Huntington Preferred Capital (HPCCP) 10-Q 2006 Q2 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 June 30, 2006

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  Yes     o  No

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

Large accelerated filer  o     Accelerated filero     Non-accelerated filer  þ

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

As of July 31, 2006, 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 I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets — At June 30, 2006, December 31, 2005, and June 30, 2005	3
	Condensed Consolidated Statements of Income — For the three-months and six-months ended June 30, 2006 and 2005	4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity — For the six-months ended June 30, 2006 and 2005	5
	Condensed Consolidated Statements of Cash Flows — For the six-months ended June 30, 2006 and 2005	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23
Part II. Other Information
Item 4.	Submission of Matters to a Vote of Shareholders	23
Item 6.	Exhibits	23
Signatures		25
EX-31(A)
EX-31(B)
EX-32(A)
EX-32(B)
EX-99(A)

2

Part I. Financial Information

Item 1. Financial Statements

Huntington Preferred Capital, Inc.

Condensed Consolidated Balance Sheets

	June 30,			December 31,			June 30,
(in thousands, except share data)	2006			2005			2005
	(Unaudited)						(Unaudited)
Assets
Cash and interest bearing deposits with The Huntington National Bank	$	308,796		$	810,102		$	458,480
Due from The Huntington National Bank		96,616			46,321			1,812
Loan participation interests:
Commercial		39,182			46,559			72,310
Commercial real estate		3,312,787			3,311,275			3,614,633
Consumer		933,111			997,094			896,201
Residential real estate		130,569			157,397			188,407
Total loan participation interests		4,415,649			4,512,325			4,771,551
Allowance for loan losses		(51,466	)		(57,530	)		(60,987	)
Net loan participation interests		4,364,183			4,454,795			4,710,564
Premises and equipment		19,642			21,683			23,862
Accrued income and other assets		20,733			20,984			19,573
Total assets	$	4,809,970		$	5,353,885		$	5,214,291
Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments	$	4,002		$	4,135		$	4,650
Dividends and distributions payable		9,624			700,000			9,922
Other liabilities		106			290			265
Total liabilities		13,732			704,425			14,837
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; 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; 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		3,848,460			3,848,460			4,268,776
Retained earnings		146,778			—			129,678
Total shareholders’ equity		4,796,238			4,649,460			5,199,454
Total liabilities and shareholders’ equity	$	4,809,970		$	5,353,885		$	5,214,291

See notes to unaudited condensed consolidated financial statements.

3

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2006			2005			2006			2005
Interest and fee income
Interest on loan participation interests:
Commercial	$	792		$	1,264		$	1,638		$	2,644
Commercial real estate		59,841			51,982			115,623			100,737
Consumer		16,067			14,687			32,767			28,612
Residential real estate		2,007			2,647			4,239			5,543
Total loan participation interest income		78,707			70,580			154,267			137,536
Fees from loan participation interests		279			491			572			1,119
Interest on deposits with The Huntington National Bank		3,290			2,570			4,781			4,043
Total interest and fee income		82,276			73,641			159,620			142,698
Reduction in allowances for credit losses		(5,203	)		(3,840	)		(14,386	)		(7,281	)
Interest income after reduction in allowances for credit losses		87,479			77,481			174,006			149,979
Non-interest income:
Rental income		1,591			1,591			3,182			3,181
Collateral fees		115			965			833			1,146
Total non-interest income		1,706			2,556			4,015			4,327
Non-interest expense:
Servicing costs		2,720			2,899			5,503			5,762
Depreciation and amortization		999			1,102			2,016			2,239
(Gain) loss on disposal of premises and equipment		—			388			(31	)		533
Other		202			169			372			409
Total non-interest expense		3,921			4,558			7,860			8,943
Income before provision for income taxes		85,264			75,479			170,161			145,363
Provision for income taxes		310			25			595			124
Net income	$	84,954		$	75,454		$	169,566		$	145,239
Dividends declared on preferred securities		(11,781	)		(8,256	)		(22,788	)		(15,561	)
Net income applicable to common shares	$	73,173		$	67,198		$	146,778		$	129,678

See notes to unaudited condensed consolidated financial statements.

4

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

	Preferred, Class A				Preferred, Class B				Preferred, Class C
(in thousands)	Shares		Securities		Shares		Securities		Shares		Securities
Six Months Ended June 30, 2005 (Unaudited):
Balance, beginning of period		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of period(Unaudited)		1	$	1,000		400	$	400,000		2,000	$	50,000
Six Months Ended June 30, 2006 (Unaudited):
Balance, beginning of period		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of period(Unaudited)		1	$	1,000		400	$	400,000		2,000	$	50,000

	Preferred, Class D				Preferred				Common				Retained
(in thousands)	Shares		Securities		Shares		Securities		Shares		Stock		Earnings			Total
Six Months Ended June 30, 2005 (Unaudited):
Balance, beginning of period		14,000	$	350,000		—	$	—		14,000	$	4,268,776	$	—		$	5,069,776
Comprehensive Income:
Net income														145,239			145,239
Total comprehensive income																	145,239
Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(5,690	)		(5,690	)
Dividends declared on Class C preferred securities														(1,969	)		(1,969	)
Dividends declared on Class D preferred securities														(7,822	)		(7,822	)
Balance, end of period(Unaudited)		14,000	$	350,000		—	$	—		14,000	$	4,268,776	$	129,678		$	5,199,454
Six Months Ended June 30, 2006 (Unaudited):
Balance, beginning of period		14,000	$	350,000		—	$	—		14,000	$	3,848,460	$	—		$	4,649,460
Comprehensive Income:
Net income														169,566			169,566
Total comprehensive income																	169,566
Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(9,544	)		(9,544	)
Dividends declared on Class C preferred securities														(1,969	)		(1,969	)
Dividends declared on Class D preferred securities														(11,195	)		(11,195	)
Balance, end of period(Unaudited)		14,000	$	350,000		—	$	—		14,000	$	3,848,460	$	146,778		$	4,796,238

See notes to unaudited condensed consolidated financial statements.

5

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	June 30,
(in thousands)	2006			2005
Operating activities
Net income	$	169,566		$	145,239
Adjustments to reconcile net income to net cash provided by operating activities:
Reduction of allowances for credit losses		(14,386	)		(7,281	)
Depreciation and amortization		2,016			2,239
Deferred income tax expense (benefit)		65			(216	)
(Gain) loss on disposal of premises and equipment		(31	)		533
Increase in due from The Huntington National Bank		(3,377	)		(1,637	)
(Decrease) increase in other liabilities		(184	)		215
Other, net		1,001			(176	)
Net cash provided by operating activities		154,670			138,916
Investing activities
Participation interests acquired		(1,439,604	)		(1,599,095	)
Sales and repayments of loans underlying participation interests		1,496,736			1,724,045
Proceeds from the sale of premises and equipment		56			—
Net cash provided by investing activities		57,188			124,950
Financing activities
Dividends paid on preferred securities		(13,164	)		(5,639	)
Dividends paid on common stock		(279,684	)		(263,798	)
Return of capital to common shareholders		(420,316	)		(336,202	)
Net cash used for financing activities		(713,164	)		(605,639	)
Change in cash and cash equivalents		(501,306	)		(341,773	)
Cash and cash equivalents at beginning of year		810,102			800,253
Cash and cash equivalents at end of period	$	308,796		$	458,480
Supplemental information:
Income taxes paid	$	677		$	—
Dividends and distributions declared, not paid		9,624			9,922
Change in loan participation activity due from The Huntington National Bank		46,918			—

See notes to unaudited condensed consolidated financial statements.

6

Notes to the Unaudited Condensed Consolidated Financial Statements

Note 1 — Organization

     Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. Four related parties own HPCI’s common stock: Huntington Capital Financing LLC (HCF); Huntington Preferred Capital II, Inc. (HPCII); Huntington Preferred Capital Holdings, Inc. (Holdings); and Huntington Bancshares Incorporated (Huntington). HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). 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. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At June 30, 2006, the Bank, on a consolidated basis with its subsidiaries, accounted for 99% of Huntington’s (on a consolidated basis) total assets and for the six months ended June 30, 2006, accounted for 95% of Huntington’s net income. Thus, consolidated financial statements for the Bank and for Huntington were substantially the same for these periods.

Note 2 — Basis of Presentation and New Accounting Pronouncements

     The accompanying unaudited condensed consolidated financial statements of HPCI reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in HPCI’s 2005 Annual Report on Form 10-K (Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

     HPCI elected to be treated as a REIT for federal income tax purposes and intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, is not subject to federal income taxes. HPCI’s subsidiary, HPCLI, elected to be treated as a taxable REIT subsidiary and, therefore, a separate provision related to its income taxes is included in the accompanying unaudited condensed consolidated financial statements.

     All of HPCI’s common stock is owned by 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.”

Financial Accounting Standards Board (FASB) Statement No. 154,Accounting Changes and Error Corrections– areplacement of APB Opinion No. 20 and FASB Statement No. 3(Statement No. 154)– In May 2005, the FASB issued Statement No. 154, which replaces APB Opinion No. 20,Accounting Changes, and Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this new pronouncement had no impact on HPCI’s financial condition, results of operations, or cash flows

7

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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

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

	June 30,		December 31,		June 30,
(in thousands)	2006		2005		2005
Commercial	$	108	$	147	$	1,069
Commercial real estate		16,834		20,746		17,965
Consumer		3,545		2,799		2,252
Residential real estate		1,687		2,923		4,652
Total participations in non-performing assets	$	22,174	$	26,615	$	25,938
Participations in accruing loans past due 90 days or more	$	6,079	$	3,188	$	12,036

     There were no underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries, or business activity. Underlying loans were, however, generally collateralized by real estate. Loans made to borrowers in the four states of Ohio, Michigan, Indiana, and Kentucky comprised 94.7%, 95.9%, and 96.2% of the portfolio at June 30, 2006, December 31, 2005, and June 30, 2005, respectively.

Note 4 — Allowances for Credit Losses (ACL)

     An allowance for loan participation losses (ALL) is transferred to HPCI from the Bank on loans underlying the participations at the time the participations are acquired. The allowances for credit losses (ACL) are comprised of the ALL and the allowance for unfunded loan participation commitments (AULPC). The following table reflects activity in the ACL for the three-month and six-month periods ended June 30, 2006 and 2005:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2006			2005			2006			2005
ALL balance, beginning of period	$	53,586		$	62,461		$	57,530		$	61,146
Allowance for loan participations acquired		5,172			6,880			11,634			12,521
Net loan losses		(2,272	)		(3,522	)		(3,445	)		(4,514	)
Reduction in ALL		(5,020	)		(3,894	)		(14,253	)		(7,228	)
Economic reserve transfer to AULPC		—			(938	)		—			(938	)
ALL balance, end of period	$	51,466		$	60,987		$	51,466		$	60,987
AULPC balance, beginning of period	$	4,185		$	3,658		$	4,135		$	3,765
Provision for (reduction in) AULPC		(183	)		54			(133	)		(53	)
Economic reserve transfer from ALL		—			938			—			938
AULPC balance, end of period	$	4,002		$	4,650		$	4,002		$	4,650
Total ACL	$	55,468		$	65,637		$	55,468		$	65,637

Note 5 — Preferred Dividends

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

8

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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

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

     The holder of Class D preferred securities, 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				Six Months Ended
	June 30,				June 30,
(in thousands)	2006		2005		2006		2005
Class A preferred securities	$	—	$	—	$	80	$	80
Class B preferred securities		5,000		3,120		9,544		5,690
Class C preferred securities		984		984		1,969		1,969
Class D preferred securities		5,797		4,152		11,195		7,822
Total dividends declared	$	11,781	$	8,256	$	22,788	$	15,561

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, commercial real estate, residential real estate, and consumer loans underlying the participations held by HPCI in accordance with normal industry practice under the amended participation 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

9

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

$2.7 million and $2.9 million for the three-month periods ended June 30, 2006 and 2005, respectively. For the respective six-month periods, the cost were $5.5 million and $5.8 million.

     In 2006 and 2005 the annual servicing rates the Bank charged with respect to outstanding principal balances were:

	July 1, 2005			January 1, 2005
	thru			thru
	June 30, 2006			June 30, 2005
Commercial and commercial real estate		0.125	%		0.125	%
Consumer		0.650	%		0.750	%
Residential real estate		0.267	%		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. Effective July 1, 2004, in lieu of paying higher servicing costs to the Bank with respect to commercial and commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial and commercial real estate loans transferred on or after July 1, 2004. The Bank and HPCI have performed a review of loan-servicing fees in 2006, 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 2007.

     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 are recorded in other non-interest expense and totaled $0.1 million for each of the three-month periods ended June 30, 2006 and 2005. For the respective six-month periods, the cost was $0.2 million for each period.

     The following table represents the ownership of HPCI’s outstanding common and preferred securities as of June 30, 2006:

	Number of
	Common		Number of Preferred Securities
Shareholder:	Shares		Class A		Class B		Class C		Class D
Held by related parties:
HPC II		4,550,000		—		—		—		—
HCF		6,580,000		—		—		—		—
Holdings		2,851,333		895		—		—		14,000,000
HPC Holdings-II, Inc.		—		—		400,000		—		—
Huntington		18,667		—		—		—		—
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 June 30, 2006, 10.5% of the Class A preferred securities were owned by current and past employees of Huntington and its subsidiaries in addition to the 89.5% owned by Holdings. The Class A preferred securities are non-voting. All of the Class B preferred securities are owned by HPC Holdings-II, Inc., a non-bank subsidiary of Huntington and are non-voting. In 2001, the Class C preferred securities were obtained by Holdings, who sold the securities to the public. Various board members and executive officers of HPCI have purchased a portion of the Class C preferred securities. At June 30, 2006, HPCI board members and executive officers beneficially owned, in

10

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

the aggregate, a total of 4,713 shares, or 0.236%, of the Class C preferred securities. All of the Class D preferred securities are owned by Holdings. Dividends paid to the Class C shareholders in the second quarter of 2006 were approximately $1.0 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 C and Class D preferred securities are redeemable at HPCI’s option on or after December 31, 2021, and December 31, 2006, respectively, with prior consent of the OCC. In the event HPCI redeems its Class C or Class D preferred securities, holders of such securities will be entitled to receive $25.00 per share plus accrued and unpaid dividends on such shares. The redemption amount may be significantly lower than the then current market price of the Class C or Class D preferred securities.

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

     HPCI’s premises and equipment were acquired from the Bank through Holdings. Leasehold improvements were subsequently contributed to HPCLI for its common shares in the fourth quarter of 2001. HPCLI charges rent to the Bank for use of applicable facilities by the Bank. The amount of rental income received by HPCLI for each of the three-months ended June 30, 2006 and 2005 was $1.6 million. The amount of rental income received by HPCLI for each of the six-months ended June 30, 2006 and 2005 was $3.2 million. Rental income is reflected as a component of non-interest income in the condensed consolidated statements of income.

     HPCI had a non-interest bearing receivable from the Bank of $96.6 million at June 30, 2006, $46.3 million at December 31, 2005, and $1.8 million at June 30, 2005. The increase from June 30, 2005 primarily related to the reclassification of a receivable from cash and interest bearing deposits with The Huntington National Bank to due from The Huntington National Bank. The amount reclassified represents principal and interest payments on loan participations remitted by customers directly to the Bank but not yet received by HPCI, net of new loan participation purchases. The receivable is settled with the Bank shortly after period end.

     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 7.

     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 — 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 obtained a line of credit from the FHLB, limited to $3.3 billion as of June 30, 2006, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had borrowings of $1.3 billion under this facility.

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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

     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 $1.3 billion as of June 30, 2006, as reflected in the HPCI’s month-end management report for the previous month. 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 $0.1 billion at June 30, 2006, $1.1 billion at December 31, 2005, and $1.1 billion at June 30, 2005. In 2005, the loans pledged consisted of 1-4 family residential mortgage portfolio and consumer second mortgage loans. The reduction during 2006 was due to the Bank’s release of approximately $1.0 billion of HPCI’s second mortgage loans pledged as collateral with the FHLB. 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 $0.1 million and $1.0 million for the first three months ended June 30, 2006 and 2005, respectively, as compensation for making such assets available to the Bank. The amounts paid to HPCI for the first six months of 2006 and 2005 were $0.8 million and $1.1 million, respectively. The fee represented thirty-five basis points per year on total pledged loans after April 1, 2005. Prior to April 1, 2005, the fee represented twelve basis points per year on the certified collateral.

     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 June 30, 2006, December 31, 2005, and June 30, 2005, HPCI’s unfunded loan commitments totaled $746.9 million, $827.3 million, and $817.5 million, respectively.

Note 8 — Segment Reporting

     HPCI’s operations consist of acquiring, holding, and managing its participation interests. Accordingly, HPCI only operates in one segment. HPCI has no external customers and transacts all of its business with the Bank and its affiliates.

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Item 2. Managements’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 Holdings and a Second Amended and Restated Loan Participation Agreement with the Bank. The Bank is required, under the participation and/or subparticipation agreements, to service HPCI’s loan portfolio in a manner substantially the same as for similar work for transactions on its own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral positions, and submits and pursues insurance claims. In addition, the Bank provides to HPCI accounting and reporting services as required. The Bank is required to adhere to HPCI’s policies relating to the relationship between HPCI and the Bank and to pay all expenses related to the performance of the Bank’s duties under the participation and subparticipation agreements. All of these participation interests to date were acquired directly or indirectly from the Bank.

     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 2005 Annual Report on Form 10-K (Form 10-K), as updated by the information contained in this report, should be read in conjunction with this interim MD&A.

Forward-looking Statements

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

     By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth under the heading “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.

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

Critical Accounting Policies

     Note 1 to HPCI’s consolidated financial statements included in its Form 10-K lists critical accounting policies used in the development and presentation of its financial statements. These critical accounting policies, as well as this discussion and analysis and other financial statement disclosures, identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of HPCI, its financial position, results of operations, and cash flows.

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Use of Significant Estimates

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

SUMMARY DISCUSSION OF RESULTS

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

     HPCI’s net income was $85.0 million and $75.5 million, respectively, for the three-months ended June 30, 2006 and 2005, while net income applicable to common shareholders was $73.2 million and $67.2 million, respectively, for the same three-month periods. For the six-month period ended June 30, 2006 and 2005, HPCI’s net income was $169.6 million and $145.2 million, respectively, while net income available to common shareholders was $146.8 million and $129.7 million, respectively. The increase in net income was primarily the result of higher interest income on commercial real estate and consumer loan participation interests, and an increased benefit from the reduction in credit losses. The increases in net income applicable to shareholders was the result of the increases in net income offset by higher dividends declared on preferred securities due to higher three-month LIBOR rates.

     HPCI had total assets of $4.8 billion at June 30, 2006, down from $5.4 billion at December 31, 2005, and $5.2 billion a year earlier. Total assets consisted principally of participation interests in loans which were an aggregate of $4.4 billion, $4.5 billion, and $4.8 billion, at June 30, 2006, December 31, 2005, and June 30, 2005, respectively. The decline in total loan participation interests and total assets from a year ago was due to the reduced availability of new loan participation purchases that met HPCI’s policies, primarily commercial real estate loans.

     Participation interests in underlying loans by category were as follows:

Table 1 — Loan Participation Interests

			% of				% of				% of
	June 30,		Total		December 31,		Total		June 30,		Total
(in thousands)	2006		Assets		2005		Assets		2005		Assets
Gross loan participation interests:
Commercial	$	39,182		0.8	$	46,559		0.9	$	72,310		1.4
Commercial real estate		3,312,787		68.9		3,311,275		61.8		3,614,633		69.3
Consumer		933,111		19.4		997,094		18.6		896,201		17.2
Residential real estate		130,569		2.7		157,397		2.9		188,407		3.6
Total	$	4,415,649		91.8	$	4,512,325		84.2	$	4,771,551		91.5

     HPCI’s participation interests in commercial loans represented 0.8% of total assets as of June 30, 2006. The decline in balance from June 30, 2005 was due to continued portfolio run off. Commercial real estate loan participations at June 30, 2006, which represented 68.9% of total assets, were up slightly compared to December 31, 2005, but down from June 30, 2005 primarily due to run off, and decreased new loan purchases. Consumer loan participation interests were 19.4% of total assets at June 30, 2006, as loan balances were up from a year ago due to purchases of consumer home equity loan participations over the second half of 2005, but down from prior-year end as HPCI has not purchased any new consumer loan participations since the first quarter of 2006. Residential real estate loan participation interests represented 2.7% of total assets at June 30, 2006. The decline in balance was due to portfolio run off, as there were no additional residential real estate loan purchases in this time period.

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     HPCI incurs no direct loan origination costs. In lieu of paying higher servicing fees to the Bank with respect to commercial and commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial and commercial real estate loans transferred on or after July 1, 2004, until such time as loan servicing fees are reviewed in 2006.

     Cash and interest bearing deposits with the Bank were $308.8 million, $810.1 million, and $458.5 million at June 30, 2006, December 31, 2005, and June 30, 2005, respectively. The reduction in cash balances from the beginning of the year was related to the common stock dividend and capital distribution for 2005 paid on January 3, 2006, offset by amounts provided by operations and investment activities. 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.

     HPCI also had an amount due from the Bank of $96.6 million, $46.3 million, and $1.8 million at June 30, 2006, December 31, 2005, and June 30, 2005. The increase from the same period-end last year primarily related to the reclassification of a receivable from cash and interest bearing deposits with The Huntington National Bank to due from The Huntington National Bank. The amount reclassified represents principal and interest payments on loan participations remitted by customers directly to the Bank but not yet received by HPCI, net of new loan participation purchases. The receivable is settled with the Bank shortly after period-end. The increase from the beginning of the year is due to higher loan participation remittances received by the Bank during June 2006, as compared to December 2005.

     Total liabilities were $13.7 million, $704.4 million, and $14.8 million at June 30, 2006, December 31, 2005, and June 30, 2005, respectively. The decrease from the beginning of the year was due to the payment of 2005 common stock dividend and capital distribution.

     Shareholders’ equity was $4.8 billion at June 30, 2006, up from $4.6 billion at December 31, 2005, and down from $5.2 billion at June 30, 2005. The increase from the beginning of the year is the result of income from operations. The decline from the same quarter a year ago was due to the return of capital to common shareholders declared in December 2005.

QUALIFICATION TESTS

     Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At June 30, 2006, 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 2005, 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

15

be further limited by the provisions of the Investment Company Act and positions taken by the SEC staff. At June 30, 2006, HPCI was exempt from registration as an investment company under the Investment Company Act and intends to operate its business in a manner that will maintain this exemption.

RESULTS OF OPERATIONS

     Net income for the second quarter 2006 was $85.0 million, up 12.6%, from $75.5 million for the second quarter 2005. Net income applicable to common shares was $73.2 million for the second quarter of 2006, an increase of $6.0 million, or 8.9%, compared to the second quarter of 2005. Dividend declarations on preferred securities increased by 42.7% in the most recent quarter to $11.8 million compared to $8.3 million for the second quarter 2005 as the result of higher three-month LIBOR rates applicable to the Class B and Class D preferred securities. Increased net income for the second quarter of 2006, compared to the same period of 2005, was the result of higher interest and fee income from improved yields on total loan participations and cash deposits, and a higher reduction in allowances for credit losses.

Table 2 — Quarterly Statements of Income

	2006						2005									2Q06 vs 2Q05
(in thousands)	Second			First			Fourth			Third			Second			$ Chg			% Chg
Interest and fee income
Interest on loan participation interests:
Commercial	$	792		$	846		$	982		$	1,006		$	1,264		$	(472	)		(37.3	)%
Commercial real estate		59,841			55,782			55,053			54,013			51,982			7,859			15.1
Consumer		16,067			16,700			16,268			15,465			14,687			1,380			9.4
Residential real estate		2,007			2,232			2,341			2,420			2,647			(640	)		(24.2	)
Total loan participation interest income		78,707			75,560			74,644			72,904			70,580			8,127			11.5
Fees from loan participation interests		279			293			320			539			491			(212	)		(43.2	)
Interest on deposits with The Huntington National Bank		3,290			1,491			7,200			4,439			2,570			720			28.0
Total interest and fee income		82,276			77,344			82,164			77,882			73,641			8,635			11.7
Reduction in allowances for credit losses		(5,203	)		(9,183	)		(4,409	)		(8,106	)		(3,840	)		(1,363	)		(35.5	)
Interest income after reduction in allowances for credit losses		87,479			86,527			86,573			85,988			77,481			9,998			12.9
Non-interest income:
Rental income		1,591			1,591			1,590			1,590			1,591			—			—
Collateral fees		115			718			976			907			965			(850	)		(88.1	)
Total non-interest income		1,706			2,309			2,566			2,497			2,556			(850	)		(33.3	)
Non-interest expense:
Servicing costs		2,720			2,783			2,730			2,717			2,899			(179	)		(6.2	)
Depreciation and amortization		999			1,017			1,045			1,086			1,102			(103	)		(9.3	)
(Gain)loss on disposal of premises and equipment		—			(31	)		4			45			388			(388	)		N.M.
Other		202			170			288			205			169			33			19.5
Total non-interest expense		3,921			3,939			4,067			4,053			4,558			(637	)		(14.0	)
Income before provision for income taxes		85,264			84,897			85,072			84,432			75,479			9,785			13.0
Provision for income taxes		310			285			251			173			25			285			N.M.
Net income	$	84,954		$	84,612		$	84,821		$	84,259		$	75,454		$	9,500			12.6	%
Dividends declared on preferred securities		(11,781	)		(11,007	)		(10,050	)		(9,023	)		(8,256	)		(3,525	)		(42.7	)
Net income applicable to common shares(1)	$	73,173		$	73,605		$	74,771		$	75,236		$	67,198		$	5,975			8.9	%

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

N.M. — Not Meaningful.

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Table 3 — Year-To-Date Statements of Income

	Six Months Ended June 30,						2006 vs 2005
(in thousands)	2005			2005			$ Chg			% Chg
Interest and fee income
Interest on loan participation interests:
Commercial	$	1,638		$	2,644		$	(1,006	)		(38.0	)%
Commercial real estate		115,623			100,737			14,886			14.8
Consumer		32,767			28,612			4,155			14.5
Residential real estate		4,239			5,543			(1,304	)		(23.5	)
Total loan participation interest income		154,267			137,536			16,731			12.2
Fees from loan participation interests		572			1,119			(547	)		(48.9	)
Interest on deposits with The Huntington National Bank		4,781			4,043			738			18.3
Total interest and fee income		159,620			142,698			16,922			11.9
Reduction in allowances for credit losses		(14,386	)		(7,281	)		(7,105	)		(97.6	)
Interest income after reduction in allowances for credit losses		174,006			149,979			24,027			16.0
Non-interest income:
Rental income		3,182			3,181			1			0.0
Collateral fees		833			1,146			(313	)		(27.3	)
Total non-interest income		4,015			4,327			(312	)		(7.2	)
Non-interest expense:
Servicing costs		5,503			5,762			(259	)		(4.5	)
Depreciation and amortization		2,016			2,239			(223	)		(10.0	)
(Gain) loss on disposal of premises and equipment		(31	)		533			(564	)		N.M.
Other		372			409			(37	)		(9.0	)
Total non-interest expense		7,860			8,943			(1,083	)		(12.1	)
Income before provision for income taxes		170,161			145,363			24,798			17.1
Provision for income taxes		595			124			471			N.M.
Net income	$	169,566		$	145,239		$	24,327			16.7	%
Dividends declared on preferred securities		(22,788	)		(15,561	)		(7,227	)		(46.4	)
Net income applicable to common shares(1)	$	146,778		$	129,678		$	17,100			13.2	%

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

N.M. — Not Meaningful.

Interest and Fee Income

     HPCI’s primary source of revenue is interest and fee income on its participation interests in loans. At June 30, 2006 and 2005, 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.

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     The table below shows HPCI’s average balances, interest and fee income, and yields for the three-month and six-month periods ended June 30, 2006 and 2005:

Table 4 — Quarterly Average Balance Sheets and Net Interest Margin Analysis

	Three Months Ended June 30,
	2006							2005
	Average							Average
(in millions)	Balance		Income(1)		Yield			Balance		Income(1)		Yield
Loan participation interests:
Commercial	$	42.3	$	0.8		7.53	%	$	89.5	$	1.3		5.69	%
Commercial real estate		3,350.8		60.0		7.18			3,637.1		52.3		5.77
Consumer		960.9		16.2		6.77			867.3		14.9		6.88
Residential real estate		135.5		2.0		5.92			197.7		2.6		5.36
Total loan participations		4,489.5		79.0		7.06			4,791.6		71.1		5.95
Interest bearing deposits in the Bank		265.0		3.3		4.91			347.6		2.6		2.97
Total	$	4,754.5	$	82.3		6.94	%	$	5,139.2	$	73.7		5.75	%

⁽¹⁾ Income includes interest and fees.

Table 5 — Year-To-Date Average Balance Sheets and Net Interest Margin Analysis

	Six Months Ended June 30,
	2006							2005
	Average							Average
(in millions)	Balance		Income(1)		Yield			Balance		Income(1)		Yield
Loan participation interests:
Commercial	$	44.8	$	1.6		7.39	%	$	96.6	$	2.7		5.56	%
Commercial real estate		3,333.3		115.9		7.01			3,671.1		101.5		5.58
Consumer		983.1		33.1		6.78			844.9		29.0		6.91
Residential real estate		143.2		4.2		5.92			207.3		5.5		5.35
Total loan participations		4,504.4		154.8		6.93			4,819.9		138.7		5.80
Interest bearing deposits in the Bank		198.8		4.8		4.78			292.7		4.0		2.79
Total	$	4,703.2	$	159.6		6.84	%	$	5,112.6	$	142.7		5.63	%

⁽¹⁾  Income includes interest and fees.

     Interest and fee income was $82.3 million for the three-months ended June 30, 2006, compared with $73.7 million for the year ago quarter. As shown in Table 4, the increase in interest and fee income was the result of higher yields more than offsetting lower earning asset balances. For the six-months ended June 30, 2006 and 2005, interest and fee income was $159.6 million and $142.7 million, respectively. For the three-months ended June 30, 2006 and 2005, the yield increased 1.19% to 6.94%, while average earning asset balances decreased $384.6 million, or 7%. At June 30, 2006, approximately 67% of the portfolio was comprised of variable interest rate loan participations. The tables above include interest received on participations in loans that are on a non-accrual status in the individual portfolios.

Allowances for Credit Losses (ACL)

     HPCI maintains two reserves, both of which are available to absorb probable credit losses: the allowance for loan participation losses (ALL) and the allowance for unfunded loan participation commitments (AULPC). When summed together, these reserves constitute the total allowances for credit losses (ACL).

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     The following table shows the activity in HPCI’s ALL and AULPC for the last five quarters:

Table 6 — Allowances for Credit Loss Activity

	2006						2005
(in thousands)	Second			First			Fourth			Third			Second
ALL balance, beginning of period	$	53,586		$	57,530		$	56,866		$	60,987		$	62,461
Allowance of loan participations acquired		5,172			6,462			6,675			5,875			6,880
Net loan losses
Commercial		633			256			232			159			312
Commercial real estate		(2,162	)		(776	)		(400	)		(2,083	)		(2,705	)
Consumer		(743	)		(621	)		(712	)		(1,004	)		(1,123	)
Residential real estate		—			(32	)		(152	)		(47	)		(6	)
Total net loan losses		(2,272	)		(1,173	)		(1,032	)		(2,975	)		(3,522	)
Reduction in ALL		(5,020	)		(9,233	)		(4,979	)		(7,021	)		(3,894	)
Economic reserve transfer to AULPC		—			—			—			—			(938	)
ALL balance, end of period	$	51,466		$	53,586		$	57,530		$	56,866		$	60,987
AULPC balance, beginning of period	$	4,185		$	4,135		$	3,565		$	4,650		$	3,658
Provision for (reduction in) AULPC		(183	)		50			570			(1,085	)		54
Economic reserve transfer from ALL		—			—			—			—			938
AULPC balance, end of period	$	4,002		$	4,185		$	4,135		$	3,565		$	4,650
Total Allowance for Credit Losses	$	55,468		$	57,771		$	61,665		$	60,431		$	65,637
ALL as a % of total participation interests		1.17	%		1.19	%		1.27	%		1.23	%		1.28	%
ACL as a % of total participation interests		1.26			1.28			1.37			1.31			1.38

     The allowance for credit losses was $55.5 million and $65.6 million as of June 30, 2006, and 2005, respectively. The lower balance was the result of a decline in loan participation balances and improved credit quality over the twelve-month period. The reduction in ALL for the three-month period ended June 30, 2006 was $5.0 million, a $1.1 million increase from the comparable quarter a year ago. This increase was primarily the reflection of lower net loan losses and a slightly better improvement in credit quality during the second quarter of 2006, as compared to same period in 2005.

     In the 2005 second quarter, the ACL included a refinement in methodology that transferred $0.9 million of the ACL’s economic reserve component from ALL to AULPC. Previously, the entire economic reserve component was included in ALL.

     Total net charge-offs for the quarter ended June 30, 2006, were $2.3 million, or an annualized 0.20% of average loan participation interests, down from $3.5 million, or 0.29%, in the same quarter a year ago.

     In Management’s judgment, both the ALL and the AULPC were adequate at June 30, 2006, to cover probable 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 for the year ended December 31, 2005.

Non-Performing Assets (NPAs)

     NPAs consist of participation interests in underlying loans that are no longer accruing interest. Underlying commercial and commercial real estate loans are placed on non-accrual status and stop accruing interest when collection of principal or interest is in doubt or generally when the underlying loan is 90-days past due. Underlying residential real estate loans are generally placed on non-accrual status within 180-days past due as to principal and 210-days past due as to interest. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. Consumer loans are placed on non-accrual status within 180-days past due.

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

Table 7 — Quarterly Non-Performing Assets

	2006						2005
(in thousands)	Second			First			Fourth			Third			Second
Participation interests in non-accrual loans
Commercial	$	108		$	108		$	147		$	746		$	1,069
Commercial real estate		16,834			20,133			20,746			17,735			17,965
Consumer		3,545			3,282			2,799			2,028			2,252
Residential real estate		1,687			2,144			2,923			3,695			4,652
Total Non-Performing Assets	$	22,174		$	25,667		$	26,615		$	24,204		$	25,938
Participations in Accruing Loans Past Due 90 Days or More	$	6,079		$	3,402		$	3,188		$	3,382		$	12,036
NPAs as a % of total participation interests		0.50	%		0.57	%		0.59	%		0.52	%		0.54	%
ALL as a % of NPAs		232			209			216			235			235
ACL as a % of NPAs		250			225			232			250			253

     Total NPAs declined to $22.2 million at June 30, 2006, from $26.6 million at December 31, 2005, and from $25.9 million at June 30, 2005, representing 0.50%, 0.59%, and 0.54% of total participation interests, respectively.

     Underlying loans past due ninety days or more but continuing to accrue interest were $6.1 million at June 30, 2006, $3.2 million at December 31, 2005, and $12.0 million at June 30, 2005.

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

     For a further discussion of “Credit Quality,” see HPCI’s Form 10-K for the year ended December 31, 2005.

Non-Interest Income and Non-Interest Expense

     Non-interest income was $1.7 million for the second quarter of 2006 and $2.6 million for the comparable quarter a year ago. For the six-months ended June 30, 2006 and 2005, non-interest income was $4.0 million and $4.3 million, respectively. This income consists of rental income received from the Bank related to leasehold improvements owned by HPCLI and includes fees from the Bank for use of HPCI’s assets as collateral for the Bank’s advances from the Federal Home Loan Bank (FHLB). Collateral fees totaled $0.1 million and $1.0 million for three-months ended June 30, 2006 and 2005, respectively. For the six-month period, the fees totaled $0.8 million and $1.1 million, respectively. The decrease in collateral fees was the result of the Bank releasing approximately $1.0 billion of HPCI’s consumer loans pledged as collateral with the FHLB in the first quarter of 2006.(See Note 7 to the unaudited condensed consolidated financial statements for more information regarding use of HPCI’s assets as collateral for the Bank’s advances from the FHLB.)

     Non-interest expense for the second quarter of 2006 was $3.9 million compared with $4.6 million for the same period last year. For the six-months ended June 30, 2006 and 2005, non-interest expense was $7.9 million and $8.9

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million, respectively. The predominant components of HPCI’s non-interest expense are the fees paid to the Bank for servicing the loans underlying the participation interests and depreciation and amortization on its premises and equipment. For the second quarter 2006, servicing costs amounted to $2.7 million, down from the $2.9 million recorded in the same period of 2005. The servicing costs for the six-month period ended June 30, 2006 and 2005 totaled $5.5 million and $5.8 million, respectively. The annual servicing rates the Bank charged with respect to outstanding principal balances in 2005 and 2006 were:

	July 1, 2005			January 1, 2005
	thru			thru
	June 30, 2006			June 30, 2005
Commercial and commercial real estate		0.125	%		0.125	%
Consumer		0.650	%		0.750	%
Residential real estate		0.267	%		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. Effective July 1, 2004, in lieu of paying higher servicing costs to the Bank with respect to commercial and commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial and commercial real estate loans transferred on or after July 1, 2004. The Bank and HPCI have performed a review of loan-servicing fees in 2006, 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 2007.

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. HPCI’s subsidiary, HPCLI, elected to be treated as a taxable REIT subsidiary and, therefore, a separate provision related to its income taxes is included in the accompanying unaudited condensed consolidated financial statements. The provision for income taxes was $0.3 million and less than $0.1 million for the three-month periods ended June 30, 2006 and 2005, respectively. For the six-month periods ended June 30, 2006 and 2005, the provision for income taxes was $0.6 million and $0.1 million, respectively.

MARKET RISK

     Market risk represents the risk of loss due to a decline in interest rates, which is the primary risk to which HPCI has exposure. If there is a decline in market interest rates, HPCI may experience a reduction in interest income from its loan participation interests and a corresponding decrease in funds available to be distributed to shareholders. Market risk arises in the normal course of business when HPCI purchases a participation interest in a fixed-rate loan, and as of June 30, 2006, approximately 33% of the loan participation portfolio had fixed rates.

     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 assumes among other things, no new loan participation volume.

     Using the income simulation model for HPCI as of June 30, 2006, interest income for the next 12-month period would be expected to increase by $18.6 million, or 7.2%, 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 $18.8 million, or 7.3%, in the event of a gradual 200 basis point decline in rates from the forward rates implied in the yield curve.

     Using the economic value analysis model for HPCI as of June 30, 2006, the fair value of loan participation interests over the next 12-month period would be expected to increase $72.3 million, or 1.6%, based on a immediate 200 basis point decline in rates from the forward rates implied in the yield curve. The fair value would be expected to decline

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$71.1 million, or 1.6%, in the event of a immediate 200 basis point increase in rates from the forward rates implied in the yield curve.

OFF-BALANCE SHEET ARRANGEMENTS

     Under the terms of the participation and subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank, either directly or indirectly through Holdings so that the Bank may extend credit to any borrowers, or pay letters of credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying HPCI’s participation interests. At June 30, 2006, December 31, 2005, and June 30, 2005, HPCI’s unfunded commitments totaled $746.9 million, $827.3 million, and $817.5 million, respectively. It is expected that cash flows generated by the existing portfolio will be sufficient to meet these obligations.

LIQUIDITY AND CAPITAL RESOURCES

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

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

     At June 30, 2006, December 31, 2005, and June 30, 2005, HPCI maintained interest bearing and non-interest bearing cash balances with the Bank totaling $308.8 million, $810.1 million, and $458.5 million, respectively. The reduction in cash balances from the beginning of the year was related to the common stock dividend and capital distribution for 2005 paid on January 3, 2006, offset by amounts provided by operations and investment activities. HPCI maintains and transacts all of its cash activity with the Bank and may invest available funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

     At June 30, 2006, HPCI had no material liabilities or contractual commitments, other than unfunded loan commitments of $746.9 million and dividends payable of $9.6 million.

     Shareholders’ equity was $4.8 billion at June 30, 2006, up from $4.6 billion at December 31, 2005, and down from $5.2 billion at June 30, 2005. The increase from the beginning of the year relates to income from operations. The decline from June 30, 2005, was due to the return of capital to common shareholders declared in December 2005.

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Item 3. Quantitative And Qualitative Disclosures About Market Risk

     Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in HPCI’s Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

     HPCI’s management, with the participation of its President (principal executive officer) and the Vice President (principal financial officer), evaluated the effectiveness of HPCI’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, HPCI’s President and Vice President have concluded that, as of the end of such period, HPCI’s disclosure controls and procedures are effective.

     There have not been any changes in HPCI’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2006, to which this report relates, that have materially affected, or are reasonably likely to materially affect, HPCI’s internal control over financial reporting.

PART II. OTHER INFORMATION

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

Item 4. Submission of Matters to a Vote of Shareholders

HPCI held its annual meeting of shareholders on May 11, 2006. At this meeting, the shareholders approved the following management proposals:

1.	Election of directors to serve as Directors until the next Annual Meeting of shareholders as follows: Richard A. Cheap, Stephen E. Dutton, R. Larry Hoover, Edward J. Kane, Roger E. Kephart, Donald R. Kimble, Thomas P. Reed, James D. Robbins, and Karen D. Roggenkamp.
2.	Ratification of appointment of Deloitte & Touche LLP to serve as the company’s independent registered public accounting firm for the year 2006.

There were 14,000,000 votes cast in favor of each nominee for director and for agenda item no. 2. There were no votes against, no abstentions, and no broker non-votes.

Item 6. Exhibits

     (a)

	3.(i).	Amended and Restated Articles of Incorporation (previously filed as Exhibit 3(a)(ii) to Amendment No. 4 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on October 12, 2001, and incorporated herein by reference.)
3.(ii).		Code of Regulations (previously filed as Exhibit 3(b) to the Registrant’s Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 17, 2001, and incorporated herein by reference.)
	4.	Specimen of certificate representing Class C preferred securities, previously filed as Exhibit 4 to the Registrant’s Amendment No. 1 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 31, 2001, and incorporated herein by reference.

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31.(a).	Rule 13a – 14(a) Certification – President (chief executive officer).
31.(b).	Rule 13a – 14(a) Certification – Vice President (chief financial officer).
32.(a).	Section 1350 Certification – President (chief executive officer).
32.(b).	Section 1350 Certification – Vice President (chief financial officer).
99.(a).	Unaudited Condensed Consolidated Financial Statements of Huntington Bancshares Incorporated as of and for the three-month and six-month periods ended June 30, 2006 and 2005.

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Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 11th day of August, 2006.

HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant)

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

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