPCI in the first nine-months of 2004, representing twelve
basis points per year on the collateral pledged, as compensation for making
such assets available to the Bank as collateral. Under the terms of the participation and subparticipation agreements, HPCI
is obligated to make funds or credit available to the Bank, either directly,
indirectly through Holdings, or indirectly through Holdings and HPCH III, so
that the Bank may extend credit to any borrowers, or pay letters of credit issued
for the account of any borrowers, to the extent provided in the loan agreements
underlying HPCIs participation interests. As of September 30, 2004, December
31, 2003, and September 30, 2003, unfunded loan commitments totaled $645.2
million, $923.7 million, and $967.3 million, respectively. Note 8  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. 11




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##### Table of Contents



Item 2. Managementss Discussion and Analysis of Financial
Condition and Results of Operations INTRODUCTION Huntington Preferred Capital, Inc. (HPCI) is an Ohio corporation operating
as a real estate investment trust (REIT) for federal income tax purposes.
HPCIs principal business objective is to acquire, hold, and manage mortgage
assets and other authorized investments that will generate net income for
distribution to its shareholders. HPCI was organized under Ohio law in 1992 and designated as a real estate
investment trust (REIT) in 1998. HPCIs common stock is owned by three related
parties: HPC Holdings-III, Inc. (HPCH-III), Huntington Preferred Capital II,
Inc. (HPCII), and Huntington Bancshares Incorporated (Huntington). HPCI and
HPCII are subsidiaries of HPCH-III, which is a subsidiary of Huntington
Preferred Capital Holdings, Inc. (Holdings). Holdings is a subsidiary of The
Huntington National Bank (the Bank), a national banking association organized
under the laws of the United States and headquartered in Columbus, Ohio. The
Bank is a wholly owned subsidiary of Huntington. HPCI has one subsidiary,
HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the
purpose of holding certain assets (primarily leasehold improvements). HPCI is a party to a Second Amended and Restated Loan Subparticipation
Agreement with Holdings, an Amended and Restated Loan Subparticipation
Agreement with HPCH-III, and an Amended and Restated Loan Participation
Agreement with the Bank. The Bank is required, under the participation and/or
subparticipation agreements, to service HPCIs loan portfolio in a manner
substantially the same as for similar work for transactions on its own behalf.
The Bank collects and remits principal and interest payments, maintains
perfected collateral positions, and submits and pursues insurance claims. In
addition, the Bank provides to HPCI accounting and reporting services as
required. The Bank is required to pay all expenses related to the performance
of its duties under the participation and subparticipation agreements. All of
these participation interests to date were acquired directly or indirectly from
the Bank. Forward-looking Statements This report, including managements discussion and analysis of financial
condition and results of operations, contains forward-looking statements about
HPCI. These include descriptions of products or services, plans, or objectives
of Management for future operations, and forecasts of revenues, earnings, cash
flows, or other measures of economic performance. Forward-looking statements
can be identified by the fact that they do not relate strictly to historical or
current facts. By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors could cause actual
conditions, events, or results to differ significantly from those described in
the forward-looking statements. These factors include, but are not limited to,
those set forth under the heading Business Risks included in Item 1 of HPCIs
2003 Form 10-K (Form 10-K) and other factors described in this report and from
time to time in other filings with the Securities and Exchange Commission. Management encourages readers of this report to understand forward-looking
statements to be strategic objectives rather than absolute forecasts of future
performance. Forward-looking statements speak only as of the date they are
made. 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. Critical Accounting Policies Note 1 to HPCIs consolidated financial statements included in Form 10-K
lists critical accounting policies used in the development and presentation of
its financial statements. These critical accounting policies, as well as this
discussion and analysis and other financial statement disclosures, identify and
address key variables and other qualitative and quantitative factors that are
necessary for an understanding and evaluation of HPCI, its financial position,
results of operations, and cash flows. Use of Significant Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires Management
to establish critical accounting policies and make accounting estimates, 12




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##### Table of Contents



assumptions, and judgments that affect amounts recorded and reported in
its financial statements. An accounting estimate requires assumptions about
uncertain matters that could have a material effect on the financial statements
if a different amount within a range of estimates were used or if estimates
changed from period to period. 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. Summary Discussion of Results HPCIs income is primarily derived from its participation in loans
acquired from the Bank and Holdings. Income varies based on the level of these
assets and their respective interest rates. The cash flows from these assets
are used to satisfy HPCIs preferred dividend obligations. The preferred stock
is considered equity and, therefore, the dividends are not reflected as
interest expense. HPCIs net income was $69.5 million and $84.6 million, respectively, for
the three-months ended September 30, 2004 and 2003, while net income available
to common shareholders was $64.1 million and $80.1 million, respectively, for
the same three-month periods. For the nine-months ended September 30, 2004 and
2003, HPCIs net income was $204.7 million and $236.5 million, respectively,
while net income available to common shareholders was $190.2 million and $222.2
million, respectively. HPCI had total assets and total equity of $5.6 billion at September 30,
2004, a slight increase compared to the December 31, 2003 balance of $5.4
billion and down from $5.7 billion a year earlier. At September 30, 2004,
December 31, 2003, and September 30, 2003, an aggregate of $4.8 billion, $5.3
billion, and $5.3 billion, respectively, consisted of participation interests
in loans. Participation interests in specific underlying loans were as follows: Table 1  Loan Participation Interests % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofSeptember 30,
    
    Total
    
    December 31,
    
    Total
    
    September 30,
    
    Total(in thousands of dollars)
    
    2004
    
    Assets
    
    2003
    
    Assets
    
    2003
    
    AssetsGross loan participation
interests:Commercial
    
    $
    151,787
    
    
    
    2.7
    
    
    $
    147,211
    
    
    
    2.7
    
    
    $
    194,712
    
    
    
    3.4Commercial real estate
    
    
    3,746,356
    
    
    
    66.9
    
    
    
    4,245,092
    
    
    
    78.5
    
    
    
    4,195,813
    
    
    
    73.1Consumer
    
    
    698,652
    
    
    
    12.5
    
    
    
    622,575
    
    
    
    11.5
    
    
    
    577,319
    
    
    
    10.1Residential real estate
    
    
    239,547
    
    
    
    4.3
    
    
    
    288,190
    
    
    
    5.4
    
    
    
    305,797
    
    
    
    5.2Total
    
    $
    4,836,342
    
    
    
    86.3
    
    
    $
    5,303,068
    
    
    
    98.1
    
    
    $
    5,273,641
    
    
    
    91.8
 HPCIs participation interests in commercial loans represented 2.7% of
total assets as of September 30, 2004, and December 31, 2003 and 3.4% as of
September 30, 2003. The decrease from September 30, 2003 was due to continued
portfolio run off and asset sales in June 2004 and
December 2003 totaling
approximately $21.8 million. This decline was partially offset by the
reclassification of commercial real estate loan participation interests to
commercial loan participation interests of $55.9 million during September 2004
and $62.6 million in February 2004. These reclassifications were made to better
reflect the loan participation interests based on the collateral underlying the
loan. Participation interests in commercial real estate loans at September 30,
2004, which represent 66.9% of total assets at the end of the third quarter,
decreased compared to the same period last year primarily due to run off,
reclassifications, and decreased new loan purchases during the second and third
quarters of 2004. Consumer loan participation interests, which include any loan
secured by an automobile, truck, equipment, or a first or junior mortgage on
the borrowers primary residence, increased by 12% and 21%, respectively, for
the reported periods. These increases were due to purchases of consumer home
equity loan participations and the $6.1 million reclassification from
commercial real estate participations to consumer loan participations in
September 2004. Residential real estate loan participation interests decreased
by $66.3 million, or 22%, between September 30, 2003 and September 30, 2004 due
to portfolio run off. Interest-bearing and non-interest bearing cash balances on deposit with
the Bank were $788.1 million, $124.1 million, and $499.6 million at September
30, 2004, December 31, 2003, and September 30, 2003, respectively. HPCI
reduced its purchases of participation interests in the second quarter, which
contributed to a $664.1 million increase in interest-bearing and cash balances
during the first nine-months of 2004. Management intends this 13




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##### Table of Contents



increase is to
be used for dividend distributions at the end of the year. Typically, cash is
invested with the Bank in an interest bearing account. These interest-bearing
balances are invested overnight or may be invested in Eurodollar deposits with
the Bank for a term of not more than 30 days at market rates. At September 30, 2004, December 31, 2003, and September 30, 2003, amounts
due from affiliates and the Bank were $1.3 million, $13.7 million, and $12.9
million, respectively. The decline was related to a payment of accrued rents
due between the Bank and HPCLI during the second quarter of 2004. Total
liabilities were $7.1 million at September 30, 2004, up from $4.4 million at
September 30, 2003. This increase was primarily due to the allowance for
unfunded loan participation commitments and dividends payable at September 30,
2004. Shareholders equity was $5.6 billion at September 30, 2004, slightly
higher than the December 31, 2003 balance of $5.4 billion, but down from $5.7
billion at September 30, 2003. The $0.2 billion increase since December 31,
2003, reflects earnings for the first nine months of 2004. QUALIFICATION TESTS Qualification as a REIT involves application of specific provisions of the
Internal Revenue Code relating to various asset tests. A REIT must satisfy six
asset tests quarterly: (1) 75% of the value of the REITs total assets must
consist of real estate assets, cash and cash items, and government securities;
(2) not more than 25% of the value of the REITs total assets may consist of
securities, other than those includible under the 75% test; (3) not more than
5% of the value of its total assets may consist of securities of any one
issuer, other than those securities includible under the 75% test or securities
of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting
power of any one issuer may be held, other than those securities includible
under the 75% test or securities of taxable REIT subsidiaries; (5) not more
than 10% of the total value of the outstanding securities of any one issuer may
be held, other than those securities includible under the 75% test or
securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities
in one or more taxable REIT subsidiaries which comprise more than 20% of its
total assets. At September 30, 2004, 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. As of December 31, 2003,
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 September 30, 2004, HPCI was exempt from
registration as an investment company under the Investment Company Act and
intends to operate its business in a manner that will maintain this exemption. RESULTS OF OPERATIONS Net income for the third quarter 2004 was $69.5 million, down 17.9% from
$84.6 million for the third quarter 2003. Net income applicable to common
shares was $64.1 million for the third quarter of 2004, a decline from $80.1
million, or 20%, compared to the third quarter of 2003. Dividend declarations
on preferred stock increased by 20.5% in the most recent quarter to $5.4
million compared $4.5 million for the third quarter 2003. A lower reduction in
the Allowances for Credit Losses, lower interest and fee income, and higher
servicing costs reduced earnings for the third quarter of 2004 compared to the
same period of 2003. As shown in Table 3, net income for the first nine months of 2004 was
$204.7 million compared to $236.5 million for the same period in 2003, down
13.4%. Net income applicable to common shares decreased by 14.4% between the
two periods. Lower loan participation balances and declining interest rates
decreased total loan participation income. Reduced fee income and lower
reductions in the Allowances for Credit Losses contributed to lower year over
year financial results. 14




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##### Table of Contents



Table 2  Quarterly Statements of Income 2004
    
    2003
    
    3Q04 vs 3Q03(in thousands of dollars)
    
    Third
    
    Second
    
    First
    
    Fourth
    
    Third
    
    $ Chg
    
    % ChgInterest and fee incomeInterest on loan participation interests:Commercial
    
    $
    2,136
    
    
    $
    1,901
    
    
    $
    2,094
    
    
    $
    2,191
    
    
    $
    1,917
    
    
    $
    219
    
    
    
    11.4
    %Commercial real estate
    
    
    45,305
    
    
    
    44,751
    
    
    
    45,060
    
    
    
    46,321
    
    
    
    46,593
    
    
    
    (1,288
    )
    
    
    (2.8
    )Consumer
    
    
    12,353
    
    
    
    12,969
    
    
    
    12,013
    
    
    
    12,027
    
    
    
    11,729
    
    
    
    624
    
    
    
    5.3Residential real estate
    
    
    3,247
    
    
    
    3,475
    
    
    
    3,683
    
    
    
    4,155
    
    
    
    4,689
    
    
    
    (1,442
    )
    
    
    (30.8
    )Total loan participation interest income
    
    
    63,041
    
    
    
    63,096
    
    
    
    62,850
    
    
    
    64,694
    
    
    
    64,928
    
    
    
    (1,887
    )
    
    
    (2.9
    )Fees from loan participation interests
    
    
    469
    
    
    
    652
    
    
    
    611
    
    
    
    828
    
    
    
    1,566
    
    
    
    (1,097
    )
    
    
    (70.1
    )Interest on deposits with the Bank
    
    
    1,781
    
    
    
    198
    
    
    
    289
    
    
    
    1,193
    
    
    
    1,193
    
    
    
    588
    
    
    
    49.3Total interest and fee income
    
    
    65,291
    
    
    
    63,946
    
    
    
    63,750
    
    
    
    66,715
    
    
    
    67,687
    
    
    
    (2,396
    )
    
    
    (3.5
    )Reduction of allowances for credit losses
    
    
    (6,874
    )
    
    
    (9,301
    )
    
    
    (2,263
    )
    
    
    (7,301
    )
    
    
    (18,918
    )
    
    
    12,044
    
    
    
    63.7Interest income after reduction of
allowances for credit losses
    
    
    72,165
    
    
    
    73,247
    
    
    
    66,013
    
    
    
    74,016
    
    
    
    86,605
    
    
    
    (14,440
    )
    
    
    (16.7
    )Non-interest income:Rental income
    
    
    1,590
    
    
    
    1,853
    
    
    
    1,469
    
    
    
    1,456
    
    
    
    1,458
    
    
    
    132
    
    
    
    9.1Collateral fees
    
    
    180
    
    
    
    192
    
    
    
    197
    
    
    
    200
    
    
    
    212
    
    
    
    (32
    )
    
    
    (15.1
    )Total non-interest income
    
    
    1,770
    
    
    
    2,045
    
    
    
    1,666
    
    
    
    1,656
    
    
    
    1,670
    
    
    
    100
    
    
    
    6.0Non-interest expense:Servicing costs
    
    
    2,854
    
    
    
    2,199
    
    
    
    2,135
    
    
    
    2,131
    
    
    
    2,101
    
    
    
    753
    
    
    
    35.8Depreciation
    
    
    1,339
    
    
    
    1,346
    
    
    
    1,353
    
    
    
    1,377
    
    
    
    1,378
    
    
    
    (39
    )
    
    
    (2.8
    )Loss on disposal of fixed assets
    
    
    
    
    
    
    26
    
    
    
    37
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    196
    
    
    
    374
    
    
    
    106
    
    
    
    121
    
    
    
    181
    
    
    
    15
    
    
    
    8.3Total non-interest expense
    
    
    4,389
    
    
    
    3,945
    
    
    
    3,631
    
    
    
    3,640
    
    
    
    3,660
    
    
    
    729
    
    
    
    19.9Income before provision for income taxes
    
    
    69,546
    
    
    
    71,347
    
    
    
    64,048
    
    
    
    72,032
    
    
    
    84,615
    
    
    
    (15,069
    )
    
    
    (17.8
    )Provision for income taxes
    
    
    88
    
    
    
    84
    
    
    
    23
    
    
    
    24
    
    
    
    24
    
    
    
    64
    
    
    
    N.M.Net income
    
    $
    69,458
    
    
    $
    71,263
    
    
    $
    64,025
    
    
    $
    72,008
    
    
    
    84,591
    
    
    $
    (15,133
    )
    
    
    (17.9
    )Dividends declared on preferred securities
    
    
    (5,406
    )
    
    
    (4,488
    )
    
    
    (4,642
    )
    
    
    (4,562
    )
    
    
    (4,488
    )
    
    
    (918
    )
    
    
    (20.5
    )Net income applicable to
common shares(1)
    
    $
    64,052
    
    
    $
    66,775
    
    
    $
    59,383
    
    
    $
    67,446
    
    
    $
    80,103
    
    
    $
    (16,051
    )
    
    
    (20.0
    )%
 (1) All of
HPCIs common stock is owned by Huntington, HPCII, and HPCH-III
and therefore, net income per share is not presented.

N.M.  Not Meaningful. 15




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##### Table of Contents



Table 3  Year-To-Date Statements of Income Nine Months Ended September 30,
    
    2004 vs 2003(in thousands of dollars)
    
    2004
    
    2003
    
    $ Chg
    
    % ChgInterest and fee incomeInterest on loan participation interests:Commercial
    
    $
    6,131
    
    
    $
    8,850
    
    
    $
    (2,719
    )
    
    
    (30.7
    )%Commercial real estate
    
    
    135,116
    
    
    
    139,429
    
    
    
    (4,313
    )
    
    
    (3.1
    )Consumer
    
    
    37,335
    
    
    
    37,497
    
    
    
    (162
    )
    
    
    (0.4
    )Residential real estate
    
    
    10,405
    
    
    
    9,940
    
    
    
    465
    
    
    
    4.7Total loan participation interest income
    
    
    188,987
    
    
    
    195,716
    
    
    
    (6,729
    )
    
    
    (3.4
    )Fees from loan participation interests
    
    
    1,732
    
    
    
    6,908
    
    
    
    (5,176
    )
    
    
    (74.9
    )Interest on deposits with the Bank
    
    
    2,268
    
    
    
    5,062
    
    
    
    (2,794
    )
    
    
    (55.2
    )Total interest and fee income
    
    
    192,987
    
    
    
    207,686
    
    
    
    (14,699
    )
    
    
    (7.1
    )Reduction of allowances for credit losses
    
    
    (18,438
    )
    
    
    (33,918
    )
    
    
    15,480
    
    
    
    45.6Interest income after reduction of
allowances for credit losses
    
    
    211,425
    
    
    
    241,604
    
    
    
    (30,179
    )
    
    
    (12.5
    )Non-interest income:Rental income
    
    
    4,912
    
    
    
    4,727
    
    
    
    185
    
    
    
    3.9Collateral fees
    
    
    569
    
    
    
    519
    
    
    
    50
    
    
    
    9.6Total non-interest income
    
    
    5,481
    
    
    
    5,246
    
    
    
    235
    
    
    
    4.5Non-interest expense:Servicing costs
    
    
    7,188
    
    
    
    5,427
    
    
    
    1,761
    
    
    
    32.4Depreciation
    
    
    4,038
    
    
    
    4,162
    
    
    
    (124
    )
    
    
    (3.0
    )Loss on disposal of fixed assets
    
    
    63
    
    
    
    325
    
    
    
    (262
    )
    
    
    (81
    )Other
    
    
    676
    
    
    
    332
    
    
    
    344
    
    
    
    N.M.Total non-interest expense
    
    
    11,965
    
    
    
    10,246
    
    
    
    1,719
    
    
    
    16.8Income before provision for income taxes
    
    
    204,941
    
    
    
    236,604
    
    
    
    (31,663
    )
    
    
    (13.4
    )Provision for income taxes
    
    
    195
    
    
    
    73
    
    
    
    122
    
    
    
    N.M.Net income
    
    $
    204,746
    
    
    $
    236,531
    
    
    $
    (31,785
    )
    
    
    (13.4
    )Dividends declared on preferred securities
    
    
    (14,536
    )
    
    
    (14,349
    )
    
    
    (187
    )
    
    
    (1.3
    )Net income applicable to
common shares(1)
    
    $
    190,210
    
    
    $
    222,182
    
    
    $
    (31,972
    )
    
    
    (14.4
    )%
 (1) All of HPCIs common stock is owned by Huntington, HPCII, and HPCH-III and therefore, net income per share is not presented.


N.M.  Not Meaningful. Interest and Fee Income HPCIs primary source of revenue is interest and fee income on its
participation interests in loans. At September 30, 2004 and 2003, HPCI did not
have any interest-bearing liabilities or related interest expense. Interest
income is impacted by changes in the levels of interest rates and earning
assets. The yield on earning assets is the percentage of interest income to
average earning assets. The tables below show HPCIs average balances, interest and fee income,
and yields for the three-month and nine-month periods ending September 30: 16




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##### Table of Contents



Table 4  Quarterly Average Balance Sheets and Net Interest Margin Analysis Three Months Ended September 30,2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    Average(in millions of dollars)
    
    Balance
    
    Income(1)
    
    Yield
    
    Balance
    
    Income(1)
    
    YieldLoan participation interests:Commercial
    
    $
    140.2
    
    
    $
    2.1
    
    
    
    6.06
    %
    
    $
    220.6
    
    
    $
    2.0
    
    
    
    3.48
    %Commercial real estate
    
    
    3,942.7
    
    
    
    45.6
    
    
    
    4.60
    
    
    
    4,134.0
    
    
    
    47.7
    
    
    
    4.52Consumer
    
    
    708.2
    
    
    
    12.5
    
    
    
    7.04
    
    
    
    541.9
    
    
    
    12.1
    
    
    
    8.85Residential real estate
    
    
    248.0
    
    
    
    3.2
    
    
    
    5.24
    
    
    
    352.3
    
    
    
    4.7
    
    
    
    5.33Total loan participations
    
    
    5,039.1
    
    
    
    63.4
    
    
    
    5.02
    
    
    
    5,248.8
    
    
    
    66.5
    
    
    
    4.98Interest on deposits
in banks
    
    
    508.9
    
    
    
    1.8
    
    
    
    1.39
    
    
    
    465.8
    
    
    
    1.2
    
    
    
    1.02Total
    
    $
    5,548.0
    
    
    $
    65.2
    
    
    
    4.68
    %
    
    $
    5,714.6
    
    
    $
    67.7
    
    
    
    4.66
    %
  (1)
    
    Income includes interest and fees. Table 5  Year-To-Date Average Balance Sheets and Net Interest Margin Analysis Nine Months Ended September 30,2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    Average(in millions of dollars)
    
    Balance
    
    Income(1)
    
    Yield
    
    Balance
    
    Income(1)
    
    YieldLoan participation interests:Commercial
    
    $
    166.9
    
    
    $
    6.2
    
    
    
    4.92
    %
    
    $
    271.1
    
    
    $
    9.2
    
    
    
    4.45
    %Commercial real estate
    
    
    4,140.1
    
    
    
    136.2
    
    
    
    4.39
    
    
    
    4,011.9
    
    
    
    144.8
    
    
    
    4.76Consumer
    
    
    684.8
    
    
    
    38.0
    
    
    
    7.41
    
    
    
    567.3
    
    
    
    38.6
    
    
    
    9.09Residential real estate
    
    
    266.7
    
    
    
    10.4
    
    
    
    5.20
    
    
    
    238.6
    
    
    
    10.0
    
    
    
    5.57Total loan participations
    
    
    5,258.5
    
    
    
    190.8
    
    
    
    4.84
    
    
    
    5,088.9
    
    
    
    202.6
    
    
    
    5.27Interest on deposits
in banks
    
    
    234.8
    
    
    
    2.3
    
    
    
    1.29
    
    
    
    573.1
    
    
    
    5.1
    
    
    
    1.18Total
    
    $
    5,493.3
    
    
    $
    193.1
    
    
    
    4.69
    %
    
    $
    5,662.0
    
    
    $
    207.7
    
    
    
    4.86
    %
  (1)
    
    Income includes interest and fees. Interest and fee income was $65.2 million for the three-months ended
September 30, 2004, compared with $67.7 million for the year ago quarter. As
shown in Table 4, the decline in interest and fee income was due to lower loan
participation balances. The yield on average loan participation balances
increased slightly from 4.98% to 5.02% for the three-months ended September 30,
2004 and 2003. The interest and fee income for the current quarter included
$770 thousand of interest income recognized for payments received on
non-accrual commercial and commercial real estate loan participations. This
income had a positive impact to the yield of 139 basis points in commercial and
3 basis points in commericial real estate participations. Approximately 75%
of the portfolio was comprised of variable interest rate loan participations.
For the nine-months ended September 30, 2004 and 2003, the yield declined from
5.27% to 4.84%, while average participation balances increased by $169.6
million. The tables above include interest received on participations in loans
that are on a non-accrual status in the individual portfolios. Allowances for Loan Losses (ALL) and Allowance for Unfunded Loan Participation
Commitments (AULPC) The ALL represents the estimate of probable losses inherent in the loan
portfolio at the balance sheet date. Additions to the ALL and AULPC result
primarily from an allocation of the purchase price of participations acquired. It is HPCIs policy to rely on the Banks detailed analysis as of the end
of each quarter to estimate the required level of the ALL and AULPC. The
Banks methodology for establishing these reserves consists of three distinct
reserve components. The first component represents transaction reserves. This
component is determined using expected losses derived from historical
performance. Specifically, the probability-of-default and the
loss-in-event-of-default are assigned based on specific characteristics and
structure of each loan or loan portfolio. Factors are applied on an individual
loan basis for commercial and commercial real estate loans and on a portfolio
basis for consumer loans. The second component is specific reserves. These
represent credit-by-credit decisions for 17




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##### Table of Contents



commercial and commercial real estate loans based on a determination that the related transaction reserve is
insufficient to cover estimated embedded losses on the loan. The third reserve
component is the economic reserve designed to estimate losses due to the
volatility caused by changes in the economic environment. Beginning in the
first quarter of 2004, this reserve component is determined using a
quantitative methodology. Four economic indicators have been determined to be
statistically significant indicators of loss volatility. These are:  
    
    The Index of Leading Economic Indicators,
    
    The U.S. Profits Index,
    
    The U.S. Unemployment Index, and
    
    The Current Consumer Confidence Index. The change in methodology related to the economic reserve has two
implications. It will likely result in a more precise and quantitative
determination of required reserves, and may well lead to more
quarter-to-quarter volatility in reserve levels. Management will continue to
assess the adequacy of the ALL and AULPC reserve on a quarterly basis. The levels of the ALL and AULPC are adjusted based on the results of the
above-mentioned detailed quarterly analysis. This adjustment may be either an
increase (provision) or a reduction. Such adjustments for the three and
nine-month periods ended September 30, 2004 were reductions of the allowances
of $6.9 million and $18.4 million, respectively. These reductions compared to
reductions of $18.9 million and $33.9 million for the three and nine-month
periods ended September 30, 2003. The continued reduction of the allowances
for credit losses was indicative of Managements judgement regarding the
adequacy of those allowances particularly in light of lower net loan losses in
the current quarter, lower non-performing asset (NPA) balances at September 30,
2004, and an improving economic environment. The following table shows the activity in HPCIs ALL and AULPC for the
last five quarters: Table 6  Allowances for Credit Loss Activity 2004
    
    2003(in thousands of dollars)
    
    Third
    
    Second
    
    First
    
    Fourth
    
    ThirdALL balance, beginning of period
    
    $
    72,524
    
    
    $
    79,842
    
    
    $
    84,532
    
    
    $
    94,738
    
    
    $
    110,127Allowance of loan participations
acquired, net
    
    
    2,738
    
    
    
    3,601
    
    
    
    5,577
    
    
    
    10,391
    
    
    
    11,610Net loan lossesCommercial
    
    
    848
    
    
    
    (372
    )
    
    
    154
    
    
    
    (3,378
    )
    
    
    (1,265
    )Commercial real estate
    
    
    (588
    )
    
    
    (785
    )
    
    
    (2,388
    )
    
    
    (7,636
    )
    
    
    (4,538
    )Consumer
    
    
    (1,666
    )
    
    
    (885
    )
    
    
    (1,425
    )
    
    
    (2,236
    )
    
    
    (2,075
    )Residential real estate
    
    
    (55
    )
    
    
    (9
    )
    
    
    (20
    )
    
    
    (46
    )
    
    
    (203
    )Total net loan losses
    
    
    (1,461
    )
    
    
    (2,051
    )
    
    
    (3,679
    )
    
    
    (13,296
    )
    
    
    (8,081
    )Reducton of allowances for credit losses
    
    
    (6,874
    )
    
    
    (9,301
    )
    
    
    (2,263
    )
    
    
    (7,301
    )
    
    
    (18,918
    )Net change in AULPC
    
    
    741
    
    
    
    433
    
    
    
    (4,325
    )
    
    
    
    
    
    
    ALL balance, end of period
    
    $
    67,668
    
    
    $
    72,524
    
    
    $
    79,842
    
    
    $
    84,532
    
    
    $
    94,738AULPC balance, beginning of period
    
    $
    3,892
    
    
    $
    4,325
    
    
    $
    
    
    
    $
    
    
    
    $
    Net Change
    
    
    (741
    )
    
    
    (433
    )
    
    
    4,325
    
    
    
    
    
    
    
    AULPC balance, end of period
    
    $
    3,151
    
    
    $
    3,892
    
    
    $
    4,325
    
    
    $
    
    
    
    $
    
 The ALL was $67.7 million at September 30, 2004, down from $84.5 million
at December 31, 2003 and down from $94.7 million at September 30, 2003. This
represented 1.40%, 1.59%, and 1.80% of total loan participations at the end of
each respective period. Effective March 31, 2004, HPCI reclassified $4.3
million of its ALL to a separate liability on the balance sheet titled AULPC.
The AULPC is based on expected losses and is derived from historical
experience. HPCI believes that this reclassification better reflects the
nature of this reserve and represents improved financial statement disclosure.
Prior period financial statements have not been revised due to immateriality.
For the third quarter 2004, AULPC was reduced by $741 thousand, or
19%, due to an
11% decline in unfunded loan participation commitment balances from the second
quarter. 18




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##### Table of Contents



The ALL plus the AULPC was 1.46% of total loan participations at the end
of the third quarter 2004 and covered 375% of NPAs. This compares to 1.59% of
total loan participations, which covered 379% of NPAs, at the end of December
31, 2003. In Managements judgment, both the ALL and the AULPC are adequate at
September 30, 2004, to cover credit losses inherent in the loan participation
portfolio and loan commitments. Additional information regarding asset quality
appears in the Credit Quality section of the Form 10-K. Total net charge-offs for the quarter ended September 30, 2004, were $1.5
million, or an annualized 0.12% of average loan participation interests, down
from $8.1 million, or 0.62%, in the same quarter a year ago. For the
nine-months ended September 30, 2004, total net charge-offs were $7.2 million,
or an annualized 0.18% of average participation interests, down from $46.7
million, or 1.23%, in the same period in 2003. Non-Performing Assets (NPAs) NPAs consist of participation interests in underlying loans that are no
longer accruing interest. Underlying commercial and commercial real estate
loans are placed on non-accrual status and stop accruing interest when
collection of principal or interest is in doubt or generally when the
underlying loan is 90 days past due. Underlying residential real estate loans
are generally placed on non-accrual status within 180 days past due as to
principal and 210 days past due as to interest. When interest accruals are
suspended, accrued interest income is reversed with current year accruals
charged to earnings and prior year amounts generally charged off as a credit
loss. Consumer loans are placed on non-accrual status within 180 days past due.
At September 30, 2004, HPCI adopted a new policy of placing consumer home
equity loan participations on non-accrual status when they exceed 180 days past
due. Prior practice was to continue to accrue interest until
collection or resolution of the loan participations. Such loan participations were previously classified as accruing loans
past due 90 days or more. The following table shows NPAs for the assets
at the end of the most recent five quarters: Table 7  Quarterly Non-Performing Assets (in thousands of dollars)
    
    2004
    
    2003Third
    
    Second
    
    First
    
    Fourth
    
    ThirdParticipation interests in
non-accrual loansCommercial
    
    $
    973
    
    
    $
    3,988
    
    
    $
    5,881
    
    
    $
    5,176
    
    
    $
    11,677Commercial Real Estate
    
    
    10,460
    
    
    
    9,218
    
    
    
    10,820
    
    
    
    12,987
    
    
    
    25,302Consumer(1)
    
    
    2,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential Real Estate
    
    
    4,749
    
    
    
    4,900
    
    
    
    5,335
    
    
    
    4,157
    
    
    
    4,795Total Non-Performing Assets
    
    $
    18,874
    
    
    $
    18,106
    
    
    $
    22,036
    
    
    $
    22,320
    
    
    $
    41,774Participations in Accruing Loans
Past Due 90 Days or More
    
    $
    8,466
    
    
    $
    10,255
    
    
    $
    14,923
    
    
    $
    13,363
    
    
    $
    17,252NPAs as a % of total
participation interests
    
    
    0.39
    %
    
    
    0.35
    %
    
    
    0.41
    %
    
    
    0.42
    %
    
    
    0.79
    %ALL as a % of NPAs
    
    
    359
    %
    
    
    401
    %
    
    
    362
    %
    
    
    379
    %
    
    
    227
    %ALL and AULPC as a % of NPAs
    
    
    375
    %
    
    
    422
    %
    
    
    382
    %
    
    
    379
    %
    
    
    227
    %
 (1) At September 30, 2004, HPCI adopted a new policy of placing consumer home equity loan participations on non-accrual status when they exceed 180
days past due. Prior practice was to continue to accrue interest until collection or resolution of the loan participations. Such loan
participations were previously classified as accruing loans past due 90 days or more. Total NPAs declined to $18.9 million at September 30, 2004, from $41.8
million at September 30, 2003, representing 0.39% and 0.79% of total
participation interests, respectively. In the second quarter of 2004, and the
fourth quarter of 2003, the Banks credit workout group identified economically
attractive opportunities to sell $4.4 million and $47.7 million lower quality
loans, respectively, including NPAs, which related to loan participation
interests owned by HPCI. Previously established reserves for these loans were
sufficient to absorb the related charge-offs, including amounts associated with
the NPAs. Underlying loans past due ninety days or more but continuing to accrue
interest decreased to $8.5 million at September 30, 2004, from $13.4 million at
December 31, 2003, and $17.3 million at September 30, 2003. 19




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Under the participation and subparticipation agreements, the Bank may, in
accordance with HPCIs guidelines, dispose of any underlying loan that becomes
classified, is placed in a non-performing status, or is renegotiated due to the
financial deterioration of the borrower. The Bank may, in accordance with
HPCIs guidelines, institute foreclosure proceedings, exercise any power of
sale contained in any mortgage or deed of trust, obtain a deed in lieu of
foreclosure, or otherwise acquire title to a property underlying a mortgage
loan by operation of law or otherwise in accordance with the terms of the
participation and subparticipation agreement. Prior to completion of
foreclosure or liquidation, the participation is sold to the Bank at fair
market value. The Bank then incurs all costs associated with repossession and
foreclosure. For a further discussion of Credit Quality, see HPCIs Form 10-K. Non-Interest Income and Non-Interest Expense Non-interest income was $1.8 million for the third quarter of 2004 and
$1.7 for the comparable quarter a year ago. For the nine-months ended September
30, 2004 and 2003, non-interest income was $5.5 million and $5.2 million,
respectively. This income primarily represents rental income received from the
Bank related to leasehold improvements owned by HPCLI. Rental income was $4.9
million and $4.7 million for nine-months ended
September 30, 2004 and 2003, respectively. Also, non-interest income
includes fees from the Bank for use of HPCIs assets as collateral for the Banks
advances from the Federal Home Loan Bank (FHLB). These fees totaled $180,000
and $212,000 for the three-month periods ended September 30, 2004, and 2003,
respectively. For the nine-month periods ending September 30, 2004 and 2003,
the fees totaled $569,000 and $519,000, respectively. See Note 7 to the
unaudited condensed consolidated financial statements for more information
regarding use of HPCIs assets as collateral for the Banks advances from the
FHLB. Non-interest expense for the third quarter of 2004 was $4.4 million
compared with $3.7 million for the same period last year. For the nine-months
ended September 30, 2004 and 2003, non-interest expense was $12.0 million and
$10.2 million, respectively. The predominant components of HPCIs non-interest
expense are the fees paid to the Bank for servicing the loans underlying the
participation interests and depreciation and amortization on its premises and
equipment. For the third quarter 2004, servicing costs amounted to $2.9
million, up from the $2.1 million recorded in the same period of 2003. The
servicing costs for the nine-month period ended September 30, 2004 and 2003
totaled $7.2 million and $5.4 million, respectively. The increases were due to
higher service fee rates on loan participation balances. As of July 1, 2004,
the annual servicing rates the Bank charged with respect to outstanding
principal balances were:  
    
    0.125% of the underlying commercial and commercial real estate loans,
    
    0.750% of the underlying consumer loans, and
    
    0.267% of the underlying residential real estate loans. Annual servicing rates the Bank charged for the periods prior to July 1, 2004, were:  
    
    0.125% of the underlying commercial and commercial real estate loans,
    
    0.320% of the underlying consumer loans, and
    
    0.2997% of the underlying residential real estate loans. Pursuant to the existing participation and subparticipation agreements,
the amount and terms of the loan-servicing fee between the Bank and HPCI are
determined by mutual agreement from time to time during the terms of the
agreements. Effective July 1, 2004, in lieu of paying higher servicing costs
to the Bank with respect to commercial and commercial real estate loans, HPCI
waived its right to receive any origination fees associated with participation
interests in commercial and commercial real estate loans transferred on or
after July 1, 2004, until such time as loan servicing fees are reviewed in
2005. 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 income taxes. HPCIs subsidiary, HPCLI,
elected to be treated as a taxable REIT subsidiary and, therefore, a separate
provision related to its income taxes is included in the accompanying unaudited
condensed consolidated financial statements. The provision for income taxes for
the three and nine-month periods ended September 30, 2004 was $88,000 and
$195,000 respectively. This is compared to $24,000 and $73,000 for the three
and nine-month periods of the prior year. 20




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MARKET RISK Interest rate risk is the primary market risk to which HPCI has exposure.
If there is a decline in market interest rates, HPCI may experience a reduction
in interest income on its participation interests and a corresponding decrease
in funds available to be distributed to shareholders. Assuming a gradual
decline in market interest rates by 100 basis points over the next 12 months,
interest income would be expected to decline by roughtly 4.4%. Huntington
conducts its interest rate risk management on a centralized basis and does not
manage HPCIs interest rate risk separately. A key element used in Huntingtons interest rate risk management is an
income simulation model, which includes, among other things, assumptions for
loan prepayments on the existing portfolio and new loan volumes. Using that
model for HPCI as of September 30, 2004, and assuming no new loan participation
volumes, interest income for the next 12 month period would be expected to
increase by 8.7% based on a gradual 200 basis point increase in rates above the
forward rates implied in the September 30, 2004, yield curve. Interest income
would be expected to decline 8.8% in the event of a gradual 200 basis point
decline in rates from the forward rates implied in the September yield curve.
As of September 30, 2004, approximately 75% of the loan participation portfolio
had variable rates. OFF-BALANCE SHEET ARRANGEMENTS Under the terms of the participation and subparticipation agreements, HPCI
is obligated to make funds or credit available to the Bank, either directly,
indirectly through Holdings, or indirectly through Holdings and HPCH-III, so
that the Bank may extend credit to any borrowers, or pay letters of credit
issued for the account of any borrowers, to the extent provided in the loan
agreements underlying HPCIs participation interests. At September 30, 2004,
and December 31, 2003, and September 30, 2003, unfunded commitments totaled
$645.2 million, $923.7 million, and $967.3 million, respectively. It is
expected that 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 meet all of its financial commitments, pay its
dividends to retain its REIT status, satisfy obligations to make funds or
credit available to the Bank, and to capitalize on opportunities for business
expansion. In managing liquidity, Management takes into account various legal
limitations placed on a REIT. HPCIs principal liquidity needs are to acquire additional participation
interests as the underlying loans in its portfolio paydown or mature and to pay
operating expenses and dividends. Operating expenses and dividends are expected
to be funded through cash generated by operations. The acquisition of
additional participation interests in loans is intended to be funded with the
proceeds obtained from repayment of principal balances by individual borrowers,
utilization of existing cash and cash equalivant funds, and if necessary, new
capital contributions. HPCI intends to pay dividends on its preferred stock and
common stock in amounts necessary to continue to preserve its status as a REIT
under the Internal Revenue Code. At September 30, 2004, December 31, 2003, and September 30, 2003, HPCI
maintained interest bearing and non-interest bearing cash balances with the
Bank totaling $788.1 million, $124.1 million, and $499.6 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. To the extent that the board of directors determines that additional
funding is required, Management 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. HPCI reduced
its purchases of participation interests during the second and third quarter,
which contributed to a $664.1 million increase in interest-bearing and cash
balances during the first nine-months of 2004, primarily for dividend
distributions at the end of the year. HPCI resumed particpation interest
purchases of commercial real estate and consumer loans late in the third
quarter 2004. 21




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##### Table of Contents



Item 3. Quantitative And Qualitative Disclosures About Market Risk Quantitative and qualitative disclosures for the current period are found
on page 21 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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. During the quarter ended September 30, 2004, HPCI implemented a software
system that automates certain previously manual record keeping and
reconciliation processes, and provides greater data accessibility. HPCIs
management believes that this software system enhances HPCIs internal control
over financial reporting (as such term is defined in Rules 13a-15(f) ad
15d-15(f) under the Exchange Act). There have not been any other changes in
HPCIs internal control over financial reporting during the quarter ended
September 30, 2004, to which this report relates, that have materially
affected, or are reasonably likely to materially affect, HPCIs internal
control over financial reporting. 22




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##### Table of Contents



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 and Reports on Form 8-K  (a)  3.(i).
    
    Amended and Restated Articles of
Incorporation (previously filed as Exhibit 3(a)(ii) to
Amendment No. 4 to Registration Statement of Form S-11 (File
No. 333-61182), filed with the Securities and Exchange
Commission on October 12, 2001, and incorporated herein by
reference.)3.(ii).
    
    Code of Regulations (previously filed as
Exhibit 3(b) to the Registrants Registration Statement of
Form S-11 (File No. 333-61182), filed with the Securities and
Exchange Commission on May 17, 2001, and incorporated herein
by reference.)4.
    
    Specimen of certificate representing Class C
preferred securities, previously filed as Exhibit 4 to the
Registrants Amendment No. 1 to Registration Statement of Form
S-11 (File No. 333-61182), filed with the Securities and
Exchange Commission on May 31, 2001, and incorporated herein
by reference.10.
    
    Material Contracts:  (a)
    
    Leasehold Improvements Lease dated
August 12, 2004 between HPCLI, Inc. and The Huntington
National Bank (previously filed as Exhibit 10(a) to
Quarterly Report on Form 10-Q for the quarter ended June
30, 2004, and incorporated herein by reference).(b)
    
    Limited Waiver of Contract Provision
dated August 12, 2004 with Huntington Preferred Capital
Holdings, Inc., HPC Holdings  III, Inc., Huntington
Preferred Capital, Inc., and The Huntington National
Bank.  31.1.
    
    Sarbanes-Oxley Act 302 Certification  signed by Donald R. Kimble, President.31.2.
    
    Sarbanes-Oxley Act 302 Certification  signed by Thomas P. Reed, Vice President.32.1.
    
    Sarbanes-Oxley Act 906 Certification  signed by Donald R. Kimble, President.32.2.
    
    Sarbanes-Oxley Act 906 Certification  signed by Thomas P. Reed, Vice President.  (b)
    
    Reports on Form 8-K  None 23




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Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 12th day of
November, 2004. 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)
 24