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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2005 Commission File Number: 000-33243 HUNTINGTON PREFERRED CAPITAL, INC. Ohio
(State or other jurisdiction of
incorporation or organization)
    
    31-1356967
(I.R.S. Employer
Identification No.)
 41 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 þ          No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o          No þ As of April 30, 2005, 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 Statements (Unaudited)Condensed Consolidated Balance Sheets  At March 31, 2005, December 31, 2004, and March 31, 2004
    
    
    3Condensed Consolidated Statements of Income  For the three-months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Changes in Shareholders Equity  For the three-months ended March 31, 2005 and 2004
    
    
    5Condensed Consolidated Statements of Cash Flows  For the three-months ended March 31, 2005 and 2004
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II. Other InformationItem 6.
    
    Exhibits
    
    
    25Signatures
    
    
    
    
    26Exhibit 10(A)Exhibit 10(B)Exhibit 10(C)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
 March 31,
    
    
    December 31,
    
    
    March 31,(in thousands of dollars, except share data)
    
    2005
    
    
    2004
    
    
    2004(Unaudited)
    
    
    
    
    
    (Unaudited)AssetsCash with The Huntington National Bank
    
    $
    54,662
    
    
    $
    48,253
    
    
    $
    4,576Interest bearing deposits with The Huntington National Bank
    
    
    273,596
    
    
    
    752,000
    
    
    
    82,289Due from affiliates
    
    
    1,075
    
    
    
    175
    
    
    
    14,675Loan participation interests:Commercial
    
    
    98,291
    
    
    
    106,179
    
    
    
    198,950Commercial real estate
    
    
    3,681,594
    
    
    
    3,738,930
    
    
    
    4,264,002Consumer
    
    
    839,421
    
    
    
    819,250
    
    
    
    662,908Residential real estate
    
    
    208,176
    
    
    
    224,914
    
    
    
    275,284Total loan participation interests
    
    
    4,827,482
    
    
    
    4,889,273
    
    
    
    5,401,144Allowance for loan participation losses
    
    
    (62,461
    )
    
    
    (61,146
    )
    
    
    (79,842
    )Net loan participation interests
    
    
    4,765,021
    
    
    
    4,828,127
    
    
    
    5,321,302Premises and equipment
    
    
    25,352
    
    
    
    26,635
    
    
    
    30,736Accrued income and other assets
    
    
    18,928
    
    
    
    18,401
    
    
    
    17,351Total Assets
    
    $
    5,138,634
    
    
    $
    5,673,591
    
    
    $
    5,470,929LiabilitiesAllowance for unfunded loan participation commitments
    
    $
    3,658
    
    
    $
    3,765
    
    
    $
    4,325Dividends and distributions payable
    
    
    2,650
    
    
    
    600,000
    
    
    
    1,230Other liabilities
    
    
    71
    
    
    
    50
    
    
    
    13Total Liabilities
    
    
    6,379
    
    
    
    603,815
    
    
    
    5,568Shareholders 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
    
    
    4,268,776
    
    
    
    4,268,776
    
    
    
    4,604,978Retained earnings
    
    
    62,479
    
    
    
    
    
    
    
    59,383Total Shareholders Equity
    
    
    5,132,255
    
    
    
    5,069,776
    
    
    
    5,465,361Total Liabilities and Shareholders Equity
    
    $
    5,138,634
    
    
    $
    5,673,591
    
    
    $
    5,470,929
 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 EndedMarch 31,(in thousands of dollars)
    
    2005
    
    
    2004Interest and fee incomeInterest on loan participation interests:Commercial
    
    $
    1,380
    
    
    $
    2,094Commercial real estate
    
    
    48,753
    
    
    
    45,060Consumer
    
    
    13,925
    
    
    
    12,013Residential real estate
    
    
    2,896
    
    
    
    3,683Total loan participation interest income
    
    
    66,954
    
    
    
    62,850Fees from loan participation interests
    
    
    629
    
    
    
    611Interest on deposits with The Huntington National Bank
    
    
    1,473
    
    
    
    289Total interest and fee income
    
    
    69,056
    
    
    
    63,750Reduction in allowances for credit losses
    
    
    (3,441
    )
    
    
    (2,263
    )Interest income after reduction in allowances for credit losses
    
    
    72,497
    
    
    
    66,013Non-interest income:Rental income
    
    
    1,591
    
    
    
    1,469Collateral fees
    
    
    181
    
    
    
    197Total non-interest income
    
    
    1,772
    
    
    
    1,666Non-interest expense:Servicing costs
    
    
    2,864
    
    
    
    2,135Depreciation and amortization
    
    
    1,137
    
    
    
    1,353Loss on disposal of fixed assets
    
    
    145
    
    
    
    37Other
    
    
    241
    
    
    
    106Total non-interest expense
    
    
    4,387
    
    
    
    3,631Income before provision for income taxes
    
    
    69,882
    
    
    
    64,048Provision for income taxes
    
    
    98
    
    
    
    23Net income
    
    $
    69,784
    
    
    $
    64,025Dividends declared on preferred securities
    
    
    (7,305
    )
    
    
    (4,642
    )Net income applicable to common shares
    
    $
    62,479
    
    
    $
    59,383
 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
    
    
    SecuritiesThree Months Ended March 31, 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
    
    
    $
    50,000Three Months Ended March 31, 2005 (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
    
    
    Stock
    
    
    Earnings
    
    
    TotalThree Months Ended March 31, 2004 (Unaudited):Balance, beginning of period
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,604,978
    
    
    $
    
    
    
    $
    5,405,978Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,025
    
    
    
    64,025Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,025Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,150
    )
    
    
    (1,150
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (984
    )
    
    
    (984
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,428
    )
    
    
    (2,428
    )Balance, end of period (Unaudited)
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,604,978
    
    
    $
    59,383
    
    
    $
    5,465,361Three Months Ended March 31, 2005 (Unaudited):Balance, beginning of period
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,268,776
    
    
    $
    
    
    
    $
    5,069,776Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,784
    
    
    
    69,784Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,784Dividends declared on Class A preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Dividends declared on Class B preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,570
    )
    
    
    (2,570
    )Dividends declared on Class C preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (984
    )
    
    
    (984
    )Dividends declared on Class D preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,671
    )
    
    
    (3,671
    )Balance, end of period(Unaudited)
    
    
    14,000
    
    
    $
    350,000
    
    
    
    
    
    
    $
    
    
    
    
    14,000
    
    
    $
    4,268,776
    
    
    $
    62,479
    
    
    $
    5,132,255
 See notes to unaudited condensed consolidated financial statements. 5




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Huntington Preferred Capital, Inc. 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 Three Months EndedMarch 31,(in thousands of dollars)
    
    2005
    
    
    2004Operating ActivitiesNet Income
    
    $
    69,784
    
    
    $
    64,025Adjustments to reconcile net income to net
cash provided by operating activities:Reduction of allowances for credit losses
    
    
    (3,441
    )
    
    
    (2,263
    )Depreciation and amortization
    
    
    1,137
    
    
    
    1,353Deferred income tax expense (benefit)
    
    
    367
    
    
    
    (239
    )Loss on disposal of fixed assets
    
    
    145
    
    
    
    37(Increase) decrease in accrued income and other assets
    
    
    (540
    )
    
    
    1,204Increase in due from affiliates
    
    
    (900
    )
    
    
    (1,023
    )Increase in other liabilities
    
    
    21
    
    
    
    13Net Cash Provided by Operating Activities
    
    
    66,573
    
    
    
    63,107Investing ActivitiesParticipation interests acquired
    
    
    (764,978
    )
    
    
    (1,263,208
    )Sales and repayments on loans underlying
participation interests
    
    
    831,065
    
    
    
    1,166,293Net Cash Provided by (Used for) Investing Activities
    
    
    66,087
    
    
    
    (96,915
    )Financing ActivitiesDividends paid on preferred securities
    
    
    (4,655
    )
    
    
    (3,412
    )Dividends paid on common stock
    
    
    (263,798
    )
    
    
    Return of capital to common shareholders
    
    
    (336,202
    )
    
    
    Net Cash Used for Financing Activities
    
    
    (604,655
    )
    
    
    (3,412
    )Change in Cash and Cash Equivalents
    
    
    (471,995
    )
    
    
    (37,220
    )Cash and Cash Equivalents:at Beginning of Year
    
    
    800,253
    
    
    
    124,085at End of Period
    
    $
    328,258
    
    
    $
    86,865Supplemental information:Income taxes paid
    
    $
    
    
    
    $
    440Dividends and return of capital declared, not paid
    
    
    2,650
    
    
    
    1,230
 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. At December 31, 2004, three related
parties owned HPCIs common stock: HPC Holdings-III, Inc. (HPCH-III), 67.37%; Huntington Preferred
Capital II, Inc. (HPCII), 32.5%; and Huntington Bancshares Incorporated (Huntington), 0.13%.
Effective February 18, 2005, Holdings transferred 34% of its ownership in HPCH-III to Huntington
Capital Financing LLC (HCF). Holdings and HCF are subsidiaries of The Huntington National Bank (the
Bank), a national banking association organized under the laws of the United States and
headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. On March
31, 2005, HPCH-III liquidated into Holdings and HCF. As a result of the liquidation, as of March
31, 2005, four related parties own HPCIs common stock: HCF, 47%; HPCII, 32.5%; Holdings, 20.37%;
and Huntington, 0.13%. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary
formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements).
The following chart outlines the relationship among affiliates at March 31, 2005. (ORGANIZATION CHART) 7




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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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 2004 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, HCF, and Holdings, 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
with The Huntington National Bank, Interest bearing deposits
with The Huntington National Bank, and end of month settlements. 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. In the normal
course of business, HPCI does not purchase loan participation interests in loans that have
exhibited a deterioration in credit quality since origination. Therefore, the impact of this new
pronouncement was not material to HPCIs financial condition, results of operations, or cash flows. FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations (FIN 47)In
March 2005, the FASB issued FIN 47, which clarifies that the term conditional asset retirement
obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers
to a legal obligation to perform an asset retirement activity in which the timing and (or) method
of settlement are conditional on a future event that may or may not be within the control of the
entity. An entity is required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47
becomes effective for fiscal years ending after December 15, 2005. The impact of this new
pronouncement is not expected to be material to HPCIs financial condition, results of
operations, or cash flows. 8




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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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: March 31,
    
    
    December 31,
    
    
    March 31,(in thousands of dollars)
    
    2005
    
    
    2004
    
    
    2004Commercial
    
    $
    373
    
    
    $
    425
    
    
    $
    5,881Commercial real estate
    
    
    10,641
    
    
    
    6,990
    
    
    
    10,820Consumer (1)
    
    
    2,178
    
    
    
    2,692
    
    

    
    Residential real estate
    
    
    4,068
    
    
    
    4,205
    
    
    
    5,335Total Participations in Non-Accrual Loans
    
    $
    17,260
    
    
    $
    14,312
    
    
    $
    22,036Participations in Accruing Loans Past
Due 90 Days or More
    
    $
    14,178
    
    
    $
    11,686
    
    
    $
    14,923
   (1)
 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%, 96.6%, and 93.4%, of the portfolio at
March 31, 2005, December 31, 2004, and March 31, 2004, respectively. Note 4  Allowances for Credit Losses (ACL) An allowance for credit losses (ACL) is transferred to HPCI from the Bank on loans
underlying the participations at the time the participations are acquired. The ACL is comprised of
the allowance for loan participation losses (ALL) and the allowance for unfunded loan participation
commitments (AULPC). The following tables reflect activity in the ACL for the three-month periods
ended March 31, 2005 and 2004: Three Months EndedMarch 31,(in thousands of dollars)
    
    2005
    
    
    2004ALL balance, beginning of period
    
    $
    61,146
    
    
    $
    84,532Allowance for loan participations acquired
    
    
    5,641
    
    
    
    5,577Net loan losses
    
    
    (992
    )
    
    
    (3,679
    )Reduction in ALL
    
    
    (3,334
    )
    
    
    (6,588
    )ALL balance, end of period
    
    $
    62,461
    
    
    $
    79,842AULPC balance, beginning of period
    
    $
    3,765
    
    
    $
    (Reduction in) provision for AULPC
    
    
    (107
    )
    
    
    4,325AULPC balance, end of period
    
    $
    3,658
    
    
    $
    4,325Total ACL
    
    $
    66,119
    
    
    $
    84,167
 Note 5  Preferred Dividends Holders of Class A preferred securities, a majority of which are held by Holdings and the
remainder by current and past employees of 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 9




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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) preferred securities, if declared,
are payable annually in December to holders of record on the record date fixed for such purpose by
the Board of Directors in advance of payment. The holder of the Class B preferred securities, HPC Holdings-II, Inc., a direct non-bank
subsidiary of Huntington, is entitled to receive, if, when, and as declared by the Board of
Directors of HPCI out of funds legally available, dividends at a variable rate equal to the
three-month LIBOR published on the first day of each calendar quarter times par value. Dividends
on the Class B preferred securities, which are declared quarterly, are payable annually and are
non-cumulative. No dividend, except payable in common shares, may be declared or paid upon Class B
preferred securities unless dividend obligations are satisfied on the Class A, Class C, and Class D
preferred securities. Holders of Class C preferred securities are entitled to receive, if, when, and as declared by
the Board of Directors of HPCI out of funds legally available, dividends at a fixed rate of 7.875%
per annum, of the initial liquidation preference of $25.00 per share, payable quarterly. Dividends
accrue in each quarterly period from the first day of each period, whether or not dividends are
paid with respect to the preceding period. Dividends are not cumulative and if no dividend is paid
on the Class C preferred securities for a quarterly dividend period, the payment of dividends on
HPCIs common stock and other HPCI-issued securities ranking junior to the Class C preferred
securities (i.e., Class B preferred securities) will be prohibited for that period and at least the
following three quarterly dividend periods. The holder of Class D preferred securities, Holdings, is entitled to receive, if, when, and as
declared by the Board of Directors of HPCI out of funds legally available, dividends at a variable
rate established at the beginning of each calendar quarter equal to three-month LIBOR published on
the first day of each calendar quarter, plus 1.625% times par value, payable quarterly. Dividends
accrue in each quarterly period from the first day of each period, whether or not dividends are
paid with respect to the preceding period. Dividends are not cumulative and if no dividend is paid
on the Class D preferred securities for a quarterly dividend period, the payment of dividends on
HPCIs common stock and other HPCI-issued securities ranking junior to the Class D preferred
securities (i.e., Class B preferred securities) will be prohibited for that period and at least the
following three quarterly dividend periods. A summary of dividends declared by each class of preferred securities, which is considered a
distribution of ordinary income, follows for the periods indicated: Three Months EndedMarch 31,(in thousands of dollars)
    
    2005
    
    
    2004Class A preferred securities
    
    $
    80
    
    
    $
    80Class B preferred securities
    
    
    2,570
    
    
    
    1,150Class C preferred securities
    
    
    984
    
    
    
    984Class D preferred securities
    
    
    3,671
    
    
    
    2,428Total dividends declared
    
    $
    7,305
    
    
    $
    4,642
 Note 6  Related Party Transactions HPCI is a party to a Third Amended and Restated Loan Subparticipation Agreement with
Holdings and a Second Amended and Restated Loan Participation Agreement with the Bank. The Bank is
required, under the participation and/or subparticipation agreements, to service HPCIs loan
portfolio in a manner substantially the same as for similar work for transactions on its own
behalf. The Bank collects and remits principal and interest payments, maintains perfected
collateral positions, and submits and pursues insurance claims. In addition, the Bank provides
accounting and reporting services to HPCI. The Bank is required to adhere to HPCIs policies
relating to the relationship between HPCI and the Bank and to pay all expenses related to the
performance of the Banks duties under the participation and subparticipation agreements. All of
these participation interests to date were acquired directly or indirectly from the Bank. 10




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##### Table of Contents



Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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 March 31, 2005 and 2004, respectively. Beginning July 1, 2004, the annual servicing rates the Bank charged with respect to
outstanding principal balances were:  
    0.125% of the underlying commercial and commercial real estate loans,
    0.750% of the underlying consumer loans, and
    0.267% of the underlying residential real estate loans. Annual servicing rates the Bank charged for the periods prior to July 1, 2004, were:  
    0.125% of the underlying commercial and commercial real estate loans,
    0.320% of the underlying consumer loans, and
    0.2997% of the underlying residential real estate loans. Pursuant to the existing participation and subparticipation agreements, the amount and terms
of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time to
time during the terms of the agreements. Effective July 1, 2004, in lieu of paying higher
servicing costs to the Bank with respect to commercial and commercial real estate loans, HPCI
waived its right to receive any origination fees associated with participation interests in
commercial and commercial real estate loans transferred on or after July 1, 2004, until such time
as loan servicing fees are reviewed in 2005. Huntingtons and the Banks personnel handle day-to-day operations of HPCI such as financial
analysis and reporting, accounting, tax reporting, and other administrative functions. On a
monthly basis, HPCI reimburses the Bank and Huntington for the cost related to the time spent by
employees for performing these functions. These personnel costs totaled $0.1 million for both
three-month periods ended March 31, 2005 and 2004, and are recorded in other non-interest expense. The following table represents the ownership of HPCIs outstanding common and preferred
securities as of March 31, 2005: Number ofCommon
    
    
    Number of Preferred SecuritiesShareholder:
    
    Shares
    
    
    Class A
    
    
    Class B
    
    
    Class C
    
    
    Class DHeld by related parties:HPC II
    
    
    4,550,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    HCF
    
    
    6,580,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Holdings
    
    
    2,851,333
    
    
    
    895
    
    
    
    
    
    
    
    
    
    
    
    14,000,000HPC Holdings II, Inc.
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    
    
    
    
    
    Huntington
    
    
    18,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total held by related parties
    
    
    14,000,000
    
    
    
    895
    
    
    
    400,000
    
    
    
    
    
    
    
    14,000,000Other shareholders
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    2,000,000
    
    
    
    Total shares outstanding
    
    
    14,000,000
    
    
    
    1,000
    
    
    
    400,000
    
    
    
    2,000,000
    
    
    
    14,000,000
 As of March 31, 2005, 10.5% of the Class A preferred securities were owned by current and past
employees of Huntington and its subsidiaries in addition to the 89.5% owned by Holdings. The Class
A preferred securities are 11




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##### Table of Contents



Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) 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 March 31, 2005, HPCI board members and executive officers beneficially owned, in
the aggregate, a total of 4,713 shares, or 0.236%. All of the Class D preferred securities are
owned by Holdings. Dividends paid to the Class C and Class D shareholders in the first quarter of
2005 were approximately $1.0 million and $3.7 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. 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. 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 March 31, 2005 and 2004 was $1.6 million
and $1.5 million, respectively. Rental income is reflected as a component of non-interest income
in the condensed consolidated statements of income. HPCI had a non-interest bearing receivable from affiliates of $1.1 million at March 31, 2005,
$0.2 million at December 31, 2004, and $14.7 million at March 31, 2004. The Bank is eligible to obtain collateralized 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. 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 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. 12




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##### Table of Contents



Notes to the Unaudited Condensed Consolidated Financial Statements (Continued) Currently, HPCIs assets have been used to collateralize only one such facility. The Bank is
currently eligible to obtain one or more collateralized advances from the FHLB based upon the
amount of FHLB capital stock owned by the Bank. As of March 31, 2005, the Banks total borrowing
capacity under this facility was $1.6 billion. As of this same date, the Bank had borrowings of
$0.9 billion under this facility. In addition, the FHLB has separately issued a standby letter of
credit for the account of a customer of the Bank totalling $18.2 million. 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 and the aforementioned standby letter of
credit. The agreement provides that the Bank will not place at risk HPCIs assets in excess of an
aggregate dollar amount or aggregate percentage of such assets established from time to time by
HPCIs board of directors, including a majority of HPCIs independent directors. Prior to October
31, 2004, the aggregate FHLB advance limit established by HPCIs board was $1.0 billion. Effective
as of October 31, 2004, the limit was adjusted to 25% of total assets, or approximately $1.3
billion as of March 31, 2005, as reflected in the Corporations month-end management report for the
previous month. This limit may be changed in the future by the board of directors, including a
majority of HPCIs independent directors. The agreement also provides that the Bank will pay HPCI a
monthly fee based upon the certified collateral held by HPCI. As of March 31, 2005, HPCIs total
loans pledged was limited to 1-4 family residential mortgage portfolio and consumer second mortgage
loans. As of that same date, HPCIs participation interests in 1-4 family residential mortgages and
second mortgage loans pledged, totaled $1.0 billion. The Bank paid HPCI a total of $0.2 million for
the first three months of 2005, representing twelve basis points per year on the certified
collateral, as compensation for making such assets available to the Bank. Under the terms of the participation and subparticipation agreements, HPCI is obligated to
make funds or credit available to the Bank, either directly or indirectly through Holdings 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 March 31, 2005, December 31, 2004, and March 31, 2004, HPCIs unfunded loan commitments
totaled $734.5 million, $761.4 million, and $848.7 million, respectively. Note 8  Formal Regulatory Supervisory Agreements On March 1, 2005, Huntington announced that it had entered into formal written agreements
with its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the
Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance
its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. They call for independent third-party reviews, as well as the
submission of written plans and progress reports by Huntingtons management. These written
agreements remain in effect until terminated by the banking regulators. Huntingtons management has been working with its banking regulators over the past several
months and has been taking actions and devoting significant resources to address all of the issues
raised. Huntingtons management believes that the changes that it has already made, and is in the
process of making, will address these issues fully and comprehensively. No assurances, however, can
be provided as to the ultimate timing or outcome of these matters, including any effects on HPCI. Note 9  Segment Reporting HPCIs operations consist of acquiring, holding, and managing its participation interests.
Accordingly, HPCI only operates in one segment. HPCI has no external customers and transacts all
of its business with the Bank and its affiliates. 13




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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 REIT in 1998. At December 31,
2004, three related parties owned HPCIs common stock: HPC Holdings-III, Inc. (HPCH-III), 67.37%;
Huntington Preferred Capital II, Inc. (HPCII), 32.5%; and Huntington Bancshares Incorporated
(Huntington), 0.13%. Effective February 18, 2005, Holdings transferred 34% of its ownership in
HPCH-III to Huntington Capital Financing LLC (HCF). Holdings and HCF are subsidiaries of The
Huntington National Bank (the Bank), a national banking association organized under the laws of the
United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of
Huntington. On March 31, 2005, HPCH-III liquidated into Holdings and HCF. As a result of the
liquidation, as of March 31, 2005, four related parties own HPCIs common stock: HCF, 47%; HPCII,
32.5%; Holdings, 20.37%; and Huntington, 0.13%. 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 Third Amended and Restated Loan Subparticipation Agreement with Holdings
and a Second Amended and Restated Loan Participation Agreement with the Bank. The Bank is
required, under the participation and/or subparticipation agreements, to service HPCIs loan
portfolio in a manner substantially the same as for similar work for transactions on its own
behalf. The Bank collects and remits principal and interest payments, maintains perfected
collateral positions, and submits and pursues insurance claims. In addition, the Bank provides to
HPCI accounting and reporting services as required. The Bank is required to adhere to HPCIs
policies relating to the relationship between HPCI and the Bank and to pay all expenses related to
the performance of the Banks duties under the participation and subparticipation agreements. All
of these participation interests to date were acquired directly or indirectly from the Bank. 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
2004 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. Formal Regulatory Supervisory Agreements On March 1, 2005, Huntington announced that it had entered into formal written agreements with
its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the
Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance
its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. They call for independent 14




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##### Table of Contents



third-party reviews, as well as the
submission of written plans and progress reports by Huntingtons management. These written
agreements remain in effect until terminated by the banking regulators. Huntingtons management has been working with its banking regulators over the past several
months and has been taking actions and devoting significant resources to address all of the issues
raised. Huntingtons management believes that the changes that it has already made, and is in the
process of making, will address these issues fully and comprehensively. No assurances, however, can
be provided as to the ultimate timing or outcome of these matters, including any effects on HPCI. Critical Accounting Policies 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, 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 securities are considered equity and, therefore, the dividends are not reflected as
interest expense. HPCIs net income was $69.8 million and $64.0 million, respectively, for the three-months
ended March 31, 2005 and 2004, while net income applicable to common shareholders was $62.5 million
and $59.4 million, respectively, for the same three-month periods. HPCI had total assets of $5.1 billion at March 31, 2005, down from $5.7 billion at December
31, 2004 and $5.5 billion a year earlier. At March 31, 2005, December 31, 2004, and March 31,
2004, an aggregate of $4.8 billion, $4.9 billion, and $5.4 billion, respectively, consisted of
participation interests in loans. Participation interests in underlying loans by category were as
follows: Table 1 - Loan Participation Interests% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofMarch 31,
    
    
    Total
    
    
    December 31,
    
    
    Total
    
    
    March 31,
    
    
    Total(in thousands of dollars)
    
    2005
    
    
    Assets
    
    
    2004
    
    
    Assets
    
    
    2004
    
    
    AssetsGross loan
participation interests:Commercial
    
    $
    98,291
    
    
    
    1.9
    
    
    $
    106,179
    
    
    
    1.9
    
    
    $
    198,950
    
    
    
    3.7Commercial real estate
    
    
    3,681,594
    
    
    
    71.6
    
    
    
    3,738,930
    
    
    
    65.9
    
    
    
    4,264,002
    
    
    
    77.9Consumer
    
    
    839,421
    
    
    
    16.3
    
    
    
    819,250
    
    
    
    14.4
    
    
    
    662,908
    
    
    
    12.1Residential real estate
    
    
    208,176
    
    
    
    4.1
    
    
    
    224,914
    
    
    
    4.0
    
    
    
    275,284
    
    
    
    5.0Total
    
    $
    4,827,482
    
    
    
    93.9
    
    
    $
    4,889,273
    
    
    
    86.2
    
    
    $
    5,401,144
    
    
    
    98.7
 15




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##### Table of Contents



HPCIs participation interests in commercial loans represented 1.9%, 1.9%, and 3.7% of total
assets as of March 31, 2005, December 31, 2004, and March 31, 2004, respectively. The decrease
from March 31, 2004 was due to continued portfolio run off and asset sales in June 2004 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. 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 March 31, 2005, which represented 71.6% of total assets, decreased
compared to the same period last year primarily due to run off, reclassifications, and decreased
new loan purchases during the second and third quarters of 2004. Consumer loan participation
interests, which include any loan secured by an automobile, truck, equipment, or a home equity or
similar type loan on the borrowers primary residence, were 16.3% of total assets at March 31,
2005, compared to 12.1% of total assets for the same date in 2004. This increase was due to
purchases of consumer home equity loan participations totaling $113 million and the $6.1 million
reclassification from commercial real estate participations to consumer loan participations in
September 2004. Residential real estate loan participation interests represented 4.1% of total
assets at March 31, 2005, compared to 5.0% of total assets for the same date in 2004. The balance
decline was due to portfolio run off as there were no additional residential real estate loan
purchases in this time period. Interest-bearing and non-interest bearing cash balances on deposit with the Bank were $328.3
million, $800.3 million, and $86.9 million at March 31, 2005, December 31, 2004, and March 31,
2004, respectively. The reduction in cash balances from the beginning of the year was related to
the common share dividend and capital distribution for 2004 paid on January 3, 2005. Typically,
cash is invested with the Bank in an interest bearing account. These interest-bearing balances are
invested overnight or may be invested in Eurodollar deposits with the Bank for a term of not more
than 30 days at market rates. At March 31, 2005, December 31, 2004, and March 31, 2004, amounts due from affiliates and the
Bank were $1.1 million, $0.2 million, and $14.7 million, respectively. The decline from the first
quarter of 2004 was related to a payment of prior accrued rents due between the Bank and HPCLI
during the second quarter of 2004. The increase from the prior year-end was due to the timing of
HPCLIs tax payments. Total liabilities were $6.4 million, $603.8 million, and $5.6 million at
March 31, 2005, December 31, 2004, and March 31, 2004, respectively. The decrease from the
beginning of the year-end was due to the payment of 2004 common dividend and capital distribution,
while the increase from March 31, 2004 was due to larger
preferred dividends payable as a result of
higher rates. Shareholders equity was $5.1 billion at March 31, 2005, and December 31, 2004, down from $5.5
billion at March 31, 2004. The decline from the year-ago quarter was due to the return of capital
to common shareholders declared in December 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 March 31, 2005, HPCI met all of the quarterly asset tests. Also, a REIT must annually satisfy two gross income tests: (1) 75% of its gross income must be
from qualifying income closely connected with real estate activities; and (2) 95% of its gross
income must be derived from sources qualifying for the 75% test plus dividends, interest, and gains
from the sale of securities. In addition, a REIT must distribute 90% of the REITs taxable income
for the taxable year, excluding any net capital gains, to maintain its
non-taxable status for federal income tax purposes. For tax year 2004, HPCI met all annual
income and distribution tests. HPCI intends to operate 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 16




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##### Table of Contents



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 March 31, 2005, 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 first quarter 2005 was $69.8 million, up 9.0% from $64.0 million for the
first quarter 2004. Net income applicable to common shares was $62.5 million for the first quarter
of 2005, an increase of $3.1 million, or 5.2%, compared to the first quarter of 2004. Dividend
declarations on preferred securities increased by 57.4% in the most recent quarter to $7.3 million
compared to $4.6 million for the first quarter 2004 as the result of higher three-month LIBOR
rates applicable to the Class B and Class D preferred securities. Increased earnings for the first
quarter of 2005, compared to the same period of 2004, were the result of higher interest and fee
income from improved yields on total loan participations and cash deposits slightly offset by
higher servicing costs. Table 2 - Quarterly Statements of Income2005
    
    
    2004
    
    
    1Q05 vs 1Q04(in thousands of dollars)
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    
    $ Chg
    
    
    % ChgInterest and fee incomeInterest on loan participation interests:Commercial
    
    $
    1,380
    
    
    $
    1,679
    
    
    $
    2,136
    
    
    $
    1,901
    
    
    $
    2,094
    
    
    
    $
    (714
    )
    
    
    (34.1
    )%Commercial real estate
    
    
    48,753
    
    
    
    46,931
    
    
    
    45,305
    
    
    
    44,751
    
    
    
    45,060
    
    
    
    
    3,693
    
    
    
    8.2Consumer
    
    
    13,925
    
    
    
    13,208
    
    
    
    12,353
    
    
    
    12,969
    
    
    
    12,013
    
    
    
    
    1,912
    
    
    
    15.9Residential real estate
    
    
    2,896
    
    
    
    3,069
    
    
    
    3,247
    
    
    
    3,475
    
    
    
    3,683
    
    
    
    
    (787
    )
    
    
    (21.4
    )Total loan participation interest income
    
    
    66,954
    
    
    
    64,887
    
    
    
    63,041
    
    
    
    63,096
    
    
    
    62,850
    
    
    
    
    4,104
    
    
    
    6.5Fees from loan participation interests
    
    
    629
    
    
    
    605
    
    
    
    469
    
    
    
    652
    
    
    
    611
    
    
    
    
    18
    
    
    
    2.9Interest on deposits with the Bank
    
    
    1,473
    
    
    
    3,736
    
    
    
    1,781
    
    
    
    198
    
    
    
    289
    
    
    
    
    1,184
    
    
    
    N.M.Total interest and fee income
    
    
    69,056
    
    
    
    69,228
    
    
    
    65,291
    
    
    
    63,946
    
    
    
    63,750
    
    
    
    
    5,306
    
    
    
    8.3Reduction in allowances for credit losses
    
    
    (3,441
    )
    
    
    (13,153
    )
    
    
    (6,874
    )
    
    
    (9,301
    )
    
    
    (2,263
    )
    
    
    
    (1,178
    )
    
    
    (52.1
    )Interest income after reduction in
allowance for credit losses
    
    
    72,497
    
    
    
    82,381
    
    
    
    72,165
    
    
    
    73,247
    
    
    
    66,013
    
    
    
    
    6,484
    
    
    
    9.8Non-interest income:Rental income
    
    
    1,591
    
    
    
    1,591
    
    
    
    1,590
    
    
    
    1,853
    
    
    
    1,469
    
    
    
    
    122
    
    
    
    8.3Collateral fees
    
    
    181
    
    
    
    177
    
    
    
    180
    
    
    
    192
    
    
    
    197
    
    
    
    
    (16
    )
    
    
    (8.1
    )Total non-interest income
    
    
    1,772
    
    
    
    1,768
    
    
    
    1,770
    
    
    
    2,045
    
    
    
    1,666
    
    
    
    
    106
    
    
    
    6.4Non-interest expense:Servicing costs
    
    
    2,864
    
    
    
    2,735
    
    
    
    2,854
    
    
    
    2,199
    
    
    
    2,135
    
    
    
    
    729
    
    
    
    34.1Depreciation
    
    
    1,137
    
    
    
    1,235
    
    
    
    1,339
    
    
    
    1,346
    
    
    
    1,353
    
    
    
    
    (216
    )
    
    
    (16.0
    )Loss on disposal of fixed assets
    
    
    145
    
    
    
    155
    
    
    
    0
    
    
    
    26
    
    
    
    37
    
    
    
    
    108
    
    
    
    N.M.Other
    
    
    241
    
    
    
    170
    
    
    
    196
    
    
    
    374
    
    
    
    106
    
    
    
    
    135
    
    
    
    N.M.Total non-interest expense
    
    
    4,387
    
    
    
    4,295
    
    
    
    4,389
    
    
    
    3,945
    
    
    
    3,631
    
    
    
    
    756
    
    
    
    20.8Income before provision for income taxes
    
    
    69,882
    
    
    
    79,854
    
    
    
    69,546
    
    
    
    71,347
    
    
    
    64,048
    
    
    
    
    5,834
    
    
    
    9.1Provision for income taxes
    
    
    98
    
    
    
    58
    
    
    
    88
    
    
    
    84
    
    
    
    23
    
    
    
    
    75
    
    
    
    N.M.Net income
    
    $
    69,784
    
    
    $
    79,796
    
    
    $
    69,458
    
    
    $
    71,263
    
    
    $
    64,025
    
    
    
    $
    5,759
    
    
    
    9.0Dividends declared on preferred securities
    
    
    (7,305
    )
    
    
    (6,208
    )
    
    
    (5,406
    )
    
    
    (4,488
    )
    
    
    (4,642
    )
    
    
    
    (2,663
    )
    
    
    (57.4
    )Net income applicable to
common shares(1)
    
    $
    62,479
    
    
    $
    73,588
    
    
    $
    64,052
    
    
    $
    66,775
    
    
    $
    59,383
    
    
    
    $
    3,096
    
    
    
    5.2
    %
   (1)
    
    All of HPCIs common stock is owned by Huntington, HPCII, HCF, and Holdings and therefore, net income per share is not presented. N.M. - Not Meaningful. 17




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##### Table of Contents



Interest and Fee Income HPCIs primary source of revenue is interest and fee income on its participation interests in
loans. At March 31, 2005 and 2004, HPCI did not have any interest-bearing liabilities or related
interest expense. Interest income is impacted by changes in the levels of interest rates and
earning assets. The yield on earning assets is the percentage of interest income to average
earning assets. The table below shows HPCIs average balances, interest and fee income, and yields for the
three-month period ended March 31: Table 3 - Quarterly Average Balance Sheets and Net Interest Margin AnalysisThree Months Ended March 31,2005
    
    
    2004Average
    
    
    
    
    
    
    
    
    
    
    Average(in millions of dollars)
    
    Balance
    
    
    Income(1)
    
    
    Yield
    
    
    Balance
    
    
    Income(1)
    
    
    YieldLoan participation interests:Commercial
    
    $
    103.7
    
    
    $
    1.4
    
    
    
    5.45
    %
    
    $
    170.8
    
    
    $
    2.1
    
    
    
    5.00
    %Commercial real estate
    
    
    3,705.4
    
    
    
    49.2
    
    
    
    5.39
    
    
    
    4,240.4
    
    
    
    45.4
    
    
    
    4.31Consumer
    
    
    822.2
    
    
    
    14.1
    
    
    
    6.94
    
    
    
    625.6
    
    
    
    12.2
    
    
    
    7.85Residential real estate
    
    
    216.9
    
    
    
    2.9
    
    
    
    5.34
    
    
    
    284.3
    
    
    
    3.7
    
    
    
    5.18Total loan participations
    
    
    4,848.2
    
    
    
    67.6
    
    
    
    5.65
    
    
    
    5,321.1
    
    
    
    63.4
    
    
    
    4.80Interest bearing deposits in banks
    
    
    237.1
    
    
    
    1.5
    
    
    
    2.52
    
    
    
    114.2
    
    
    
    0.3
    
    
    
    1.02Total
    
    $
    5,085.3
    
    
    $
    69.1
    
    
    
    5.50
    %
    
    $
    5,435.3
    
    
    $
    63.7
    
    
    
    4.72
    %
   (1)
    
    Income includes interest and fees. Interest and fee income was $69.1 million for the three-months ended March 31, 2005,
compared with $63.7 million for the year ago quarter. As shown in Table 3, the increase in interest
and fee income was the result of higher yields offsetting lower earning asset balances. For the
three-months ended March 31, 2005 and 2004, the yield on average loan participation balances
increased from 4.80% to 5.65%, while average earning asset balances decreased $350 million.
Approximately 72% of the portfolio was comprised of variable interest rate loan participations.
The table above includes interest received on participations in loans that are on a non-accrual
status in the individual portfolios. Allowances for Credit Losses (ACL) HPCI maintains two reserves, both of which are available to absorb probable credit losses: the
allowance for loan participation losses (ALL) and the allowance for unfunded loan participation
commitments (AULPC). When summed together, these reserves constitute the total allowances for
credit losses (ACL). The ALL represents the estimate of probable losses inherent in the loan portfolio at the
balance sheet date. Additions to the ALL and AULPC result primarily from an allocation of the
purchase price of participations acquired. It is HPCIs policy to rely on the Banks detailed analysis as of the end of each quarter to
estimate the required level of the ALL and AULPC. The Banks methodology to determine the adequacy
of the ALL relies on a number of analytical tools and benchmarks. No single statistic or
measurement, in itself, determines the adequacy of the allowance. For determination purposes, the
allowance is comprised of three components: the transaction reserve, specific reserve, and the
economic reserve. Transaction Reserve This ALL component represents an estimate of loss based on characteristics of each
commercial and consumer loan in the portfolio. Each loan is assigned a
probability-of-default and a loss-in-event-of-default factor that are used to calculate the
transaction reserve. 18




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##### Table of Contents



For commercial and commercial real estate loans, the calculation involves the use of a
standardized loan grading system that is applied on an individual loan level and updated on
a continuous basis. The reserve factors applied to these portfolios were developed based on
internal credit migration models that track historical movements of loans between loan
ratings over time and a combination of long-term average loss experience of the Banks own
portfolio and external industry data. For consumer loans and residential real estate loans, the determination of the
transaction component is conducted at an aggregate, or pooled, level. For such portfolios,
the development of the reserve factors includes the use of forecasting models to measure
inherent loss in these portfolios. Models and analyses are updated frequently to capture the recent behavioral
characteristics of the subject portfolios, as well as any changes in the loss mitigation or
credit origination strategies. Adjustments to the reserve factors are made as needed based
on observed results of the portfolio analytics. Specific Reserve This ALL component is associated only with the commercial and commercial real estate
loans and is the result of credit-by-credit reserve decisions for individual loans when it
is determined that the calculated transaction reserve component is insufficient to cover the
estimated losses. Individual non-performing and

substandard loans over $250,000 are analyzed for impairment and possible assignment of
a specific reserve. The impairment tests are done in accordance with applicable accounting
standards and regulations. Economic Reserve Changes in the economic environment are a significant judgmental factor the Bank
considers in determining the appropriate level of the ACL. The economic reserve
incorporates the Banks determination of the impact of risks associated with the general
economic environment on the portfolio. The economic reserve is designed to address economic
uncertainties and is determined based on a variety of economic factors that are correlated
to the historical performance of the loan portfolio. Because of this more quantitative
approach to recognizing risks in the general economy, the economic reserve may fluctuate
from period-to-period. In an effort to be as quantitative as possible in the ALL calculation, the Bank developed a
revised methodology for calculating the economic reserve portion of the ALL for
implementation in 2004. The revised methodology is specifically tied to economic indices that
have a high correlation to the Companys historic charge-off variability. The indices
currently in the model consist of the U.S. Index of Leading Economic Indicators, U.S. Profits
Index, U.S. Unemployment Index, and the University of Michigan Current Consumer Confidence
Index. Beginning in 2004, the calculated economic reserve was determined based upon the
variability of credit losses over a credit cycle. The indices and time frame may be adjusted
as actual portfolio performance changes over time. At the time of the implementation, the
Bank has the capability to judgmentally adjust the calculated economic reserve amount by a
maximum of +/ 20% to reflect, among other factors, differences in local versus national
economic conditions. This adjustment capability was deemed necessary given the newness of the
model and the continuing uncertainty of forecasting economic environment changes. At March
31, 2005 , there was no judgmental adjustment made by the Bank to the economic reserve. This methodology allows for a more meaningful discussion of the Banks view of the current
economic conditions and the potential impact on HPCIs credit losses. The continued use of
quantitative methodologies for the transaction reserve and the economic reserve may result in
period-to-period fluctuation in the absolute and relative level of the ACL. 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-month periods ended March 31, 2005 and 2004 were reductions of the
allowances of $3.4 million and $2.3 million, respectively. These reductions were indicative of
Managements judgment regarding the adequacy of those allowances particularly in light of lower net
loan losses in the current quarter, and low non-performing asset (NPA) levels at March 31, 2005. 19




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##### Table of Contents



The following table shows the activity in HPCIs ALL and AULPC for the last five quarters: Table 4 - Allowances for Credit Loss Activity2005
    
    
    2004(in thousands of dollars)
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstALL balance, beginning of period
    
    $
    61,146
    
    
    $
    67,668
    
    
    $
    72,524
    
    
    $
    79,842
    
    
    $
    84,532Allowance of loan participations
acquired, net
    
    
    5,641
    
    
    
    9,285
    
    
    
    2,738
    
    
    
    3,601
    
    
    
    5,577Net loan lossesCommercial
    
    
    544
    
    
    
    964
    
    
    
    848
    
    
    
    (372
    )
    
    
    154Commercial real estate
    
    
    13
    
    
    
    (1,271
    )
    
    
    (588
    )
    
    
    (785
    )
    
    
    (2,388
    )Consumer
    
    
    (1,523
    )
    
    
    (1,482
    )
    
    
    (1,666
    )
    
    
    (885
    )
    
    
    (1,425
    )Residential real estate
    
    
    (26
    )
    
    
    (251
    )
    
    
    (55
    )
    
    
    (9
    )
    

    
    (20
    )Total net loan losses
    
    
    (992
    )
    
    
    (2,040
    )
    
    
    (1,461
    )
    
    
    (2,051
    )
    
    
    (3,679
    )Reduction in ALL
    
    
    (3,334
    )
    
    
    (13,767
    )
    
    
    (6,133
    )
    
    
    (8,868
    )
    
    
    (6,588
    )ALL balance, end of period
    
    $
    62,461
    
    
    $
    61,146
    
    
    $
    67,668
    
    
    $
    72,524
    
    
    $
    79,842AULPC balance, beginning of period
    
    $
    3,765
    
    
    $
    3,151
    
    
    $
    3,892
    
    
    $
    4,325
    
    
    $
    (Reduction in) provision for AULPC
    
    
    (107
    )
    
    
    614
    
    
    
    (741
    )
    
    
    (433
    )
    
    
    4,325AULPC balance, end of period
    
    $
    3,658
    
    
    $
    3,765
    
    
    $
    3,151
    
    
    $
    3,892
    
    
    $
    4,325Total Allowance for Credit Losses
    
    $
    66,119
    
    
    $
    64,911
    
    
    $
    70,819
    
    
    $
    76,416
    
    
    $
    84,167ALL as a % of total participation
interests
    
    
    1.29
    %
    
    
    1.25
    %
    
    
    1.40
    %
    
    
    1.40
    %
    
    
    1.48
    %ACL as a % of total participation
interests
    
    
    1.37
    
    
    
    1.33
    
    
    
    1.46
    
    
    
    1.48
    
    
    
    1.56
 The ALL plus the AULPC was 1.37% of total loan participations at the end of the first quarter
2005 and covered 383% of non-performing assets (NPAs). This compares to 1.33% of total loan
participations, which covered 454% of NPAs, at the end of December 31, 2004. In Managements
judgment, both the ALL and the AULPC are adequate at March 31, 2005, to cover probable credit
losses inherent in the loan participation portfolio and loan participation commitments. Additional
information regarding asset quality appears in the Credit Quality section of the Form 10-K for
the year ended December 31, 2004. Total net charge-offs for the quarter ended March 31, 2005, were $1.0 million, or an
annualized 0.08% of average loan participation interests, down from $3.7 million, or 0.28%, in the
same quarter a year ago. 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 20




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##### Table of Contents



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 5 - Quarterly Non-Performing Assets(in thousands of dollars)
    
    2005
    
    
    2004First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstParticipation interests in
non-accrual loansCommercial
    
    $
    373
    
    
    $
    425
    
    
    $
    973
    
    
    $
    3,988
    
    
    $
    5,881Commercial Real Estate
    
    
    10,641
    
    
    
    6,990
    
    
    
    10,460
    
    
    
    9,218
    
    
    
    10,820Consumer (1)
    
    
    2,178
    
    
    
    2,692
    
    
    
    2,692
    
    
    
    
    
    
    
    Residential Real Estate
    
    
    4,068
    
    
    
    4,205
    
    
    
    4,749
    
    
    
    4,900
    
    
    
    5,335Total Non-Performing Assets
    
    $
    17,260
    
    
    $
    14,312
    
    
    $
    18,874
    
    
    $
    18,106
    
    
    $
    22,036Participations in Accruing Loans
Past Due 90 Days or More
    
    $
    14,178
    
    
    $
    11,686
    
    
    $
    8,466
    
    
    $
    10,255
    
    
    $
    14,923NPAs as a % of total
participation interests
    
    
    0.36
    %
    
    
    0.29
    %
    
    
    0.39
    %
    
    
    0.35
    %
    
    
    0.41
    %ALL as a % of NPAs
    
    
    362
    
    
    
    427
    
    
    
    359
    
    
    
    401
    
    
    
    362ALL and AULPC as a % of NPAs
    
    
    383
    
    
    
    454
    
    
    
    375
    
    
    
    422
    
    
    
    382
   (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 $17.3 million at March 31, 2005, from $22.0 million at March 31,
2004, representing 0.36% and 0.41% of total participation interests, respectively. In the second
quarter of 2004, the Banks credit workout group identified economically attractive opportunities
to sell $4.4 million lower quality loans, 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 increased to
$14.2 million at March 31, 2005, from $11.7 million at December 31, 2004, and decreased from $14.9
million at March 31, 2004. 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 for the year ended December
31, 2004. Non-Interest Income and Non-Interest Expense Non-interest income was $1.8 million for the first quarter of 2005 and $1.7 million for the
comparable quarter a year ago. This income primarily represents rental income received from the
Bank related to leasehold improvements owned by HPCLI. Rental income was $1.6 million and $1.5
million for three-months ended March 31, 2005 and 2004, respectively. Also, non-interest income
includes fees from the Bank for use of HPCIs assets as collateral for the Banks 21




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##### Table of Contents



advances from the
Federal Home Loan Bank (FHLB). These fees totaled $0.2 million for each of the three-month periods
ended March 31, 2005, and 2004. 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 first quarter of 2005 was $4.4 million compared with $3.6 million
for the same period last year. 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 first quarter 2005, servicing
costs amounted to $2.9 million, up from the $2.1 million recorded in the same period of 2004. 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-month period ended March 31, 2005 and 2004 was $98,000 and $23,000, respectively. 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 approximately 3.7%. 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 March 31, 2005, and assuming no new loan
participation volumes, interest income for the next 12 month period would be expected to increase
by 7.4% based on a gradual 200 basis point increase in rates above the forward rates implied in the
March 31, 2005, yield curve. Interest income would be expected to decline 7.5% in the event of a
gradual 200 basis point decline in rates from the forward rates implied in the March yield curve.
As of March 31, 2005, approximately 72% of the loan participation portfolio had variable rates. 22




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OFF-BALANCE SHEET ARRANGEMENTS Under the terms of the participation and subparticipation agreements, HPCI is obligated to
make funds or credit available to the Bank, either directly or indirectly through Holdings so that
the Bank may extend credit 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 March 31, 2005, December 31, 2004, and March 31, 2004, HPCIs unfunded commitments totaled
$734.5 million, $761.4 million, and $848.7 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 fund its existing loan participation commitments, to acquire additional participation
interests, and to pay operating expenses and dividends. Unfunded commitments and additional
participation interests in loans are funded with the proceeds from repayment of principal balances
by individual borrowers, utilization of existing cash and cash equivalent funds, and if necessary,
new capital contributions. Payment of operating expenses and dividends will be funded through cash
generated by operations. In managing liquidity, HPCI takes into account forecasted principal and interest payments on
loan participations as well as various legal limitations placed on a REIT. To the extent that
additional funding is required, HPCI may raise such funds through retention of cash flow, debt
financings, additional equity offerings, or a combination of these methods. However, any cash flow
retention must be consistent with the provisions of the Internal Revenue Code requiring the
distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and
must take into account taxes that would be imposed on undistributed income. At March 31, 2005, December 31, 2004, and March 31, 2004, HPCI maintained interest bearing and
non-interest bearing cash balances with the Bank totaling $328.3 million, $800.3 million, and $86.9
million, respectively. The increase in interest bearing and non-interest bearing cash from 2003 to
2004, was a result of the dividend on common stock and return of capital declared in 2004, but not
paid until January 2005. HPCI maintains and transacts all of its cash activity with the Bank and
may invest available funds in Eurodollar deposits with the Bank for a term of not more than 30 days
at market rates. At March 31, 2005, HPCI had no material liabilities or commitments, other than unfunded loan
commitments and dividends payable. 23




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Item 3. Quantitative And Qualitative Disclosures About Market Risk Quantitative and qualitative disclosures for the current period can be found in the Market
Risk section of this report, which includes changes in market risk exposures from disclosures
presented in HPCIs Form 10-K for the year ended December 31, 2004. 
 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. There have not been any changes in 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) during the quarter ended
March 31, 2005, to which this report relates, that have materially affected, or are reasonably
likely to materially affect, HPCIs internal control over financial reporting. 24




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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 (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).
    
    Third Amended and Restated Loan Participation
Agreement, dated May 12, 2005, between The Huntington National Bank and
Huntington Preferred Capital Holdings, Inc.(b).
    
    Third Amended and Restated Loan
Subparticipation Agreement, dated May 12, 2005, between Huntington
Preferred Capital Holdings, Inc. and Huntington Preferred Capital, Inc.(c).
    
    Second Amended and Restated Loan Participation
Agreement, dated May 12, 2005, between The Huntington National Bank and
Huntington Preferred Capital, Inc.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.
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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 13th day of May, 2005. HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant) By:
    
    /s/ Donald R. Kimble
    
    By:
    
    /s/ Thomas P. ReedDonald R. Kimble
    
    
    
    Thomas P. ReedPresident and Director
    
    
    
    Vice President and Director(Principal Executive Officer)
    
    
    
    (Principal Financial and Accounting Officer)
 26