Huntington Preferred Capital 10Q 2009 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED September 30, 2009

Commission File Number: 000-33243

Huntington Preferred Capital, Inc.


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

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number(614) 480-8300

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

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

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


Large accelerated filero		Accelerated filero		Non-accelerated filerþ(Do not check if a smaller reporting company)		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).oYesþ No

As of October 31, 2009, 14,000,000 shares of common stock without par value were outstanding, all of which were held by affiliates of the registrant.

HUNTINGTON PREFERRED CAPITAL, INC.

INDEX


Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Balance Sheets at September 30, 2009, December 31, 2008, and September 30, 2008			3

Condensed Statements of Income for the three months and nine months ended September 30, 2009 and 2008			4

Condensed Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2009 and 2008			5

Condensed Statements of Cash Flows for the nine months ended September 30, 2009 and 2008			6

Notes to Unaudited Condensed Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16

Item 3. Quantitative and Qualitative Disclosures about Market Risk			31

Item 4. Controls and Procedures			31

Item 4T. Controls and Procedures			31

PART II. OTHER INFORMATION

Item 6. Exhibits			31

Signatures			32

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1

Part 1. Financial Information


Item 1.		Financial Statements

Huntington Preferred Capital, Inc.

Condensed Balance Sheets

(Unaudited)


	September 30,			December 31,			September 30,
(in thousands, except share data)	2009			2008			2008
Assets
Cash and interest bearing deposits with The Huntington National Bank	$	653,865		$	293,009		$	45,930
Due from The Huntington National Bank		56,589			38,423			82,165
Loan participation interests:
Commercial real estate		3,073,289			3,433,872			3,554,080
Consumer and residential real estate		790,829			974,619			1,023,069

Total loan participation interests		3,864,118			4,408,491			4,577,149
Allowance for loan participation losses		(97,331	)		(65,456	)		(72,073	)

Net loan participation interests		3,766,787			4,343,035			4,505,076

Accrued income and other assets		10,552			14,101			15,881


Total assets	$	4,487,793		$	4,688,568		$	4,649,052


Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments	$	1,649		$	2,301		$	3,423
Dividends and distributions payable		3,257			225,000			10,232
Other liabilities		63			50			71

Total liabilities		4,969			227,351			13,726


Shareholders’ Equity
Preferred 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			1,000
Preferred 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			400,000
Preferred securities, Class C, 7.875% noncumulative and conditionally exchangeable; $25 par and liquidation value per share; 2,000,000 shares authorized, issued, and outstanding		50,000			50,000			50,000
Preferred securities, Class D, variable-rate, noncumulative, and conditionally exchangeable; $25 par and liquidation value per share; 14,000,000 shares authorized, issued, and outstanding		350,000			350,000			350,000
Preferred 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		3,660,217			3,660,217			3,660,959
Retained earnings		21,607			—			173,367

Total shareholders’ equity		4,482,824			4,461,217			4,635,326


Total liabilities and shareholders’ equity	$	4,487,793		$	4,688,568		$	4,649,052

See notes to unaudited condensed financial statements.

Huntington Preferred Capital, Inc.

Condensed Statements of Income

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2009			2008			2009			2008
Interest and fee income
Interest on loan participation interests:
Commercial real estate		26,575			44,375			82,972			131,457
Consumer and residential real estate		13,392			17,454			43,146			55,403

Total loan participation interest income		39,967			61,829			126,118			186,860
Fees from loan participation interests		379			274			938			921
Interest on deposits with The Huntington National Bank		395			830			781			4,788

Total interest and fee income		40,741			62,933			127,837			192,569


Provision for (reduction in allowances for) credit losses		27,701			(7,437	)		87,186			(13,661	)


Interest income after provision for (reduction in allowances for) credit losses		13,040			70,370			40,651			206,230


Noninterest income:
Rental income		17			17			49			50
Collateral fees		609			744			1,926			2,253

Total noninterest income		626			761			1,975			2,303


Noninterest expense:
Servicing costs		2,264			2,718			7,202			8,260
Other		162			182			562			573

Total noninterest expense		2,426			2,900			7,764			8,833


Net income	$	11,240		$	68,231		$	34,862		$	199,700


Dividends declared on preferred securities		(3,507	)		(7,632	)		(13,255	)		(26,333	)


Net income applicable to common shares	$	7,733		$	60,599		$	21,607		$	173,367

See notes to unaudited condensed financial statements.

Huntington Preferred Capital, Inc.

Condensed Statements of Changes in Shareholders’ Equity

(Unaudited)


	Preferred, Class A				Preferred, Class B				Preferred, Class C
(in thousands)	Shares		Amount		Shares		Amount		Shares		Amount

Nine Months Ended September 30, 2008:
Balance, beginning of period		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income


Balance, end of the period		1	$	1,000		400	$	400,000		2,000	$	50,000


Nine Months Ended September 30, 2009:
Balance, beginning of period		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income


Balance, end of the period		1	$	1,000		400	$	400,000		2,000	$	50,000


	Preferred, Class D				Preferred				Common				Retained
(in thousands)	Shares		Amount		Shares		Amount		Shares		Amount		Earnings			Total
Nine Months Ended September 30, 2008:
Balance, beginning of period		14,000	$	350,000		—	$	—		14,000	$	3,660,959	$	—		$	4,461,959
Comprehensive Income:
Net income														199,700			199,700

Total comprehensive income																	199,700

Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(10,152	)		(10,152	)
Dividends declared on Class C preferred securities														(2,953	)		(2,953	)
Dividends declared on Class D preferred securities														(13,148	)		(13,148	)


Balance, end of the period		14,000	$	350,000		—	$	—		14,000	$	3,660,959	$	173,367		$	4,635,326


Nine Months Ended September 30, 2009:
Balance, beginning of period		14,000	$	350,000		—	$	—		14,000	$	3,660,217	$	—		$	4,461,217
Comprehensive Income:
Net income														34,862			34,862
Total comprehensive income																	34,862

Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(3,177	)		(3,177	)
Dividends declared on Class C preferred securities														(2,953	)		(2,953	)
Dividends declared on Class D preferred securities														(7,045	)		(7,045	)


Balance, end of the period		14,000	$	350,000		—	$	—		14,000		3,660,217		21,607		$	4,482,824

See notes to unaudited condensed financial statements.

Huntington Preferred Capital, Inc.

Condensed Statements of Cash Flows

(Unaudited)


	Nine Months Ended
	September 30,
(in thousands)	2009			2008

Operating activities
Net income	$	34,862		$	199,700
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (reduction in allowances for) credit losses		87,186			(13,661	)
Change in due to/from The Huntington National Bank		5,083			7,775
Other, net		3,562			5,918

Net cash provided by operating activities		130,693			199,732


Investing activities
Participation interests acquired		(1,151,578	)		(2,182,061	)
Sales and repayments of loans underlying participation interests		1,616,739			1,996,896


Net cash provided by (used for) investing activities		465,161			(185,165	)


Financing activities
Dividends paid on preferred securities		(9,998	)		(16,101	)
Dividends paid on common stock		(224,258	)		—
Return of capital to common shareholders		(742	)		—


Net cash used for financing activities		(234,998	)		(16,101	)


Increase (decrease) in cash and cash equivalents		360,856			(1,534	)

Cash and cash equivalents at beginning of year		293,009			47,464


Cash and cash equivalents at end of period	$	653,865		$	45,930


Supplemental information:
Dividends and distributions declared, not paid	$	3,257		$	10,232
Non cash change in loan participation activity with The Huntington National Bank		23,249			(32,041	)

See notes to unaudited condensed financial statements.

Notes to Unaudited Condensed Financial Statements

Note 1 — Organization

Huntington Preferred Capital, Inc. (HPCI or the Company) was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. HPCI’s principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to its shareholders. Three related parties own HPCI’s common stock: Huntington Capital Financing LLC (HCF); Huntington Preferred Capital II, Inc. (HPCII); and Huntington Preferred Capital Holdings, Inc. (Holdings).

HCF, HPCII, and Holdings are direct and indirect subsidiaries of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington Bancshares Incorporated (Huntington). Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At September 30, 2009, the Bank, on a consolidated basis with its subsidiaries, accounted for over 98% of Huntington’s consolidated total assets and net loss. Thus, for purposes of presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington to be substantially the same for these periods.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued on November 13, 2009. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.

Note 2 — Basis of Presentation and New Accounting Pronouncements

The accompanying unaudited condensed financial statements of HPCI reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. These unaudited condensed financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in HPCI’s Annual Report on Form 10-K for the year ended December 31, 2008 (Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

HPCI elected to be treated as a REIT for federal income tax purposes and intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, is not subject to federal income taxes.

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

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

FASB Accounting Standards Codification (ASC) Topic 810 — Consolidation (Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements —an amendment of ARB No. 51) (ASC 810).This accounting guidance was originally issued in December 2007 and is now included in ASC 810. The guidance requires that noncontrolling interests in subsidiaries be initially measured at fair value and classified as a separate component of equity. The guidance is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption was prohibited. The adoption of this new Statement had no impact on HPCI’s condensed financial statements.

ASC Topic 825—Financial Instruments (FSP FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments) (ASC 825).This accounting guidance was originally issued in April 2009 and is now included in ASC 825. The guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance was effective for interim reporting periods ending after June 15, 2009 (See Note 7).

ASC Topic 855 — Subsequent Events (Statement No. 165,Subsequent Events) (ASC 855).This accounting guidance was originally issued in May 2009 and is now included in ASC 855. The guidance establishes general standards of accounting for and disclosure of subsequent events. Subsequent events are events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance is effective for interim or annual periods ending after June 15, 2009. The adoption of this guidance was not material to HPCI’s financial statements.

ASC Topic 105 — Generally Accepted Accounting Principles (Statement No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162) (ASC 105).This accounting guidance was originally issued in June 2009 and is now included in ASC 105. The guidance identifies the FASB Accounting Standards Codification (Codification) as the single source of authoritative U.S. Generally Accepted Accounting Principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. The Codification reorganizes all previous GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. All existing standards that were used to create the Codification will be superseded, replacing the previous references to specific Statements of Financial Accounting Standards (SFAS) with numbers used in the Codification’s structural organization. The guidance is effective for interim and annual periods ending after September 15, 2009. After September 15, only one level of authoritative GAAP will exist, other than guidance issued by the Securities and Exchange Commission (SEC). All other accounting literature excluded from the Codification will be considered non-authoritative. The adoption of the Codification is not expected to have a material impact on the HPCI’s condensed financial statements.

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

There were no underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries, or business activity. Underlying loans were, however, generally collateralized by real estate. Loans made to borrowers in the five states of Ohio, Michigan, Indiana, Pennsylvania and Kentucky comprised 93.8%, 92.0%, and 91.9% of the portfolio at September 30, 2009, December 31, 2008, and September 30, 2008, respectively.

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


	September 30,		December 31,		September 30,
(in thousands)	2009		2008		2008
Commercial real estate	$	192,661	$	54,246	$	59,701
Consumer and residential real estate		5,467		6,041		6,834

Total participations in non-performing assets	$	198,128	$	60,287	$	66,535

Participations in accruing loans past due 90 days or more	$	10,294	$	9,543	$	8,315

Note 4 — Allowance for Credit Losses (ACL)

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

The following table reflects activity in the ACL for the three-month and nine-month periods ended September 30, 2009 and 2008:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2009			2008			2009			2008

ALPL balance, beginning of period	$	95,748		$	66,876		$	65,456		$	62,275
ALPL for loan participations acquired		9,331			15,828			18,134			31,824
Net loan losses		(36,080	)		(2,347	)		(74,097	)		(8,798	)
Provision for (reduction in allowance for) credit losses		28,332			(8,284	)		87,838			(13,228	)

ALPL balance, end of period	$	97,331		$	72,073		$	97,331		$	72,073


AULPC balance, beginning of period	$	2,280		$	2,576		$	2,301		$	3,856
Provision for (reduction in) AULPC		(631	)		847			(652	)		(433	)

AULPC balance, end of period	$	1,649		$	3,423		$	1,649		$	3,423


Total ACL	$	98,980		$	75,496		$	98,980		$	75,496

As of September 30, 2009, December 31, 2008, and September 30, 2008, HPCI’s unfunded loan commitments totaled $290.2 million, $486.6 million, and $626.5 million, respectively.

Note 5 — Preferred Dividends

Holders of Class A preferred securities, a majority of which are held by Holdings and the remainder by current and past employees of Huntington and the Bank, are entitled to receive, if, when, and as declared by the Board of Directors of HPCI out of funds legally available, dividends at a fixed rate of $80.00 per share per annum. Dividends on the Class A preferred securities, if declared, are payable annually in December to holders of record on the record date fixed for such purpose by the Board of Directors in advance of payment.

The holder of the Class B preferred securities, HPC Holdings-II, Inc., a direct non-bank subsidiary of Huntington, is entitled to receive, if, when, and as declared by the Board of Directors of HPCI out of funds legally available, dividends at a variable rate equal to three-month LIBOR published on the first day of each calendar quarter times par value. Dividends on the Class B preferred securities, which are declared quarterly, are payable annually and are non-cumulative. No dividend, except payable in common shares, may be declared or paid upon Class B preferred securities unless dividend obligations are satisfied on the Class A, Class C, and Class D preferred securities.

Holders of Class C preferred securities are entitled to receive, if, when, and as declared by the Board of Directors of HPCI out of funds legally available, dividends at a fixed rate of 7.875% per annum, of the initial liquidation preference of $25.00 per share, payable quarterly. Dividends accrue in each quarterly period from the first day of each period, whether or not dividends are paid with respect to the preceding period. Dividends are not cumulative and if no dividend is paid on the Class C preferred securities for a quarterly dividend period, the payment of dividends on HPCI’s common stock and other HPCI-issued securities ranking junior to the Class C preferred securities (i.e., Class B preferred securities) will be prohibited for that period and at least the following three quarterly dividend periods.

The holder of Class D preferred securities, Holdings, is entitled to receive, if, when, and as declared by the Board of Directors of HPCI out of funds legally available, dividends at a variable rate established at the beginning of each calendar quarter equal to three-month LIBOR published on the first day of each calendar quarter, plus 1.625%, times par value, payable quarterly. Dividends accrue in each quarterly period from the first day of each period, whether or not dividends are paid with respect to the preceding period. Dividends are not cumulative and if no dividend is paid on the Class D preferred securities for a quarterly dividend period, the payment of dividends on HPCI’s common stock and other HPCI-issued securities ranking junior to the Class D preferred securities (i.e.,Class B preferred securities) will be prohibited for that period and at least the following three quarterly dividend periods.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2009		2008		2009		2008
Class A preferred securities	$	—	$	—	$	80	$	80
Class B preferred securities		588		2,788		3,177		10,152
Class C preferred securities		984		984		2,953		2,953
Class D preferred securities		1,935		3,860		7,045		13,148

Total dividends declared	$	3,507	$	7,632	$	13,255	$	26,333

Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of the Bank’s available retained earnings. The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock. Based on these regulatory dividend limitation, the Bank could not have declared and paid a dividend at September 30, 2009, without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends on Class A, B, and C preferred securities without regulatory approval. The Office of the Comptroller of the Currency (OCC) has approved the payment of HPCI’s dividends on its preferred securities throughout 2008 and 2009. For the foreseeable future, management intends to request approval for any future dividend; however, there can be no assurance that the OCC will continue to approve future dividends.

Note 6 — Related Party Transactions

HPCI is a party to a Third Amended and Restated Loan Subparticipation Agreement with Holdings and a Second Amended and Restated Loan Participation Agreement with the Bank. The Bank is required, under the participation and/or subparticipation agreements, to service HPCI’s loan portfolio in a manner substantially the same as for similar work for transactions on its own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral positions, and submits and pursues insurance claims. In addition, the Bank provides accounting and reporting services to HPCI. The Bank is required to adhere to HPCI’s policies relating to the relationship between HPCI and the Bank and to pay all expenses related to the performance of the Bank’s duties under the participation and subparticipation agreements. All of these participation interests to date were acquired directly or indirectly from the Bank.

The Bank performs the servicing of the commercial real estate, consumer, and residential real estate loans underlying the participations held by HPCI in accordance with normal industry practice under the amended participation and subparticipation agreements. In its capacity as servicer, the Bank collects and holds the loan payments received on behalf of HPCI until the end of each month. Loan servicing costs totaled $2.3 million and $2.7 million for the three-month periods ended September 30, 2009 and 2008, respectively. For the respective nine-month periods, the costs were $7.2 million and $8.3 million.

In 2009 and 2008, the annual servicing rates the Bank charged with respect to outstanding principal balances were:


	January 1, 2008
	through
	September 30, 2009
Commercial real estate		0.125	%
Consumer		0.650	%
Residential real estate		0.267	%

Pursuant to the existing participation and sub-participation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time-to-time during the terms of the agreements. In lieu of paying higher servicing costs to the Bank with respect to commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial real estate loans. The Bank and HPCI performed a review of loan servicing fees in 2009, and have agreed to retain current servicing rates for all loan participation categories, including the continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed in 2010.

Huntington’s and the Bank’s personnel handle day-to-day operations of HPCI such as financial analysis and reporting, accounting, tax reporting, and other administrative functions. On a monthly basis, HPCI reimburses the Bank and Huntington for the cost related to the time spent by employees for performing these functions. These personnel costs totaled $0.1 million for both of the three-month periods ended September 30, 2009 and 2008, and are included in other non-interest expense. For each of the nine-month periods ended September 30, 2009 and 2008, the cost was $0.3 million.

The following table represents the ownership of HPCI’s outstanding common and preferred securities as of September 30, 2009:


	Number of
	Common		Number of Preferred Securities
Shareholder:	Shares		Class A		Class B		Class C		Class D
Held by related parties:
HPCII		4,550,000		—		—		—		—
HCF		6,580,000		—		—		—		—
Holdings		2,870,000		895		—		—		14,000,000
HPC Holdings-II, Inc.		—		—		400,000		—		—

Total held by related parties		14,000,000		895		400,000		—		14,000,000


Other shareholders		—		105		—		2,000,000		—


Total shares outstanding		14,000,000		1,000		400,000		2,000,000		14,000,000

As of September 30, 2009, 10.5% of the Class A preferred securities were owned by current and past employees of Huntington and its subsidiaries in addition to the 89.5% owned by Holdings. The Class A preferred securities are non-voting. All of the Class B preferred securities are owned by HPC Holdings-II, Inc., a non-bank subsidiary of Huntington, and are non-voting. In 2001, the Class C preferred securities were obtained by Holdings, who sold the securities to the public. Various board members and executive officers of HPCI have purchased a portion of the Class C preferred securities. At September 30, 2009, HPCI board members and executive officers beneficially owned, in the aggregate, a total of 6,811 shares, or 0.34% of the Class C preferred securities. All of the Class D preferred securities are owned by Holdings. Dividends declared and accrued to the Class C shareholders for the first nine months of 2009 were approximately $3.0 million.

Both the Class C and Class D preferred securities are entitled to one-tenth of one vote per share on all matters submitted to HPCI shareholders. The Class C and Class D preferred securities are exchangeable, without shareholder approval or any action of shareholders, for preferred securities of the Bank with substantially equivalent terms as to dividends, liquidation preference, and redemption if the Office of the Comptroller of the Currency (OCC) so directs only if the Bank becomes, or may in the near term become, undercapitalized or the Bank is placed in conservatorship or receivership. The Class D preferred securities are currently redeemable and Class C preferred securities are redeemable at HPCI’s option on or after December 31, 2021, with prior consent of the OCC. In the event HPCI redeems its Class C or Class D preferred securities, holders of such securities will be entitled to receive $25.00 per share plus accrued and unpaid dividends on such shares. The redemption amount may be significantly different than the current market price of the Class C or Class D preferred securities.

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

HPCI had a noninterest bearing receivable from the Bank of $56.6 million at September 30, 2009, $38.4 million at December 31, 2008, and $82.2 million at September 30, 2008. The balances represent the net settlement amounts due from, the Bank for the last month of the period’s activity, and are settled shortly after period-end. Principal and interest payments on loan participations remitted by customers are due from the Bank, while new loan participation purchases are due to the Bank.

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

HPCI maintains and transacts all of its cash activity through the Bank. Typically, cash is invested with the Bank in an interest-bearing account. These interest-bearing balances are invested overnight or may be invested in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

Note 7 — Fair Value of Financial Instruments

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

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

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

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

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

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

Periodically, HPCI records adjustments of collateral-dependent loan participation interest measured for impairment when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In cases where the carrying value exceeds the fair value of the collateral, an impairment charge is recognized. During 2009, HPCI identified $103.7 million of loans where the carrying value exceeded the fair value of the underlying collateral for the loan. These loans were written down to their fair value (a level 3 input) of $77.3 million and a fair value loss of $26.4 million was recorded within the provision for credit losses.

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

Cash and interest-bearing deposits, and due from The Huntington National Bank— The carrying value approximates the fair value.

Loan participation interests— Underlying variable rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of probable losses and the credit risk associated in the loan portfolio. As of September 30, 2009, the carrying amount of $3.8 billion corresponded to a fair value of $2.8 billion. At September 30, 2009, the valuation of the loan portfolio reflected discounts that HPCI believed are consistent with transactions occurring in the market place.

Note 8 — Commitments and Contingencies

The Bank is eligible to obtain collateralized advances from various federal and government-sponsored agencies such as the Federal Home Loan Bank. From time-to-time, HPCI may be asked to act 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 the FHLB falls within the definition of Permitted Indebtedness (as defined in HPCI’s articles of incorporation) and, therefore, HPCI is not required to obtain the consent of the holders of its common or preferred securities for any such guarantee and/or pledge.

Currently, HPCI’s assets have been used to collateralize only one such facility. The Bank has a line of credit from the FHLB, limited to $3.1 billion as of September 30, 2009, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had borrowings of $0.9 billion under this facility. This was down from borrowings of $2.6 billion at December 31, 2008.

HPCI has entered into an Amended and Restated Agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize the Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess of an aggregate dollar amount or aggregate percentage of such assets established from time-to-time by HPCI’s board of directors, including a majority of HPCI’s independent directors. The pledge limit was established by HPCI’s board at 25% of total assets, or approximately $1.1 billion as of September 30, 2009, as reflected in HPCI’s month-end management report. This pledge limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors. The amount of HPCI’s participation interests pledged was $0.7 billion at September 30, 2009. In 2009, the loans pledged consisted of 1-4 family residential mortgage loans. The agreement also provides that the Bank will pay HPCI a monthly fee based upon the total loans pledged by HPCI. The Bank paid HPCI a total of $0.6 million and $0.7 million for the three months ended September 30, 2009 and 2008, respectively, as compensation for making such assets available to the Bank. The amounts paid to HPCI for the first nine months of 2009 and 2008 were $1.9 million and $2.3 million, respectively. The fee represented thirty-five basis points per year on total pledged loans.

Under the terms of the participation and subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank, either directly or indirectly through Holdings, so that the Bank may extend credit to any borrowers, or pay letters of credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying HPCI’s participation interests. As of September 30, 2009, December 31, 2008, and September 30, 2008, HPCI’s unfunded loan commitments totaled $290.2 million, $486.6 million, and $626.5 million, respectively.

During 2008, the State of Indiana proposed adjustments to HPCI’s previously filed tax returns. Management believes that HPCI’s positions taken related to such proposed adjustments were correct and supported by applicable statutes, regulations, or judicial authority, and intends to vigorously defend them. Although no assurance can be given, we believe that the resolution of this examination will not have a material adverse impact on HPCI’s financial position or results of operations.

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.

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

INTRODUCTION

Huntington Preferred Capital, Inc. (HPCI or the Company) is an Ohio corporation operating as a real estate investment trust (REIT) for federal income tax purposes. HPCI’s principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to its shareholders.

HPCI is a party to a Third Amended and Restated Loan Subparticipation Agreement with Huntington Preferred Capital Holdings, Inc. (Holdings) and a Second Amended and Restated Loan Participation Agreement with The Huntington National Bank (the Bank). The Bank is required, under the participation and/or subparticipation agreements, to service HPCI’s loan portfolio in a manner substantially the same as for similar work for transactions on its own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral positions, and submits and pursues insurance claims. In addition, the Bank provides to HPCI accounting and reporting services as required. The Bank is required to adhere to HPCI’s policies relating to the relationship between HPCI and the Bank and to pay all expenses related to the performance of the Bank’s duties under the participation and subparticipation agreements. All of these participation interests to date were acquired directly or indirectly from the Bank.

The following discussion and analysis provides information the Company believes is necessary for understanding the financial condition, changes in financial condition, results of operations, and cash flows and should be read in conjunction with the financial statements, notes, and other information contained in this report. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) appearing in HPCI’s Annual Report on Form 10-K for the year ended December 31, 2008 (Form 10-K) should be read in conjunction with this interim MD&A.

Forward-looking Statements

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

By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth under the heading “Risk Factors” included in Item 1A of HPCI’s Form 10-K and other factors described in this report and from time to time in other filings with the Securities and Exchange Commission (SEC).

Management encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. HPCI assumes no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.

Risk Factors

HPCI is subject to a number of risks that may adversely affect its financial condition or results of operation, many of which are outside of the Company’s direct control, though efforts are made to manage those risks while optimizing returns. Credit risk related to single family homebuilders is of particular concern in the current economy. See “Credit Risk – Single family homebuilders” on page 23 of this report. Additionally, more information on risk is set forth under the heading “Risk Factors” included in Item 1A of HPCI’s Form 10-K, and subsequent filings with the SEC.

Update to Risk Factors

During the first nine months of 2009, the Bank’s and HPCI’s commercial and residential real estate and real estate-related portfolios continued to be affected by the ongoing reduction in real estate values and reduced levels of sales and, more generally, HPCI’s participation interest portfolio has been affected by the sustained economic weakness of the Midwest markets and the impact of higher unemployment rates. The continued economic weakness could adversely impact HPCI’s business, financial condition, liquidity, capital, and results of operations, as well as the Bank’s financial condition, liquidity, capital, capital ratios, and results of operations.

In general, credit quality performance continued to be under pressure during the first nine months of 2009, with nonperforming assets (NPAs) increasing at September 30, 2009, compared with December 31, 2008, and September 30, 2008. If the credit quality of the Bank’s customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the allowance for loan losses is not adequate, the Bank’s business, financial condition, liquidity, capital, capital ratios, and results of operations could be materially adversely affected. As of September 30, 2009, the Bank has excess capital of $770 million above “well-capitalized” levels.

The majority of the HPCI’s credit risk is associated with lending activities, as the acceptance and management of credit risk is central to profitable lending. Credit risk is mitigated through a combination of credit policies and processes, market risk management activities, and portfolio diversification. However, adverse changes in the HPCI’s borrower’s ability to meet their financial obligations under agreed upon terms and, in some cases, to the value of the assets securing loans to HPCI’s borrower’s may increase HPCI’s credit risk. The real estate-related portfolios have continued to be negatively affected by the ongoing reduction in real estate values and reduced levels of sales and leasing activities. More generally, all of HPCI’s participation interests, particularly its construction and commercial real estate participation interests, have been affected by the sustained economic weakness of markets in the Midwest and the impact of higher unemployment rates. An increase in the number of delinquencies, bankruptcies, or defaults could negatively impact HPCI’s business and result in a higher level of related nonperforming assets, net charge-offs, and provision for allowances for credit losses. It is HPCI’s policy to rely on the Bank’s detailed quarterly review of the ALPL for adequacy considering economic conditions and trends, collateral values, and credit quality indicators, including past charge-off experience and levels of past due loans and NPAs. There is no certainty that the ALPL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries, or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ALPL is not adequate, HPCI’s business, financial condition, ability to pay dividends, liquidity, capital, and results of operations could be materially adversely affected.

Critical Accounting Policies

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

Use of Significant Estimates

The preparation of financial statements in conformity with GAAP requires Management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in the Company’s financial statements. An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this interim report should understand that estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. HPCI’s Management has identified the most significant accounting estimates and their related application in its Form 10-K.

Total Allowances for Credit Losses (ACL)

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

The ACL of $99.0 million at September 30, 2009, was 2.56% of total loan participation interests. To illustrate the potential effect on the financial statements of our estimates of the ACL, a 10 basis point, or 3.9%, increase would have required $3.9 million in additional reserves (funded by additional provision for credit losses), which would have negatively impacted the net income of the first nine-month period of 2009 by approximately $3.9 million. The ACL of $99.0 million at September 30, 2009, represented a 46% increase from $67.8 million at December 31, 2008.

QUALIFICATION TESTS

Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At September 30, 2009, 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 2008, HPCI met all annual income and distribution tests.

HPCI operates in a manner that will not cause it to be deemed an investment company under the Investment Company Act. The Investment Company Act exempts from registration as an investment company an entity that is primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (Qualifying Interests). Under positions taken by the SEC staff in no-action letters, in order to qualify for this exemption, HPCI must invest at least 55% of its assets in Qualifying Interests and an additional 25% of its assets in real estate-related assets, although this percentage may be reduced to the extent that more than 55% of its assets are invested in Qualifying Interests. The assets in which HPCI may invest under the Internal Revenue Code therefore may be further limited by the provisions of the Investment Company Act and positions taken by the SEC staff. At September 30, 2009, HPCI was exempt from registration as an investment company under the Investment Company Act and intends to operate its business in a manner that will maintain this exemption.

RESULTS OF OPERATIONS

HPCI’s income is primarily derived from its participation in loans acquired from the Bank and Holdings. Income varies based on the level of these assets and their respective interest rates. The cash flows from these assets are used to satisfy HPCI’s preferred dividend obligations. The preferred securities are considered equity and, therefore, the dividends are not reflected as interest expense.

The following table details the results of operations for the last five quarters. The decrease in net income for the third quarter of 2009, compared with same period of 2008, was primarily the result of higher provision for credit losses, as well as lower interest and fee income.

Table 1 — Quarterly Statements of Income


	2009									2008						3Q09 vs 3Q08
(in thousands)	Third			Second			First			Fourth			Third			$ Chg			% Chg

Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	26,575		$	27,071		$	29,326		$	44,591		$	44,375		$	(17,800	)		(40.1	)%
Consumer and residential real estate		13,392			14,278			15,476			16,614			17,454			(4,062	)		(23.3	)

Total loan participation interest income		39,967			41,349			44,802			61,205			61,829			(21,862	)		(35.4	)
Fees from loan participation interests		379			290			269			277			274			105			38.3
Interest on deposits with the Bank		395			284			102			498			830			(435	)		(52.4	)

Total interest and fee income		40,741			41,923			45,173			61,980			62,933			(22,192	)		(35.3	)
Provision for (reduction in allowances for) credit losses		27,701			40,497			18,988			(1,194	)		(7,437	)		35,138			N.M.

Interest income after provision for (reduction in allowances for) credit losses		13,040			1,426			26,185			63,174			70,370			(57,330	)		(81.5	)

Noninterest income:
Rental income		17			16			16			16			17			—			—
Collateral fees		609			640			677			745			744			(135	)		(18.1	)

Total noninterest income		626			656			693			761			761			(135	)		(17.7	)

Non-interest expense:
Servicing costs		2,264			2,387			2,551			2,675			2,718			(454	)		(16.7	)
Other		162			235			165			181			182			(20	)		(11.0	)

Total noninterest expense		2,426			2,622			2,716			2,856			2,900			(474	)		(16.3	)

Net income (loss)	$	11,240		$	(540	)	$	24,162		$	61,079		$	68,231		$	(56,991	)		(83.5	)

Dividends declared on preferred securities		(3,507	)		(4,613	)		(5,135	)		(10,188	)		(7,632	)		4,125			54.0

Net income (loss) applicable to commonshares⁽¹⁾	$	7,733		$	(5,153	)	$	19,027		$	50,891		$	60,599		$	(52,866	)		(87.2	)%


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

N.M. — Not Meaningful.

The following table details the results of operations for the year to date periods ending September 30, 2009 and 2008. The decrease in net income for the first nine-months of 2009, compared with the same period of 2008, was primarily the result of much higher provision for allowances for credit losses and lower interest income. The decline in net income applicable to common shares was the result of the decrease in net income, partially offset by lower dividends declared on preferred securities due to a reduction in the three-month LIBOR rates applicable to the Class B and Class D preferred securities.

Table 2 — Year-To-Date Statements of Income


	Nine Months Ended
	September 30,						2009 vs 2008
(in thousands)	2009			2008			$ Chg			% Chg
Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	82,972		$	131,457		$	(48,485	)		(36.9	)%
Consumer and residential real estate		43,146			55,403			(12,257	)		(22.1	)

Total loan participation interest income		126,118			186,860			(60,742	)		(32.5	)
Fees from loan participation interests		938			921			17			1.8
Interest on deposits with The Bank		781			4,788			(4,007	)		(83.7	)

Total interest and fee income		127,837			192,569			(64,732	)		(33.6	)

Provision for (reduction in allowances for) credit losses		87,186			(13,661	)		100,847			N.M.

Interest income after reduction in allowances for credit losses		40,651			206,230			(165,579	)		(80.3	)

Non-interest income:
Rental income		49			50			(1	)		(2.0	)
Collateral fees		1,926			2,253			(327	)		(14.5	)

Total non-interest income		1,975			2,303			(328	)		(14.2	)

Non-interest expense:
Servicing costs		7,202			8,260			(1,058	)		(12.8	)
Other		562			573			(11	)		(1.9	)

Total non-interest expense		7,764			8,833			(1,069	)		(12.1	)

Net income	$	34,862		$	199,700		$	(164,838	)		(82.5	)%

Dividends declared on preferred securities		(13,255	)		(26,333	)		13,078			49.7

Net income applicable to common shares⁽¹⁾	$	21,607		$	173,367		$	(151,760	)		(87.5	)%


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

Interest and Fee Income

HPCI’s primary source of revenue is interest and fee income on its participation interests in loans. At September 30, 2009 and 2008, HPCI did not have any interest-bearing liabilities or related interest expense. Interest income is impacted by changes in the levels of interest rates and earning assets. The yield on earning assets is the percentage of interest income to average earning assets.

The tables below show HPCI’s average balances, interest and fee income, and yields for the three-month and six-month periods ended September 30, 2009 and 2008:

Table 3 — Interest and Fee Income


	Three Months Ended September 30,
	2009							2008
	Average							Average
(in millions)	Balance		Income⁽¹⁾		Yield			Balance		Income⁽¹⁾		Yield
Loan participation interests:
Commercial real estate	$	3,116.7	$	26.9		3.42	%	$	3,459.9	$	44.6		5.12	%
Consumer and residential real estate		814.3		13.4		6.56			1,045.5		17.5		6.68

Total loan participations		3,931.0		40.3		4.07			4,505.4		62.1		5.48
Interest bearing deposits in the Bank		618.2		0.4		0.25			162.5		0.8		2.00

Total	$	4,549.2	$	40.7		3.55	%	$	4,667.9	$	62.9		5.36	%


⁽¹⁾		Income includes interest and fees.

Table 4 — Year-To-Date Interest and Fee Income


	Nine Months Ended September 30,
	2009							2008
	Average							Average
(in millions)	Balance		Income⁽¹⁾		Yield			Balance		Income⁽¹⁾		Yield
Loan participation interests:
Commercial real estate	$	3,230.5	$	83.6		3.46	%	$	3,212.5	$	132.0		5.49	%
Consumer and residential real estate		874.8		43.4		6.64			1,112.2		55.8		6.70

Total loan participations		4,105.3		127.0		4.14			4,324.7		187.8		5.80
Interest bearing deposits in the Bank		416.4		0.8		0.25			261.1		4.8		2.41

Total	$	4,521.7	$	127.8		3.78	%	$	4,585.8	$	192.6		5.61	%


⁽¹⁾		Income includes interest and fees.

Interest and fee income was $40.7 million for the three-months ended September 30, 2009, compared with $62.9 million for the year ago quarter. As shown in Table 3, the decrease in interest and fee income was the result of lower yields, as well as a $132.1 million increase in non-accrual loan balances in that same time period. For the three-months ended September 30, 2009 and 2008, the yield decreased 181 basis points to 3.55%, while average earning asset balances decreased $118.7 million, or 3%. For the nine-months ended September 30, 2009 and 2008, interest and fee income was $127.8 million and $192.6 million, respectively. As shown in Table 4, the decrease in interest and fee income was the result of lower yields and lower earning asset balances. At September 30, 2009, December 31, 2008, and September 30, 2008, approximately 71%, 69%, and 67%, respectively, of the portfolio was comprised of variable interest rate loan participations. The table above includes interest received on participations in loans that are on a non-accrual status in the individual portfolios.

Provision for (reduction in allowance for) credit losses

The provision for (reduction in allowance for) credit losses is the charge (credit) to earnings necessary to maintain the ACL at a level adequate to absorb Management’s estimate of inherent probable losses in the loan portfolio. Loan participations are acquired net of related allowance for loan participation losses (ALPL). As a result, this ALPL is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than HPCI recording provision for credit losses. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. As loan participations mature, refinance, or other such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL. Such adjustments for the quarter ended September 30, 2009 resulted in a provision for credit losses of $27.7 million compared with a reduction in credit losses of $7.4 million for the year-ago quarter. For the nine months ended September 30, 2009, the provision for credit losses was $87.2 million, compared with a reduction in allowances for credit losses of $13.7 million in the same period of the prior year. The increase in provision during 2009 was primarily related to the commercial real estate portfolio, and was a reflection of the overall economic slowdown in the Midwest markets. See discussion of allowances for credit losses on page 23.

Noninterest Income and Noninterest Expense

Noninterest income included fees from the Bank for use of HPCI’s assets as collateral for the Bank’s advances from the Federal Home Loan Bank (FHLB). These fees totaled $0.6 million and $0.7 million for the three-months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, non-interest income was $1.9 million and $2.3 million, respectively.(See Note 8 to the unaudited condensed financial statements for more information regarding use of HPCI’s assets as collateral for the Bank’s advances from the FHLB.)

Noninterest expense for the third quarter of 2009 was $2.4 million compared with $2.9 million for the same period last year. For the nine months ended September 30, 2009 and 2008, non-interest expense was $7.8 million and $8.8 million, respectively. The predominant component of HPCI’s noninterest expense was the fee paid to the Bank for servicing the loans underlying the participation interests. For the third quarter 2009, servicing costs amounted to $2.3 million, compared with $2.7 million for the comparable quarter of the prior year. The servicing costs for the nine-month period ended September 30, 2009 and 2008 totaled $7.2 million and $8.3 million, respectively. The annual servicing rates the Bank charged with respect to outstanding principal balances in 2009 and 2008 were:


	January 1, 2008
	through
	September 30, 2009
Commercial real estate		0.125	%
Consumer		0.650	%
Residential real estate		0.267	%

Pursuant to the existing participation and subparticipation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time to time during the terms of the agreements. In lieu of paying higher servicing costs to the Bank with respect to commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial real estate loans. The Bank and HPCI performed a review of loan servicing fees in 2009, and agreed to retain current servicing rates for all loan participation categories, including the continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed in 2010.

Provision for Income Taxes

HPCI has elected to be treated as a REIT for Federal income tax purposes and intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, is not subject to federal income taxes.

CREDIT EXPOSURE MIX

HPCI’s largest credit exposure was commercial real estate loan participation interests, which totaled $3.1 billion and represented 80% of total loan participation interests at September 30, 2009, compared with 78% at September 30, 2008. Total consumer and residential real estate loan participation interests were $0.8 billion and represented 20% of total loan participations at September 30, 2009, compared with 22% at September 30, 2008. These portfolios are discussed in greater detail below in the “Commercial Real Estate Credit” and “Consumer Credit” sections of this report.

Credit Risk

Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations under agreed upon terms. Credit risk is mitigated through a combination of credit policies and processes and portfolio diversification. These include loan origination/underwriting criteria, portfolio monitoring processes, and effective problem asset management.

HPCI’s exposure to credit risk is managed by personnel of the Bank through this credit risk management process. Based upon an assessment of the credit risk inherent in HPCI’s portfolio of loan participation interests, an ALPL is transferred from the Bank to HPCI on loans underlying the participations at the time the participations are acquired. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. As loan participations mature, refinance, or other such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL.

The maximum level of credit exposure to individual commercial borrowers is limited by policy guidelines based on the default probabilities associated with the credit facilities extended to each borrower or related group of borrowers. All authority to grant commitments is delegated through the Bank’s independent credit administration function, and is monitored and regularly updated in a centralized database.

Commercial Real Estate Credit

Commercial credit approvals are made by the Bank and are based on, among other factors, the financial strength of the borrower, assessment of the borrower’s management, industry sector trends, type of exposure, transaction structure, and the general economic outlook.

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

Commercial real estate loan participation interests outstanding by property type and location at September 30, 2009 were as follows:

Table 5 — Commercial Real Estate Loans by Property Type and Property Location


	At September 30, 2009
	Geographic Region														Percent
(in thousands of dollars)	Ohio		Michigan		Indiana		Kentucky		Pennsylvania		Other		Total Amount		of Total
Retail properties	$	409,608	$	91,778	$	58,726	$	36,121	$	29,856	$	76,993	$	703,082		22.8	%
Industrial and warehouse		386,978		153,888		67,812		13,529		5,931		35,857		663,995		21.6
Office		277,679		114,250		18,471		19,144		31,323		41,934		502,801		16.4
Raw land and other land uses		188,105		79,462		21,278		10,963		10,238		14,306		324,352		10.6
Multi family		116,880		10,972		67,928		40,736		9,180		12,541		258,237		8.4
Single family home builders		133,038		40,914		12,072		7,530		13,795		8,255		215,604		7.0
Health care		152,149		13,487		1,011		173		14,660		14,811		196,291		6.4
Other		115,181		56,980		6,184		1,722		5,940		22,920		208,927		6.8

Total	$	1,779,618	$	561,731	$	253,482	$	129,918	$	120,923	$	227,617	$	3,073,289		100.0	%

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

Retail properties

HPCI’s portfolio of commercial real estate loans secured by retail properties totaled $0.7 billion, or approximately 18% of total loans, and had an ALPL associated with these loans of $18.9 million at September 30, 2009. Credit approval in this loan segment is generally dependant on pre-leasing requirements, and net operating income from the project must cover interest expense by specified percentages when the loan is fully funded.

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

Single family homebuilders

HPCI’s portfolio of commercial real estate loans secured by builders of single family homes totaled $0.2 billion or approximately 6% of total loans, and had an ALPL associated with these loans of $11.9 million at September 30, 2009.

The housing market across the Bank’s geographic footprint remained stressed, reflecting relatively lower sales activity, declining prices, and excess inventories of houses to be sold, particularly impacting borrowers in the East Michigan and northern Ohio regions. Further, a portion of the loans extended to borrowers located within the Bank’s geographic regions finance projects outside of its geographic regions. HPCI anticipates the residential developer market will continue to be depressed, and anticipates continued pressure on the single family home builder segment in 2009. As previously mentioned, all significant exposures are monitored on a periodic basis. This process includes: (a) all loans greater than $50 thousand within this portfolio have been reviewed continuously over the past 18 months and continue to be monitored, (b) credit valuation adjustments have been made when appropriate based on the current condition of each relationship, and (c) reserves have been increased based on proactive risk identification and thorough borrower analysis.

Consumer and Residential Real Estate

Extensions of consumer credit by the Bank are based on, among other factors, the financial strength of the borrower, type of exposure, transaction structure, and the general economic outlook. Consumer credit decisions are generally made in a centralized environment utilizing decision models. Each credit extension is assigned a specific probability-of-default and loss-in-event-of-default. The probability-of-default is generally a function of the borrower’s credit bureau score, while the loss-in-event-of-default is related to the type of collateral and the loan-to-value ratio associated with the credit extension.

In consumer lending, credit risk is managed from a loan type and vintage performance analysis. All portfolio segments are continuously monitored for changes in delinquency trends and other asset quality indicators. The Bank makes extensive use of portfolio assessment models to continuously monitor the quality of the portfolio and identify under-performing segments. This information is then incorporated into future origination strategies. The Bank’s independent risk management group has a consumer process review component to ensure the effectiveness and efficiency of the consumer credit processes.

Allowance for Credit Losses (ACL)

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

The following table shows the activity in HPCI’s ALPL and AULPC for the last five quarters ended September 30, 2009 and for the nine months ended September 30, 2009 and 2008:

Table 6 — Allowances for Credit Loss Activity


	2009									2008
(in thousands)	Third			Second			First			Fourth			Third
ALPL balance, beginning of period	$	95,748		$	79,889		$	65,456		$	72,073		$	66,876
Allowance of loan participations acquired		9,331			4,673			4,130			4,461			15,828
Net loan losses
Commercial real estate		(32,138	)		(26,901	)		(6,742	)		(9,100	)		(179	)
Consumer and residential real estate		(3,942	)		(2,622	)		(1,752	)		(1,905	)		(2,168	)

Total net loan losses		(36,080	)		(29,523	)		(8,494	)		(11,005	)		(2,347	)
Provision for (reduction in) ALPL		28,332			40,709			18,797			(697	)		(8,284	)
Reserve transfer from AULPC		—			—			—			624			—

ALPL balance, end of period	$	97,331		$	95,748		$	79,889		$	65,456		$	72,073

AULPC balance, beginning of period	$	2,280		$	2,492		$	2,301		$	3,423		$	2,576
Provision for (reduction in) AULPC		(631	)		(212	)		191			(498	)		847
Reserve transfer to ALPL		—			—			—			(624	)		—

AULPC balance, end of period	$	1,649		$	2,280		$	2,492		$	2,301		$	3,423

Total Allowance for Credit Losses	$	98,980		$	98,028		$	82,381		$	67,757		$	75,496

ALPL as a % of total participation interests		2.52	%		2.41	%		1.91	%		1.48	%		1.57	%
ACL as a % of total participation interests		2.56			2.47			1.97			1.54			1.65


	Nine Months Ended
	September 30,
(in thousands)	2009			2008
ALPL balance, beginning of period	$	65,456		$	62,275
Allowance for loan participations acquired		18,134			31,824
Net loan losses
Commercial real estate		(65,781	)		(3,383	)
Consumer and residential real estate		(8,316	)		(5,415	)

Total net loan losses		(74,097	)		(8,798	)

Provision for (reduction in) ALPL		87,838			(13,228	)

ALPL balance, end of period	$	97,331		$	72,073


AULPC balance, beginning of period	$	2,301		$	3,856
Provision for (reduction in) AULPC		(652	)		(433	)

AULPC balance, end of period	$	1,649		$	3,423

Total Allowance for Credit Losses	$	98,980		$	75,496

The increase in allowance and provision during 2009 was primarily related to the commercial real estate portfolio, and was a reflection of the overall economic slowdown in the Midwest markets.

Total net charge-offs for the quarter ended September 30, 2009, were $36.1 million, or an annualized 3.64% of average loan participation interests, up from $2.3 million, or 0.21%, in the same quarter a year ago. For the nine months ended September 30, 2009, total net charge-offs were $74.1 million, or an annualized 2.41% of average participation interests, up from $8.8 million, or 0.27%, recorded in the same period in 2008.

The reduction in AULPC, which also is reflected on the income statement, was $0.6 million for the three-month period ended September 30, 2009, compared with a provision for $0.8 million in the same period of the prior year. For the nine months ended September 30, 2009, the reduction in AULPC was $0.7 million, compared with a reduction of $0.4 million in the same period of the prior year.

In Management’s judgment, both the ALPL and the AULPC were adequate at September 30, 2009, to cover credit losses inherent in the loan participation portfolio and portfolio of loan participation commitments. Additional information regarding asset quality appears in the “Credit Quality” section of the Form 10-K.

Non-Performing Assets (NPAs)

NPAs consist of participation interests in underlying loans that are no longer accruing interest. Underlying commercial real estate loans are placed on non-accrual status and stop accruing interest when collection of principal or interest is in doubt or generally when the underlying loan is 90-days past due. Underlying consumer and residential real estate loans are generally placed on non-accrual status when they became 180 days past due 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.

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

Table 7 — Quarterly Non-Performing Assets


	2009									2008
(in thousands)	Third			Second			First			Fourth			Third
Participation interests in non-accrual loans
Commercial real estate	$	192,661		$	166,810		$	100,675		$	54,246		$	59,701
Consumer and residential real estate		5,467			6,588			7,035			6,041			6,834

Total Non-Performing Assets	$	198,128		$	173,398		$	107,710		$	60,287		$	66,535

Participations in Accruing Loans Past Due 90 Days or More	$	10,294		$	6,113		$	4,909		$	9,543		$	8,315

NPAs as a % of total participation interests		5.13	%		4.36	%		2.57	%		1.37	%		1.45	%
ALPL as a % of NPAs		49			55			74			109			108
ACL as a % of NPAs		50			57			76			112			113

The increase in 2009 was principally related to the commercial real estate loan participations and was spread across the different property types of that portfolio.

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

Table 8 — Quarterly ALPL / Loan Participation Coverage Ratio Analysis


	2009									2008
(in thousands)	Third			Second			First			Fourth			Third

Loan participation interests ending balances:
Accruing Loans	$	3,665,990		$	3,800,218		$	4,077,200		$	4,348,204		$	4,510,614
Impaired loan evaluated on a pool basis		40,838			44,008			28,068			31,368			15,258
Impaired loans evaluated under ASC 310⁽¹⁾		157,290			129,390			79,642			28,919			51,277

Total non-accrual loans		198,128			173,398			107,710			60,287			66,535

Total loan participation interests	$	3,864,118		$	3,973,616		$	4,184,910		$	4,408,491		$	4,577,149


Allowance for loan participation interests (ALPL):
Accruing Loans	$	69,449		$	66,661		$	62,788		$	56,570		$	60,372
ALPL associated with impaired loans evaluated on a pool basis		3,109			3,707			2,103			1,965			1,279
ALPL determined in accordance with ASC 310⁽¹⁾		24,773			25,380			14,998			6,921			10,422

Total non-accrual loans		27,882			29,087			17,101			8,886			11,701

Total ALPL	$	97,331		$	95,748		$	79,889		$	65,456		$	72,073


ALPL as a % of loan participation interersts
Accruing Loans		1.89	%		1.75	%		1.54	%		1.30	%		1.34	%
Impaired loan evaluated on a pool basis		7.61			8.42			7.49			6.26			8.38
Impaired loans evaluated under ASC 310⁽¹⁾		15.75			19.62			18.83			23.93			20.32

Total non-accrual loans		14.07			16.77			15.88			14.74			17.59


Total loan participation interests		2.52	%		2.41	%		1.91	%		1.48	%		1.57	%


⁽¹⁾		Accounting Standards Codification Topic 310, “Receivables”

The increase in the ALPL related to the accruing portfolio reflected current economic conditions. The increase in NPA did not result in proportionate increase in ALPL, as a predominant portion of the increase was from loans whose allowance for credit losses is subject to specific reserves. As substantially all of these loans are supported by commercial real estate collateral, the specific reserve was based on an estimate of the net realizable value of the underlying collateral. In addition, it reflected some situations where there is no allowance because the net realizable value of the underlying collateral exceeded our net investment in the loan participation.

Under the participation and subparticipation agreements, the Bank may, in accordance with HPCI’s guidelines, dispose of any underlying loan that has an internal credit grade of substandard or lower, is placed in a non-performing status, or is renegotiated due to the financial deterioration of the borrower. The Bank may, in accordance with HPCI’s guidelines, institute foreclosure proceedings, exercise any power of sale contained in any mortgage or deed of trust, obtain a deed in lieu of foreclosure, or otherwise acquire title to a property underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the participation and subparticipation agreements. Prior to completion of foreclosure or liquidation, the participation is sold to the Bank at fair market value. The Bank then incurs all costs associated with repossession and foreclosure.

For a further discussion of “Credit Quality,” see HPCI’s Form 10-K for the year ended December 31, 2008.

MARKET RISK

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

Using the income simulation model for HPCI as of September 30, 2009, interest income for the next 12-month period would be expected to increase by $16.8 million, or 14.2%, based on a gradual 200 basis point increase in rates above the forward rates implied in the yield curve. Interest income would be expected to decline $8.4 million, or 7.1%, in the event of a gradual 200 basis point decline in rates from the forward rates implied in the yield curve. The gradual 200 basis point decline in market rates over the next 12-month period assumes market interest rates would reach a bottom and not fall below historical levels.

Using the economic value analysis model for HPCI as of September 30, 2009, the fair value of loan participation interests over the next 12 month period would be expected to increase $45.3 million, or 1.2%, based on an immediate 200 basis point decline in rates below the forward rates implied in the yield curve. Many of HPCI’s variable rate loans are based on LIBOR interest rates. Because the gradual 200 basis point decline in market rates over the next 12 month period assumes market interest rates would not fall below 0%, the market value would be expected to decline $68.4 million, or 1.7%.

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 borrower, or pay letters of credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying HPCI’s participation interests. At September 30, 2009, December 31, 2008, and September 30, 2008, HPCI’s unfunded commitments totaled $290.2 million, $486.6 million, and $626.5 million, respectively. It is expected that the existing cash balances and cash flows generated by the existing portfolio will be sufficient to meet these obligations.

LIQUIDITY AND CAPITAL RESOURCES

The objective of HPCI’s liquidity management is to ensure the availability of sufficient cash flows to fund its existing loan participation commitments, to acquire additional participation interests, and to pay operating expenses and dividends. Unfunded commitments and additional participation interests in loans are funded with the proceeds from repayment of principal balances by individual borrowers, utilization of existing cash and cash equivalent funds, and, if necessary, new capital contributions. Payment of operating expenses and dividends will be funded through cash generated by operations.

In managing liquidity, HPCI takes into account forecasted principal and interest payments on loan participations as well as various legal limitations placed on a REIT. To the extent that additional funding is required, HPCI may raise such funds through retention of cash flow, debt financings, additional equity offerings, or a combination of these methods. However, any cash flow retention must be consistent with the provisions of the Internal Revenue Code requiring the distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income.

At September 30, 2009, December 31, 2008, and September 30, 2008, HPCI maintained interest bearing and non-interest bearing cash balances with the Bank totaling $653.9 million, $293.0 million, and $45.9 million, respectively. HPCI maintains and transacts all of its cash activity with the Bank and may invest available funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

At September 30, 2009, HPCI had no material liabilities or contractual obligations, other than unfunded loan commitments of $290.2 million, with a weighted average remaining maturity of 1.3 years. In addition to anticipated cash flows, as noted above, HPCI has interest bearing and non-interest bearing cash balances with the bank totaling $653.9 million to supplement the funding of these liabilities and contractual commitments.

As of September 30, 2009 and December 31, 2008, shareholders’ equity was $4.5 billion. Shareholders’ equity was $4.6 billion as of September 30, 2008.

Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings. The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock. Based on these regulatory dividend limitations, the Bank could not have declared and paid a dividend at September 30, 2009, without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends without regulatory approval. The OCC has approved the payment of HPCI’s dividends on its preferred securities throughout 2008 and 2009. For the foreseeable future, management intends to request approval for any future dividends; however, there can be no assurance that the OCC will continue to approve future dividends.

Regulatory capital ratios are the primary metrics used by regulators in assessing the “safety and soundness” of banks. At September 30, 2009, the Bank met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for “well-capitalized” institutions. The capital ratios for the Bank at the end of the most recent five quarters are as follows:

Table 9 — Regulatory Capital Ratios


	2009									2008
	Third			Second			First			Fourth			Third
Tier 1 Leverage Ratio (5.00% “well-capitalized”)		6.48	%		6.46	%		5.95	%		5.99	%		6.36	%
Tier 1 Risk-based Capital Ratio (6.00% “well-capitalized”)		7.46			7.14			6.79			6.44			7.01
Total Risk-based Capital Ratio (10.00% “well-capitalized”)		11.75			11.35			11.00			10.71			10.25

During 2008, Huntington received $1.4 billion of equity capital by issuing to the U.S. Department of Treasury 1.4 million shares of its Series B Preferred Stock as a result of its participation in the Troubled Asset Relief Program (TARP) voluntary Capital Purchase Plan (CPP). During the 2008 fourth quarter, Huntington contributed $500 million of the capital received to the Bank in the form of subordinated debt qualified as Tier 2 capital. During the first nine months of 2009, Huntington also made cash contributions to the Bank’s common capital of $500 million, which qualified as Tier 1 capital to the Bank. These actions had a positive impact on the Bank’s capital ratios.

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

On October 22, 2009, Huntington announced an offer to purchase certain subordinated notes issued previously by the Bank. The offer established the cash prices that would be paid for each of the subordinated note issuances, and established a maximum amount available for purchase of up to $400 million of principal outstanding. The purpose of this offer was to redeem these obligations at prices and terms that Huntington believes are favorable. Any difference between the carrying value of the notes and the purchase price will be recorded as a pretax gain, net of expenses. While these securities qualify as Tier 2 capital, it is Huntington’s intention to replace this capital at the Bank with an intercompany subordinated note from the parent company. Therefore, any redemption should increase the quantity and quality of the Bank’s capital. Through November 4, 2009, the “Early Tender Date”, Huntington had received tenders of these subordinated notes having an aggregate principal amount of $370 million. Based on the terms and conditions of the offer, and the amount of tenders received through the “Early Tender Date”, Huntington anticipates a pretax gain of approximately $80 million -$90 million, including the impact of fair value adjustments from hedge accounting, will be recorded in the 2009 fourth quarter.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

HPCI maintains disclosure controls and procedures designed to ensure that the information disclosed in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported appropriately and on a timely basis. HPCI’s management, with the participation of its President (principal executive officer) and the Vice President (principal financial officer), evaluated the effectiveness of HPCI’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, HPCI’s President and Vice President have concluded that, as of the end of such period, HPCI’s disclosure controls and procedures are effective.

There have not been any changes in HPCI’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2009, to which this report relates, that have materially affected, or are reasonably likely to materially affect, HPCI’s internal control over financial reporting.

Item 4T. Controls and Procedures

Not applicable

PART II. OTHER INFORMATION

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

Item 6. Exhibits

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

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

(a)


	3.1.			Amended and Restated Articles of Incorporation (previously filed as Exhibit 3(a)(ii) to Amendment No. 4 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on October 12, 2001, and incorporated herein by reference.)

	3.2.			Code of Regulations (previously filed as Exhibit 3(b) to the Registrant’s Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 17, 2001, and incorporated herein by reference.)

	4.1			Specimen of certificate representing Class C preferred securities, previously filed as Exhibit 4 to the Registrant’s Amendment No. 1 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 31, 2001, and incorporated herein by reference.

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

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

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

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

	99.1.			Unaudited Condensed Consolidated Financial Statements of Huntington Bancshares Incorporated as of and for the three month and nine month periods ended September 30, 2009 and 2008.

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 November, 2009.

HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant)


By:		/s/ Donald R. Kimble Donald R. Kimble President and Director (Principal Executive Officer)				By:		/s/ Thomas P. Reed Thomas P. Reed Vice President and Director (Principal Financial and Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Bad

Huntington Preferred Capital (HPCCP) Inactive 10-Q2009 Q3 Quarterly report

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