Huntington Preferred Capital (HPCCP) 10-Q 2011 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 September 30, 2011

Commission File Number 000-33243

Huntington Preferred Capital, Inc.

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

41 South High Street, Columbus, Ohio  43287

Registrant's telephone number (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. x Yes   o 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).

x Yes   o No

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

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

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

o Yes   x No

As of October 31, 2011, 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, 2011, December 31, 2010, and September 30, 2010	4
	Condensed Statements of Income for the three months and nine months ended September 30, 2011 and 2010	5
	Condensed Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2011 and 2010	6
	Condensed Statements of Cash Flows for the nine months ended September 30, 2011 and 2010	7
	Notes to Unaudited Condensed Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 6.	Exhibits	36
Signatures		38

2

Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:

ACL	Allowance for Credit Losses
Agreements	Third Amended and Restated Loan Participation Agreement, dated May 12, 2005, between the Bank and HPCI and the Third Amended and Restated Loan Subparticipation Agreement, dated May 12, 2005, between Holdings and HPCI
ALPL	Allowance for Loan Participation Losses
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
AULPC	Allowance for Unfunded Loan Participation Commitments
Bank	The Huntington National Bank
C&I	Commercial and Industrial
CAP	Capital Assistance Program
CFPB	Bureau of Consumer Financial Protection
Codification	FASB Accounting Standards Codification
the Company	(see HPCI)
CPP	Capital Purchase Program
CRE	Commercial Real Estate
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act
Exchange Act	Securities Exchange Act of 1934, as amended
Fannie Mae	(see FNMA)
FASB	Financial Accounting Standards Board
FFO	Funds from Operations
FHLB	Federal Home Loan Bank
FHLMC	Federal Home Loan Mortgage Corporation
FICO	Fair Isaac Corporation
Form 10-K	HPCI's Annual Report on Form 10-K for the year ended December 31, 2010
FNMA	Federal National Mortgage Association
Franklin	Franklin Credit Management Corporation
Freddie Mac	(see FHLMC)
GAAP	Generally Accepted Accounting Principles in the United States of America
Holdings	Huntington Preferred Capital Holdings, Inc.
HPCI	Huntington Preferred Capital, Inc.
HPCII	Huntington Preferred Capital II, Inc.
Huntington	Huntington Bancshares Incorporated
IRC	Internal Revenue Code
IRS	Internal Revenue Service
LGD	Loss Given Default
LIBOR	London Interbank Offered Rate
LTV	Loan to Value
MD&A	Management's Discussion and Analysis of Financial Condition and Results of Operations
NCO	Net Charge-off
NPAs	Nonperforming Assets
OCC	Office of the Comptroller of the Currency
OLEM	Other Loans Especially Mentioned
PD	Probability of Default
RBC	Risk-Based Capital
REIT	Real Estate Investment Trust
ROA	Return on Average Assets
ROE	Return on Average Equity
SAD	Special Assets Division
SEC	Securities and Exchange Commission
TARP	Troubled Asset Relief Program
TDR	Troubled Debt Restructuring
Treasury	U.S. Department of the Treasury

3

Part 1.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Huntington Preferred Capital, Inc.

Condensed Balance Sheets

(Unaudited)

	September 30,			December 31,			September 30,
(dollar amounts in thousands, except share data)	2011			2010			2010
Assets:
Cash and interest-bearing deposits with The Huntington National Bank	$	219,906		$	638,220		$	516,639
Due from The Huntington National Bank		50,393			61,816			116,578
Loan participation interests:
Commercial real estate		3,086,369			2,949,711			2,935,260
Consumer and residential real estate		466,703			563,407			611,384
Total loan participation interests		3,553,072			3,513,118			3,546,644
Allowance for loan participation losses		(92,899	)		(110,103	)		(147,607	)
Net loan participation interests		3,460,173			3,403,015			3,399,037
Accrued income and other assets		9,619			9,739			9,790
Total assets	$	3,740,091		$	4,112,790		$	4,042,044
Liabilities and shareholders' equity
Liabilities:
Allowance for unfunded loan participation commitments	$	1,000		$	1,598		$	1,919
Dividends and distributions payable		930			500,000			1,159
Other liabilities		66			76			65
Total liabilities		1,996			501,674			3,143
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
Preferred securities, Class E, variable-rate noncumulative and
conditionally exchangeable; $250 par and liquidation
value; 1,400,000 shares authorized, issued, and outstanding		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		2,810,116			2,810,116			3,160,217
Retained earnings		126,979			—			77,684
Total shareholders' equity		3,738,095			3,611,116			4,038,901
Total liabilities and shareholders' equity	$	3,740,091		$	4,112,790		$	4,042,044

See notes to unaudited condensed financial statements.

4

Huntington Preferred Capital, Inc.

Condensed Statements of Income

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollar amounts in thousands)	2011			2010			2011			2010
Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	28,732		$	27,173		$	83,862		$	80,591
Consumer and residential real estate		7,833			10,418			24,925			33,018
Total loan participation interest income		36,565			37,591			108,787			113,609
Fees from loan participation interests		297			276			986			1,194
Interest on deposits with The Huntington National Bank		148			383			473			814
Total interest and fee income		37,010			38,250			110,246			115,617
Provision (reduction in allowance) for credit losses		(23,067	)		(3,957	)		(30,177	)		(4,532	)
Interest income after provision (reduction in allowance) for credit losses		60,077			42,207			140,423			120,149
Noninterest income:
Rental income		18			18			53			52
Collateral fees		371			511			1,189			1,591
Total noninterest income		389			529			1,242			1,643
Noninterest expense:
Servicing costs		1,732			1,945			5,269			6,086
Other		175			174			525			517
Total noninterest expense		1,907			2,119			5,794			6,603
Net income	$	58,559		$	40,617		$	135,871		$	115,189
Dividends declared on preferred securities		2,867			3,406			8,892			9,322
Net income applicable to common shares(1)	$	55,692		$	37,211		$	126,979		$	105,867

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

See notes to unaudited condensed financial statements.

5

Huntington Preferred Capital, Inc.

Condensed Statements of Changes in Shareholders' Equity

(Unaudited)

	Preferred, Class A				Preferred, Class B				Preferred, Class C
(all amounts in thousands)	Shares		Amount		Shares		Amount		Shares		Amount
Nine Months Ended September 30, 2010:
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		1	$	1,000		400	$	400,000		2,000	$	50,000
Nine Months Ended September 30, 2011:
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		1	$	1,000		400	$	400,000		2,000	$	50,000

	Preferred, Class D				Preferred, Class E				Preferred				Common				Retained
(all amounts in thousands)	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Earnings			Total
Nine Months Ended September 30, 2010:
Balance, beginning of period		14,000	$	350,000		—	$	—		—	$	—		14,000	$	3,160,217	$	(28,183	)	$	3,933,034
Comprehensive Income:
Net income																		115,189			115,189
Total comprehensive income																					115,189
Dividends declared on Class A preferred securities																		(80	)		(80	)
Dividends declared on Class B preferred securities																		(1,079	)		(1,079	)
Dividends declared on Class C preferred securities																		(2,953	)		(2,953	)
Dividends declared on Class D preferred securities																		(5,210	)		(5,210	)
Balance, end of period		14,000	$	350,000		—	$	—		—	$	—		14,000	$	3,160,217	$	77,684		$	4,038,901
Nine Months Ended September 30, 2011:
Balance, beginning of period		—	$	—		1,400	$	350,000		—	$	—		14,000	$	2,810,116	$	—		$	3,611,116
Comprehensive Income:
Net income																		135,871			135,871
Total comprehensive income																					135,871
Dividends declared on Class A preferred securities																		(80	)		(80	)
Dividends declared on Class B preferred securities																		(850	)		(850	)
Dividends declared on Class C preferred securities																		(2,953	)		(2,953	)
Dividends declared on Class E preferred securities																		(5,009	)		(5,009	)
Balance, end of period		—	$	—		1,400	$	350,000		—	$	—		14,000	$	2,810,116	$	126,979		$	3,738,095

See notes to unaudited condensed financial statements.

6

Huntington Preferred Capital, Inc.

Condensed Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
(dollar amounts in thousands)	2011			2010
Operating activities
Net income	$	135,871		$	115,189
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision (reduction in allowance) for credit losses		(30,177	)		(4,532	)
Change in due to/from The Huntington National Bank		(33	)		827
Other, net		1,160			1,542
Net cash provided by (used for) operating activities		106,821			113,026
Investing activities
Net participation interests acquired		(1,718,496	)		(1,226,260	)
Sales and repayments of loans underlying participation interests		1,701,323			1,422,373
Net cash provided by (used for) investing activities		(17,173	)		196,113
Financing activities
Dividends paid on preferred securities		(7,962	)		(8,163	)
Dividends paid on common stock		(149,899	)		—
Return of capital to common shareholders		(350,101	)		(500,000	)
Net cash provided by (used for) financing activities		(507,962	)		(508,163	)
Increase (decrease) in cash and cash equivalents		(418,314	)		(199,024	)
Cash and cash equivalents at beginning of period		638,220			715,663
Cash and cash equivalents at end of period	$	219,906		$	516,639
Supplemental information:
Dividends and distributions declared, not paid	$	930		$	1,159
Non-cash change in loan participation activity with The Huntington National Bank		(11,455	)		126,045

See notes to unaudited condensed financial statements.

7

Huntington Preferred Capital, Inc.

Notes to Unaudited Condensed Financial Statements

Note 1 - Organization

HPCI was organized under Ohio law in 1992, and designated as a REIT in 1998.  HPCI’s principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to its shareholders.  Two related parties own HPCI’s common stock: HPCII and Holdings.

HPCII and Holdings are direct and indirect subsidiaries of 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 September 30, 2011, the Bank, on a consolidated basis with its subsidiaries, accounted for over 99% of Huntington’s consolidated total assets and 97% of the year-to-date net income. Thus, for purposes of presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington to be substantially the same.

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 GAAP have been omitted.  The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from those estimates. Cash and cash equivalents used in the Condensed Statements of Cash Flows is defined as “Cash and interest-bearing deposits with The Huntington National Bank.” In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Financial Statements or disclosed in the Notes to Unaudited Condensed Financial Statements.

The Notes to the Financial Statements appearing in HPCI’s Annual Report on Form 10-K for the year ended December 31, 2010 (Form 10-K), include descriptions of significant accounting policies, as updated by the information contained in this report,  and 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.

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

ASU 2010-20 – Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The ASU requires expanded disclosure about the credit quality of the loan portfolio in the notes to financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how a company develops its ACL and how it manages its credit exposure.  The disclosures related to period-end balances are effective for annual or interim reporting periods ending after December 15, 2010 and the disclosures of activity that occurs during the reporting period are effective for annual or interim reporting periods beginning after December 15, 2010 (See Note 3).

ASU 2011-02 — Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The ASU amends Subtopic 310-40 to clarify existing guidance related to a creditor’s evaluation of whether a restructuring of debt is considered a TDR.  The amendments add additional clarity in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties.  The updated guidance and related disclosure requirements are effective for financial statements issued for the first interim or annual period beginning on or after June 15, 2011, and should be applied retroactively to the beginning of the annual period of adoption.  The amendment was adopted during the 2011 third quarter and did not have a material impact on HPCI’s Unaudited Condensed Financial Statements (See Note 3).

8

ASU 2011-04 — Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The ASU amends Topic 820 to add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing principles and disclosure guidance.  Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholder’s equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements.  Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively.  Early adoption is permitted.  Management does not believe the principle amendments will have a material impact on HPCI’s condensed financial statements.

Note 3 – Loan Participation Interests and Allowance for Credit Losses

Loan participation interests are categorized based on the collateral underlying the loan.  At September 30, 2011, December 31, 2010, and September 30, 2010, loan participation interests were comprised of the following:

	September 30,		December 31,		September 30,
(dollar amounts in thousands)	2011		2010		2010
Commercial real estate	$	3,086,369	$	2,949,711	$	2,935,260
Consumer and residential real estate		466,703		563,407		611,384
Total loan participation interests	$	3,553,072	$	3,513,118	$	3,546,644

As shown in the table above, the Company’s primary loan participation interest portfolios are:  CRE and consumer and residential real estate. For ACL purposes, these portfolios are further disaggregated into classes.  The classes within the CRE portfolio are:  retail properties, multi family, office, industrial and warehouse, and other CRE.  The classes within the consumer and residential real estate portfolio are: first-lien loan participation interests and second-lien loan participation interests.

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 approximately 94%, 96%, and 94% of the portfolio at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.

Loan Purchases and Sales

The following table summarizes significant portfolio purchase activity during the three-month and nine-month periods ended September 30, 2011:

				Consumer and
	Commercial			Residential
(dollar amounts in thousands)	Real Estate			Real Estate			Total
Portfolio loan participation interests purchased during the:
Three-month period ended September 30, 2011		$	629,550		$	—		$	629,550
Nine-month period ended September 30, 2011			1,689,327			—			1,689,327

There were no portfolio loans sold or transferred to loans held for sale in any portfolio during either the three-month or nine-month periods ended September 30, 2011.

NPAs and Past Due Loan Participation Interests

Loan participation interests are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date.

9

Any loan participation interest in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt.

Loan participation interests in all classes within the CRE portfolio are placed on nonaccrual status at 90-days past due.  First-lien and second-lien consumer and residential real estate loan participation interests are placed on nonaccrual status at 150-days past due and 120-days past due, respectively.  For all classes within all portfolios, when a loan participation interest is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss.

For all classes within all portfolios, cash receipts received on NPAs are applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income.

Regarding all classes within all portfolios, when, in Management’s judgment, the borrower’s ability to make required principal and interest payments resumes and collectability is no longer in doubt, the loan participation interest is returned to accrual status.  For these loan participation interests that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.

The following table presents NPAs by loan class:

	September 30,			December 31,
(dollar amounts in thousands)	2011			2010
Commercial real estate:
Industrial and warehouse	$	18,893	��	$	6,628
Retail properties		9,146			14,155
Office		9,819			2,875
Multi family		1,266			1,381
Other commercial real estate		15,026			28,914
Total commercial real estate	$	54,150		$	53,953
Consumer and residential real estate:
Secured by first-lien	$	5,837		$	4,362
Secured by second-lien		869			428
Total consumer and residential real estate	$	6,706		$	4,790
Total nonperforming assets	$	60,856		$	58,743

The following table presents an aging analysis of loan participation interests, including past due loan participation interests, by loan class: (1)

September 30, 2011
(dollar amounts in thousands)	Past Due										Total Loan		90 or More Days Past
					90 or						Participation		Due
	30-59 Days		60-89 Days		More Days		Total		Current		Interests		and Accruing
Commercial real estate:
Industrial and warehouse	$	274	$	641	$	18,155	$	19,070	$	676,793	$	695,862	$	—
Retail properties		535		268		8,407		9,210		682,906		692,116		—
Office		380		183		9,815		10,378		526,558		536,936		—
Multi family		13		—		1,252		1,265		199,441		200,706		—
Other commercial real estate		3,891		1,013		13,787		18,691		942,058		960,749		—
Total commercial real estate	$	5,093	$	2,105	$	51,416	$	58,614	$	3,027,756	$	3,086,369	$	—
Consumer and residential real estate:
Secured by first-lien	$	4,160	$	2,500	$	8,356	$	15,016	$	328,520	$	343,536	$	2,519
Secured by second-lien		2,282		788		1,611		4,681		118,486		123,167		742
Total consumer and residential real estate	$	6,442	$	3,288	$	9,967	$	19,697	$	447,006	$	466,703	$	3,261

10

December 31, 2010
(dollar amounts in thousands)	Past Due										Total Loan		90 or More Days Past
					90 or						Participation		Due
	30-59 Days		60-89 Days		More Days		Total		Current		Interests		and Accruing
Commercial real estate:
Industrial and warehouse	$	4,845	$	646	$	4,710	$	10,201	$	641,580	$	651,781	$	—
Retail properties		735		670		13,273		14,678		544,922		559,600		—
Office		9,394		516		2,471		12,381		533,042		545,423		—
Multi family		—		—		1,370		1,370		241,091		242,461		—
Other commercial real estate		16,507		2,863		15,727		35,097		915,349		950,446		—
Total commercial real estate	$	31,481	$	4,695	$	37,551	$	73,727	$	2,875,984	$	2,949,711	$	—
Consumer and residential real estate:
Secured by first-lien	$	6,737	$	1,901	$	7,760	$	16,398	$	384,925	$	401,323	$	3,400
Secured by second-lien		3,079		1,655		1,830		6,564		155,520		162,084		1,402
Total consumer and residential real estate	$	9,816	$	3,556	$	9,590	$	22,962	$	540,445	$	563,407	$	4,802

(1) NPAs are included in this aging analysis based on the loan participation interest's past due status.

Allowance for Credit Losses

TheACL is comprised of the ALPL and the AULPC, and reflects Management’s judgment regarding the appropriate level necessary to absorb credit losses inherent in the loan participation interest portfolio.  It is HPCI’s policy to utilize the Bank’s analysis as of the end of each reporting date to estimate the required level of the ALPL and AULPC.  The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loan participation interests, consideration of economic conditions, and historical loss experience pertaining to pools of homogeneous loan participation interests, all of which may be susceptible to change.

The appropriateness of the ACL is based on Management’s current judgments about the credit quality of the loan participation interests portfolio.  These judgments consider on-going evaluations of the loan participation interests portfolio, including such factors as the differing economic risks associated with each loan participation interests category, the financial condition of specific borrowers, the level of delinquent loan participation interests, the value of any collateral and, where applicable, the existence of any guarantees or other documented support.  Further, Management evaluates the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying the exposure to credit losses and assessing the appropriateness of the ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include: the impact of declining residential real estate values; the diversification of commercial real estate loan participation interests, particularly loan participation interests secured by retail properties; and the amount of loan participation interests to businesses in areas of Ohio and Michigan that have historically experienced less economic growth compared with Pennsylvania, Indiana, West Virginia, and Kentucky.  Also, the ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.

ALPL is transferred to HPCI either directly or through Holdings from the Bank on loan participation interests underlying the participation interests at the time the participation interests are acquired.  This transfer of ALPL is reflected as ALPL acquired, rather than HPCI recording provision for credit losses.  Based on Management’s quarterly evaluation of the factors previously mentioned, the ALPL may either be increased through a provision for credit losses, net of recoveries, charged to earnings or lowered through a reduction in allowance for credit losses, net of recoveries, credited to earnings. Credit losses are charged against the ALPL when Management believes the loan participation interest balance, or a portion thereof, is uncollectible.

The ALPL consists of two components: (1) the transaction reserve, which includes specific reserves related to loan participation interests considered to be impaired and loan participation interests involved in troubled debt restructurings, and (2) the general reserve.   The transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loan participation interests with similar characteristics and (2) an estimate of loss based on an impairment review of each CRE loan participation interest greater than $1 million. For the CRE portfolio, the estimate of loss based on pools of loan participation interests with similar characteristics is made by applying a PD factor and a LGD factor to each individual loan based on a continuously updated loan grade, using a standardized loan grading system.  The PD and LGD factors are determined for each loan grade using statistical models based on historical performance data.  The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s industry and future prospects.  The LGD factor considers analysis of the type of collateral and the relative LTV ratio.  These reserve factors are developed based on credit migration models that track historical movements of loan participation interests between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data using a 24-month calculation period.

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In the case of more homogeneous portfolios, such as the consumer and residential real estate portfolio, the determination of the transaction reserve also incorporates PD and LGD factors, however, the estimate of loss is based on pools of loan participation interests with similar characteristics.  The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used.  The LGD factor considers analysis of the type of collateral and the relative LTV ratio.  Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as needed.

The general reserve consists of economic reserve and risk-profile reserve components.  The economic reserve component considers the potential impact of changing market and economic conditions on portfolio performance.  The risk-profile component considers items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of the portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and internal review functions.

The estimate for the AULPC is determined using the same procedures and methodologies as used for the ALPL.  The loss factors used in the AULPC are the same as the loss factors used in the ALPL while also considering a historical utilization of unused commitments.  The AULPC is reflected in other liabilities in the Condensed Balance Sheets.

The following table presents ALPL and AULPC activity by portfolio segment:

	Commercial Real Estate			Consumer and Residential Real Estate			Total
(dollar amounts in thousands)
Three-month period ended September 30, 2011:
ALPL balance, beginning of period	$	100,124		$	12,390		$	112,514
ALPL for loan participation interests acquired		12,705			—			12,705
Loan charge-offs		(6,656	)		(3,115	)		(9,771	)
Recoveries of loan participation interests previously charged-off		405			279			684
(Reduction in) Provision for loan participation interest losses		(25,737	)		2,504			(23,233	)
ALPL balance, end of period	$	80,841		$	12,058		$	92,899
AULPC balance, beginning of period	$	834		$	—		$	834
Provision for unfunded loan commitments and letters of credit		166			—			166
AULPC balance, end of period	$	1,000		$	—		$	1,000
ACL balance, end of period	$	81,841		$	12,058		$	93,899
Nine-month period ended September 30, 2011:
ALPL balance, beginning of period	$	97,920		$	12,183		$	110,103
ALPL for loan participation interests acquired		37,913			—			37,913
Loan charge-offs		(20,908	)		(8,105	)		(29,013	)
Recoveries of loan participation interests previously charged-off		2,718			757			3,475
(Reduction in) Provision for loan participation interest losses		(36,802	)		7,223			(29,579	)
ALPL balance, end of period	$	80,841		$	12,058		$	92,899
AULPC balance, beginning of period	$	1,598		$	—		$	1,598
Reduction in unfunded loan commitments and letters of credit		(598	)		—			(598	)
AULPC balance, end of period	$	1,000		$	—		$	1,000
ACL balance, end of period	$	81,841		$	12,058		$	93,899

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Any loan participation interest in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred.  Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment.

CRE loan participation interests are either charged-off or written down to net realizable value at 90-days past due.  First-lien and second-lien consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral at 150-days past due and 120-days past due, respectively.

Credit Quality Indicators

To facilitate the monitoring of credit quality for CRE loan participation interests, and for purposes of determining an appropriate ACL level for these loan participation interests, the following categories of credit grades are utilized:

Pass = Higher quality loan participation interests that do not fit any of the other categories described below.

OLEM = Potentially weak loan participation interests.  The credit risk may be relatively minor yet represent a risk given certain specific circumstances.  If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect the Company’s position in the future.

Substandard = Inadequately protected loan participation interests by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan participation interest.  These loan participation interests have identified weaknesses that could hinder normal repayment or collection of the debt.  It is likely that the Company will sustain some loss if any identified weaknesses are not mitigated.

Doubtful = Loan participation interests that have all of the weaknesses inherent in those loan participation interests classified as Substandard, with the added elements of the full collection of the loan participation interest is improbable and that the possibility of loss is high.

The categories above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of the loan and subsequently updated as appropriate.

Commercial loan participation interests categorized as OLEM, Substandard, or Doubtful are considered Criticized loan participation interests.  Commercial loan participation interests categorized as Substandard or Doubtful are considered Classified loan participation interests.

For all classes within the consumer and residential real estate portfolio, each loan participation interest is assigned a specific PD factor that is generally based on the borrower’s most recent credit bureau score (FICO), which is updated quarterly.  A FICO credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus.  The FICO credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers.  The higher the FICO credit bureau score, the better the odds of repayment and therefore, an indicator of lower credit risk.

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The following table presents loan participation interest balances by credit quality indicator as of September 30, 2011:

September 30, 2011
	Credit Risk Profile by UCS classification
(dollar amounts in thousands)	Pass		OLEM		Substandard		Doubtful		Total
Commercial real estate:
Industrial and warehouse	$	653,117	$	13,657	$	29,054	$	34	$	695,862
Retail properties		643,561		33,879		14,676		—		692,116
Office		505,841		14,721		16,289		85		536,936
Multi family		185,800		3,650		11,256		—		200,706
Other commercial real estate		879,337		49,762		31,650		—		960,749
Total commercial real estate	$	2,867,656	$	115,669	$	102,925	$	119	$	3,086,369

	Credit Risk Profile by FICO score (1)
		750+		650-749	<650		Other		Total
Consumer and residential real estate:
Secured by first-lien	$	154,634	$	120,868	$	68,034	$	—	$	343,536
Secured by second-lien		43,175		45,659		34,333		—		123,167
Total consumer and residential real estate	$	197,809	$	166,527	$	102,367	$	—	$	466,703

December 31, 2010
	Credit Risk Profile by UCS classification
	Pass		OLEM		Substandard		Doubtful		Total
Commercial real estate:
Industrial and warehouse	$	585,662	$	27,126	$	38,959	$	34	$	651,781
Retail properties		520,974		15,618		23,008		—		559,600
Office		495,171		24,170		25,998		84		545,423
Multi family		225,498		4,317		12,646		—		242,461
Other commercial real estate		875,022		16,521		58,842		61		950,446
Total commercial real estate	$	2,702,327	$	87,752	$	159,453	$	179	$	2,949,711

	Credit Risk Profile by FICO score (1)
		750+		650-749	<650		Other		Total
Consumer and residential real estate:
Secured by first-lien	$	190,339	$	137,888	$	72,778	$	318	$	401,323
Secured by second-lien		60,887		59,251		41,946		—		162,084
Total consumer and residential real estate	$	251,226	$	197,139	$	114,724	$	318	$	563,407

(1) Reflects currently updated customer credit scores.

Impaired Loans

For all classes within the CRE portfolio, all loan participation interests with an outstanding balance of greater than $1 million are considered for individual impairment evaluation on a quarterly basis.  Generally, consumer loan participation interests within any class are not individually evaluated on a regular basis for impairment.

Once a loan participation interest has been identified for an assessment of impairment, the loan participation interest is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected.  This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.

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When a loan participation interest in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan participation interest’s effective interest rate or, as a practical expedient, the observable market price of the loan participation interest, or the fair value of the collateral if the loan participation interest is collateral-dependent.  When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan participation interest adjusted for any premium or discount.  When the contractual interest rate is variable, the effective interest rate of the loan participation interest changes over time.  A specific reserve is established as a component of the ALPL when a loan participation interest has been determined to be impaired.  Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan participation interest's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, the impairment is recalculated and the specific reserve is appropriately adjusted.  Similarly, if impairment is measured based on the observable market price of an impaired loan participation interest or the fair value of the collateral of an impaired collateral-dependent loan participation interest, the specific reserve is adjusted.

When a loan participation interest within any class is impaired, interest income is discontinued unless the receipt of principal and interest is no longer in doubt.  Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms.  Cash receipts received on nonaccrual impaired loan participation interests within any class are generally applied entirely against principal until the loan participation interest has been collected in full, after which time any additional cash receipts are recognized as interest income.  Cash receipts received on accruing impaired loan participation interests within any class are applied in the same manner as accruing loan participation interests that are not considered impaired.

The following table presents summarized data for impaired loan participation interests and the related ALPL by portfolio segment:

			Consumer and
	Commercial		Residential
	Real Estate		Real Estate		Total
ALPL at September 30, 2011:
(dollar amounts in thousands)
Portion of ending balance:
Attributable to loan participation interests individually evaluated for impairment	$	6,707	$	426	$	7,133
Attributable to loan participation interests collectively evaluated for impairment		74,134		11,632		85,766
Total ALPL balance at September 30, 2011	$	80,841	$	12,058	$	92,899
ALPL associated with portfolio loan participation interests acquired with deteriorated credit quality	$	—	$	—	$	—
Loans Participation Interests at September 30, 2011:
Portion of ending balance:
Individually evaluated for impairment	$	31,893	$	13,448	$	45,341
Collectively evaluated for impairment		3,054,476		453,255		3,507,731
Total loan participation interests evaluated for impairment	$	3,086,369	$	466,703	$	3,553,072
Portfolio loan participation interests acquired with deteriorated credit quality	$	—	$	—	$	—
ALPL at December 31, 2010:
Portion of ALPL balance:
Attributable to loan participation interests individually evaluated for impairment	$	8,115	$	156	$	8,271
Attributable to loan participation interests collectively evaluated for impairment		89,805		12,027		101,832
Total ALPL balance at December 31, 2010	$	97,920	$	12,183	$	110,103
ALPL associated with portfolio loan participation interests acquired with deteriorated credit quality	$	—	$	—	$	—
Loans Participation Interests at December 31, 2010:
Portion of ending balance:
Individually evaluated for impairment	$	25,294	$	3,464	$	28,758
Collectively evaluated for impairment		2,924,417		559,943		3,484,360
Total loan participation interests evaluated for impairment	$	2,949,711	$	563,407	$	3,513,118
Portfolio loan participation interests acquired with deteriorated credit quality	$	—	$	—	$	—

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The following tables present detailed impaired loan participation interest information by class:  (1), (2)

(dollar amounts in thousands)							Three Months Ended				Nine Months Ended
	September 30, 2011						September 30, 2011				September 30, 2011
			Unpaid						Interest				Interest
	Ending		Principal		Related		Average		Income		Average		Income
	Balance		Balance (4)		Allowance		Balance		Recognized		Balance		Recognized
With no related allowance recorded:
Commercial real estate:
Industrial and warehouse	$	—	$	—	$	—	$	1,434	$	10	$	719	$	15
Retail properties		2,982		5,865		—		3,009		—		3,721		—
Office		—		—		—		—		—		—		—
Multi family		—		—		—		—		—		—		—
Other commercial real estate		—		—		—		100		—		94		—
Total commercial real estate	$	2,982	$	5,865	$	—	$	4,543	$	10	$	4,534	$	15
Consumer and residential real estate:
Secured by first-lien	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by second-lien		—		—		—		—		—		—		—
Total consumer and residential real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—
With an allowance recorded:
Commercial real estate: (3)
Industrial and warehouse	$	17,808	$	22,512	$	4,812	$	18,998	$	5	$	8,540	$	5
Retail properties		—		—		—		—		—		772		—
Office		6,735		11,822		486		6,854		—		3,067		—
Multi family		1,129		1,298		99		1,162		—		1,589		—
Other commercial real estate		3,239		6,844		1,310		3,888		—		7,733		14
Total commercial real estate	$	28,911	$	42,476	$	6,707	$	30,902	$	5	$	21,701	$	19
Consumer and residential real estate:
Secured by first-lien	$	10,526	$	11,089	$	187	$	11,048	$	119	$	9,265	$	361
Secured by second-lien		2,922		2,922		239		3,121		50		2,418		158
Total consumer and residential real estate	$	13,448	$	14,011	$	426	$	14,169	$	169	$	11,683	$	519

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(dollar amounts in thousands)
	December 31, 2010
	Ending		Unpaid Principal		Related
	Balance		Balance (4)		Allowance
With no related allowance recorded:
Commercial real estate:
Industrial and warehouse	$	—	$	—	$	—
Retail properties		6,066		20,320		—
Office		—		—		—
Multi family		—		—		—
Other commercial real estate		124		124		—
Total commercial real estate	$	6,190	$	20,444	$	—
Consumer and residential real estate:
Secured by first-lien	$	—	$	—	$	—
Secured by second-lien		—		—		—
Total consumer and residential real estate	$	—	$	—	$	—
With an allowance recorded:
Commercial real estate:
Industrial and warehouse	$	—	$	—	$	—
Retail properties		3,696		4,400		1,103
Office		—		—		—
Multi family		1,370		1,436		675
Other commercial real estate		14,039		23,364		6,336
Total commercial real estate	$	19,105	$	29,200	$	8,114
Consumer and residential real estate:
Secured by first-lien	$	3,464	$	3,952	$	156
Secured by second-lien		—		—		—
Total consumer and residential real estate	$	3,464	$	3,952	$	156

(1)	These tables do not include loans fully charged-off.
(2)	All consumer and residential real estate impaired loans are considered impaired due to their status as a TDR.
(3)	At September 30, 2011, $47 thousand of the $28,911 thousand commercial real estate loan participation interests with an allowance recorded were considered impaired due to their status as a TDR.
(4)	The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.

TDR Loan Participation Interests

TDRs are modified loan participation interests where a concession was provided to a borrower experiencing financial difficulties.  Loan participation interest modifications are considered TDRs when the concessions provided are not available to the borrower through either the Bank’s normal channels or other sources. However, not all loan participation interest modifications are TDRs.

TDR Concession Types

The Bank’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations.  Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time.  All loan modifications, including those classified as TDRs, are reviewed and approved by the Bank. The types of concessions provided to borrowers include:

· Interest rate reduction:  A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt.

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· Amortization or maturity date change beyond what the collateral supports, including any of the following:

(1) Lengthens the amortization period of the amortized principal beyond market terms.  This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan.  Principal is generally not forgiven.  

(2) Reduces the amount of loan principal to be amortized.  This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan.  Principal is generally not forgiven.  

(3) Extends the maturity date or dates of the debt beyond what the collateral supports.  This concession generally applies to loans without a balloon payment at the end of the term of the loan.

· Other:  A concession that is not categorized as one of the concessions described above.  These concessions include, but are not limited to:  principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest.  Principal forgiveness may result from any TDR modification of any concession type.  However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the three-month and nine-month periods ended September 30, 2011, was not significant.

TDRs by Loan Participation Interest Type

The following is a description of TDRs by loan participation interest type:

Commercial real estate loan participation interest TDRs – CRE accruing TDRs often result from loan participation interests receiving a concession with terms that are not considered a market transaction to the Bank.  The TDR remains in accruing status as long as the customer is less than 90 days past due on payments per the restructured loan participation interest terms and no loss is expected.

CRE nonaccrual TDRs result from either: (1) an accruing CRE TDR being placed on nonaccrual status, or (2) a workout where an existing CRE NAL is restructured and a concession was given.  At times, these workouts restructure the NAL so that two or more new notes are created.  The primary note is underwritten based upon the Bank’s normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual principal and interest.  The terms on the secondary note(s) vary by situation, and may include notes that defer principal and interest payments until after the primary note is repaid.  Creating two or more notes often allows the borrower to continue a project or weather a temporary economic downturn and allows the Bank to right-size a loan based upon the current expectations for a project’s performance.  Additionally, if a charge-off was taken as part of the restructuring, the TDR status is not considered for removal.   The TDR status on CRE loans is considered for removal if the loan is subsequently modified at market terms.

Consumer and residential real estate loan participation interest TDRs – Consumer and residential real estate TDRs represent loan modifications associated with traditional first-lien mortgage loans, as well as first-lien and second-lien home equity loans, in which a concession has been provided to the borrower.  The primary concessions given to these borrowers are amortization or maturity date changes and interest rate reductions.  Consumer and residential real estate loans identified as TDRs include borrowers unable to refinance their mortgages through the Bank’s normal mortgage origination channels or through other independent sources.  Some, but not all, of the loans may be delinquent.

TDR Impact on Credit Quality

The ALPL is largely driven by updated risk ratings assigned to CRE loan participation interests, updated borrower credit scores on consumer and residential real estate, and borrower delinquency history in both portfolios.  As such, the provision for credit losses is impacted primarily by changes in borrower payment performance rather than the TDR classification.  TDRs can be classified as either accrual or nonaccrual loan participation interests.  Nonaccrual TDRs are included in NALs whereas accruing TDRs are excluded from NALs as it is probable that all contractual principal and interest due under the restructured terms will be collected.

Commercial real estate loan participation interest TDRs –  In instances where the Bank substantiates that it will collect the outstanding balance in full, the note is considered for return to accrual status upon the borrower sustaining sufficient cash flows for a six-month period of time.  This six-month period could extend before or after the restructure date.  If a charge-off was taken as part of the restructuring, any interest or principal payments received on that note are applied to first reduce the outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses.

Consumer and residential real estate loan participation interest TDRs – Modified loans identified as TDRs are aggregated into pools for analysis.  Cash flows and weighted average interest rates are used to calculate impairment at the pooled-loan level.  Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.

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Residential mortgage loan participation interests not guaranteed by a U.S. government agency such as the FHA, VA, and the USDA, including TDR loan participation interests, are reported as accrual or nonaccrual based upon delinquency status.  Nonaccrual TDRs are those that are greater than 150-days contractually past due.  Loan participation interests guaranteed by U.S. government organizations continue to accrue interest upon delinquency.

The following table presents new TDR activity by class for the three-month and nine-month periods ended September 30, 2011:

	New Troubled Debt Restructurings During The
	Three-Month Period Ended September 30, 2011 (1)
(dollar amounts in thousands)	Number of Contracts		Post-modification Outstanding Balance (2)		Net Change In ALPL Resulting From Modification
Consumer and residential real estate - Secured by first-lien:
Interest rate reduction		4	$	396	$	(123	)
Amortization or maturity date change		7		2,523		34
Other		—		—		—
Total consumer and residential real estate - Secured by first-lien		11	$	2,919	$	(89	)
Consumer and residential real estate - Secured by second-lien:
Interest rate reduction		—	$	—	$	—
Amortization or maturity date change		5		68		(7	)
Other		—		—		—
Total consumer and residential real estate - Secured by second-lien		5	$	68	$	(7	)

	New Troubled Debt Restructurings During The
	Nine-Month Period Ended September 30, 2011 (3)
(dollar amounts in thousands)	Number of Contracts		Post-modification Outstanding Balance (1)		Net Change In ALPL Resulting From Modification
CRE - Industrial and warehouse:
Interest rate reduction		1	$	2,165	$	(299	)
Amortization or maturity date change		—		—		—
Other		—		—		—
Total CRE - Industrial and warehouse properties		1	$	2,165	$	(299	)
Consumer and residential real estate - Secured by first-lien:
Interest rate reduction		14	$	1,646	$	(336	)
Amortization or maturity date change		33		9,231		91
Other		3		1,996		45
Total consumer and residential real estate - Secured by first-lien		50	$	12,873	$	(200	)
Consumer and residential real estate - Secured by second-lien:
Interest rate reduction		15	$	610	$	(124	)
Amortization or maturity date change		14		125		(8	)
Other		—		—		—
Total consumer and residential real estate - Secured by second-lien		29	$	735	$	(132	)

(1)	For the three-month period ended September 30, 2011, there were no new troubled debt restructurings for the following classes: CRE - Industrial and warehouse, CRE - Retail properties, CRE - Office, CRE - Multi family, and CRE - Other commercial real estate.
(2)	Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of a restructuring are not significant.
(3)	For the nine-month period ended September 30, 2011, there were no new troubled debt restructurings for the following classes: CRE - Retail properties, CRE - Office, CRE - Multi family, and CRE - Other commercial real estate.

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All classes within the CRE portfolios are considered as redefaulted at 90-days past due.  First-lien and second-lien consumer and residential real estate loan participation interests are considered as redefaulted at 150-days past due and 120-days past due, respectively.

The following table presents TDRs modified within the previous twelve months that have subsequently redefaulted during the three-month and nine-month periods ended September 30, 2011:

	Troubled Debt Restructurings Within The Previous Twelve Months
	That Have Subsequently Defaulted During The (1), (2)
	Three-month period ended September 30, 2011				Nine-month period ended September 30, 2011
(dollar amounts in thousands)	Number of		Ending		Number of		Ending
	Contracts		Balance		Contracts		Balance
Consumer and residential real estate secured by first-lien:
Interest rate reduction		—	$	—		—	$	—
Amortization or maturity date change		2		77		3		115
Other		—		—		—		—
Total consumer and residential real estate secured by first-lien		2	$	77		3	$	115
Consumer and residential real estate secured by second-lien:
Interest rate reduction		—	$	—		1	$	14
Amortization or maturity date change		—		—		2		79
Other		—		—		—		—
Total consumer and residential real estate secured by second-lien		—	$	—		3	$	93

(1)	Subsequent default is defined as a payment redefault within 12 months of the restructuring date.
(2)	For both the three-month period and nine-month period ended September 30, 2011, there were no troubled debt restructurings within the previous twelve months that have subsequently defaulted for the following classes:  CRE - Industrial and warehouse, CRE - Retail properties, CRE - Office, CRE - Multi family, and CRE - Other commercial real estate.

Note 4 - Related Party Transactions

The Bank is required, under the Agreements, to service HPCI’s loan participation interest 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.

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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 $1.7 million and $1.9 million for the three-month periods ended September 30, 2011 and 2010, respectively. For the respective nine-month periods, the costs were $5.3 million and $6.1 million.

	January 1, 2010
	through
	September 30, 2011
Commercial and commercial real estate		0.125	%
Consumer		0.650
Residential real estate		0.267

Pursuant to the 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 CRE loans, HPCI has waived its right to receive any origination fees associated with participation interests in CRE loans. The Bank and HPCI performed a review of loan servicing fees in 2011, 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 2012.

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 pays 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 each of the three-month periods ended September 30, 2011 and 2010, and are included in other noninterest expense. For each of the respective nine-month periods, the cost was $0.3 million.

The following table represents the ownership of HPCI’s outstanding common and preferred securities as of September 30, 2011:

	Number of
	Common		Number of Preferred Securities
Shareholder:	Shares		Class A		Class B		Class C		Class E
Held by related parties:
HPCII		11,130,000		—		—		—		—
Holdings		2,870,000		895		—		—		—
Tower Hill Securities, Inc.		—		—		—		—		1,400,000
HPC Holdings-II, Inc.		—		—		400,000		—		—
Total held by related parties		14,000,000		895		400,000		—		1,400,000
Other shareholders		—		105		—		2,000,000		—
Total shares outstanding		14,000,000		1,000		400,000		2,000,000		1,400,000

As of September 30, 2011, 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, 2011, HPCI board members and executive officers beneficially owned, in the aggregate, a total of 5,871 shares, or less than 1%, of the HPCI Class C preferred securities.  All of the Class E preferred securities are owned by Tower Hill Securities, Inc.  In the event HPCI redeems its Class C or Class E preferred securities, holders of such securities will be entitled to receive $25.00 per share for Class C shares, $250.00 per share for Class E shares, plus any accrued and unpaid dividends on such shares.  The redemption amount may be significantly lower than the then current market price of the Class C preferred securities.

Both the Class C and Class E preferred securities are entitled to one-tenth of one vote per share on all matters submitted to HPCI shareholders.  If the Bank becomes Under-capitalized, or is placed in conservatorship or receivership, the OCC may require the exchange of Class C and Class E Preferred securities for preferred securities of the Bank with substantially equivalent terms. The Class E 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.

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

21

A dividend on common shares and a return of capital were distributed to common shareholders through a distribution paid on January 4, 2011, which reduced HPCI’s cash balance by $500.0 million.

HPCI had a noninterest-bearing receivable due from the Bank of $50.4 million, $61.8 million, and $116.6 million at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.  The balances represent the net settlement amounts due to, or from, the Bank for the last month of the period’s activity.  Principal and interest payments on loan participations remitted by customers are due from the Bank, while new loan participation purchases are due to the Bank.  The amounts are settled with the Bank within the first few days of the following month.

HPCI has assets pledged in association with the Bank’s advances from the FHLB.  For further information regarding this, see Note 6.

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 5 - Fair Values of Assets and Liabilities

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Fair value measurements are classified within one of three levels in a valuation hierarchy based upon the transparency of inputs 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 on-going basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

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

At September 30, 2011, HPCI identified the following loan participation interests where the carrying value exceeded the fair value of the underlying collateral for the loan.  The fair value impairment for the nine-month period ended September 30, 2011, was recorded within the provision for credit losses.

	Fair Value Measurements Using
(dollar amounts in millions)	Fair Value at September 30, 2011		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total Gains/(Losses) For the Nine Months Ended September 30, 2011
2011
Loan participation interests	$	31.0	$	—	$	—	$	31.0	$	(10.7	)

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

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Fair Value of Financial Instruments

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

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

Loan participation interests — Underlying variable rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of probable losses and the credit risk associated in the loan portfolio. As of September 30, 2011, the net carrying amount of $3.5 billion corresponded to a fair value of $3.1 billion. As of September 30, 2010, the net carrying value of $ 3.4 billion corresponded to a fair value of $2.9 billion. At September 30, 2011, the valuation of the loan portfolio reflected discounts that HPCI believed are consistent with transactions occurring in the marketplace.

Note 6 - Commitments and Contingencies

The Bank is eligible to obtain collateralized advances from various federal and government-sponsored agencies such as the FHLB.  From time-to-time, HPCI may be asked to act as guarantor of the Bank’s obligations under such advances and / or pledge all or a portion of its assets in connection with those advances.  Any such guarantee and / or pledge would rank senior to HPCI’s common and preferred securities upon liquidation. Accordingly, any federal or government-sponsored agencies that make advances to the Bank where HPCI has acted as guarantor or has pledged all or a portion of its assets as collateral will have a liquidation preference over the holders of HPCI’s securities. Any such guarantee and / or pledge in connection with the Bank’s advances from the FHLB falls within the definition of Permitted Indebtedness (as defined in HPCI’s Articles of Incorporation) and, therefore, HPCI is not required to obtain the consent of the holders of its common or preferred securities for any such guarantee and / or pledge.

Currently, HPCI’s assets have been used to collateralize only one such facility.  The Bank has a line of credit from the FHLB, limited to $2.8 billion as of September 30, 2011, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had exposure of $32.6 million under the facility.

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 $0.9 billion as of September 30, 2011, 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 $0.4 billion at September 30, 2011.  In 2011, the loans pledged consisted of the 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 $0.4 million and $0.5 million for the three-month periods ended September 30, 2011 and 2010, respectively, as compensation for making such assets available to the Bank. The amounts paid to HPCI for the nine-month periods ended September 30, 2011 and 2010 were $1.2 million and $1.6 million, respectively.

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, 2011, December 31, 2010, and September 30, 2010, HPCI’s unfunded loan commitments totaled $234.4 million, $195.7 million, and $194.5 million, respectively.

Dividends

Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings.  The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock.  Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend at September 30, 2011, 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 Class A, B, and C Preferred securities throughout 2010 and 2011. For the foreseeable future, management intends to request approval for any future dividend; however, there can be no assurance that the OCC will approve future Class A, B, and C Preferred dividends.

23

Note 7 - 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

We are an Ohio corporation operating as a REIT for federal income tax purposes. Our principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to our shareholders.

The Bank is required, under the Agreements, to service our loan portfolio in a manner substantially the same as for similar work for transactions on our 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 us accounting and reporting services as required. The Bank is required to adhere to our policies relating to the relationship between us 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 our participation interests to date were acquired directly or indirectly from the Bank.

The following discussion and analysis provides information we believe 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 MD&A appearing in our Form 10-K should be read in conjunction with this interim MD&A.

Forward-looking Statements

This report, including the MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties.  Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: (1) worsening of credit quality performance due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) changes in economic conditions; (3) movements in interest rates; (4) competitive pressures on the Bank’s product pricing and services which could impact the availability of participation interests; (5) changes in accounting policies and principles and the accuracy of our assumptions and estimates used to prepare our financial statements; (6) extended disruption of vital infrastructure; and (7) the nature, extent, and timing of governmental actions and reforms, including the Dodd-Frank Act, as well as future regulations which will be adopted by the relevant regulatory agencies, including the CFPB, to implement the Dodd-Frank Act’s provisions.  Additional factors that could cause results to differ materially from those described above can be found in our 2010 Annual Report on Form 10-K, and documents subsequently filed by us with the SEC.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume 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 except as required by federal securities laws.  As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

Risk Factors

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

Critical Accounting Policies and Use of Significant Estimates

Our financial statements are prepared in accordance with GAAP. 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 our financial statements.  Note 1 to the Financial Statements included in our 2010 Form 10-K as supplemented by this report lists significant accounting policies used by Management in the development and presentation of our 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 us and our financial position, results of operations, and cash flows.

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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 was used or if estimates changed from period-to-period.  Estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that significantly differ from when those estimates were made.

Our most significant accounting estimates relate to our ACL.  This significant accounting estimate and related application is discussed in our 2010 Form 10-K.  The related fair value measurement on a nonrecurring basis can be found in Note 5 of Notes to the Unaudited Condensed Financial Statements.

QUALIFICATION TESTS

Qualification as a REIT involves application of specific provisions of the IRC 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, 2011, we 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 nontaxable status for federal income tax purposes.  For the tax year 2010, we met all annual income and distribution tests.

We operate in a manner that will not cause us 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, we must invest at least 55% of our assets in Qualifying Interests and an additional 25% of our assets in real estate-related assets, although this percentage may be reduced to the extent that more than 55% of our assets are invested in Qualifying Interests.  The assets in which we may invest under the IRC therefore may be further limited by the provisions of the Investment Company Act and positions taken by the SEC staff.  At September 30, 2011, we were exempt from registration as an investment company under the Investment Company Act and we intend to operate our business in a manner that will maintain this exemption.

RESULTS OF OPERATIONS

Our income is primarily derived from our 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 our preferred dividend obligations. The preferred stock is considered equity and, therefore, the dividends are not reflected as interest expense.

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The following table details the results of operations for the last five quarters.  The $17.9 million increase in net income for the 2011 third quarter, compared with same period in 2010, was primarily the result of a $19.1 million increase of the reduction in the allowance for credit losses, partially offset by lower interest and fee income.

Table 1 - Quarterly Statements of Income

	2011								2010						3Q11 vs. 3Q10
(dollar amounts in thousands)	Third			Second		First			Fourth			Third			$ chg			%Chg
Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	28,732		$	27,774	$	27,356		$	27,609		$	27,173		$	1,559			6	%
Consumer and residential real estate		7,833			8,262		8,830			9,518			10,418			(2,585	)		(25	)
Total loan participation interest income		36,565			36,036		36,186			37,127			37,591			(1,026	)		(3	)
Fees from loan participation interests		297			320		369			302			276			21			8
Interest on deposits with The Bank		148			169		156			475			383			(235	)		(61	)
Total interest and fee income		37,010			36,525		36,711			37,904			38,250			(1,240	)		(3	)
Provision (reduction in
allowance) for credit losses		(23,067	)		9,255		(16,365	)		(38,818	)		(3,957	)		(19,110	)		483
Interest income after provision (reduction
in allowance) for credit losses		60,077			27,270		53,076			76,722			42,207			17,870			42
Noninterest income:
Rental income		18			17		18			17			18			—			—
Collateral fees		371			398		420			446			511			(140	)		(27	)
Total noninterest income		389			415		438			463			529			(140	)		(26	)
Noninterest expense:
Servicing costs		1,732			1,750		1,787			1,851			1,945			(213	)		(11	)
Other		175			186		164			168			174			1			1
Total noninterest expense		1,907			1,936		1,951			2,019			2,119			(212	)		(10	)
Net income	$	58,559		$	25,749	$	51,563		$	75,166		$	40,617		$	17,942			44	%
Dividends declared on preferred shares		2,867			2,971		3,054			2,951			3,406			(539	)		(16	)
Net income applicable to common shares(1)	$	55,692		$	22,778	$	48,509		$	72,215		$	37,211		$	18,481			50	%

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

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The following table details the results of operations for the nine-month periods ended September 30, 2011 and 2010.  The $20.7 million increase in net income for the first nine-month period of 2011, compared to the same period in 2010, was primarily the result of a $25.6 million increase of the reduction in allowance for credit losses, partially offset by lower interest income.

Table 2 - Selected Year to Date Income Statement Data

	Nine Months Ended September 30,						Change
(dollar amounts in thousands)	2011			2010			Amount			Percent
Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	83,862		$	80,591		$	3,271			4	%
Consumer and residential real estate		24,925			33,018			(8,093	)		(25	)
Total loan participation interest income		108,787			113,609			(4,822	)		(4	)
Fees from loan participation interests		986			1,194			(208	)		(17	)
Interest on deposits with the Bank		473			814			(341	)		(42	)
Total interest and fee income		110,246			115,617			(5,371	)		(5	)
Reduction in allowance for credit losses		(30,177	)		(4,532	)		(25,645	)		566
Interest income after reduction in allowance for credit losses		140,423			120,149			20,274			17
Noninterest income:
Rental income		53			52			1			2
Collateral fees		1,189			1,591			(402	)		(25	)
Total noninterest income		1,242			1,643			(401	)		(24	)
Noninterest expense:
Servicing costs		5,269			6,086			(817	)		(13	)
Other		525			517			8			2
Total noninterest expense		5,794			6,603			(809	)		(12	)
Net income	$	135,871		$	115,189		$	20,682			18	%
Dividends declared on preferred shares		8,892			9,322			(430	)		(5	)
Net income applicable to common shares(1)	$	126,979		$	105,867		$	21,112			20	%

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

Interest and Fee Income

Our primary source of revenue is interest and fee income on our participation interests in loans.  At September 30, 2011and 2010, we 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 our average balances, interest and fee income, and yields for the three and nine-month periods ended September 30, 2011 and 2010:

Table 3 - Quarterly Interest and Fee Income

	Three Months Ended September 30,
	2011							2010
(dollar amounts in millions)	Average Balance		Income(1)		Yield			Average Balance		Income(1)		Yield
Loan participation interests:(2)
Commercial real estate	$	3,104.7	$	29.0		3.71	%	$	2,982.7	$	27.4		3.64	%
Consumer and residential real estate		483.1		7.9		6.45			638.5		10.5		6.51
Total loan participation interests		3,587.8		36.9		4.08			3,621.2		37.9		4.15
Interest-bearing deposits in the Bank		193.1		0.1		0.30			500.2		0.4		0.30
Total	$	3,780.9	$	37.0		3.88	%	$	4,121.4	$	38.3		3.68	%

(1) Income includes interest and fees.

(2) For the purposes of this analysis, average balances include nonaccrual loans.

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

	Nine Months Ended September 30,
	2011							2010
(dollar amounts in millions)	Average Balance		Income(1)		Yield			Average Balance		Income(1)		Yield
Loan participation interests: (2)
Commercial real estate	$	3,020.1	$	84.8		3.75	%	$	3,029.3	$	81.6		3.60	%
Consumer and residential real estate		514.2		25.0		6.50			687.2		33.2		6.46
Total loan participation interests		3,534.3		109.8		4.15			3,716.5		114.8		4.13
Interest-bearing deposits in the Bank		208.0		0.4		0.30			385.8		0.8		0.28
Total	$	3,742.3	$	110.2		3.94	%	$	4,102.3	$	115.6		3.77	%

(1) Income includes interest and fees.

(2) For the purposes of this analysis, average balances include nonaccrual loans.

Interest and fee income was $37.0 million for the three-months ended September 30, 2011 compared with $38.3 million for the year ago quarter.  As shown in Table 3, the decrease in interest and fee income was the result of a slight decrease in yields on loan participation interests.  For the three-months ended September 30, 2011, the loan yield decreased 7 basis points to 4.08%, while total loan participation interest balances decreased $33.4 million, or 1% compared to the year-ago quarter.

For the nine-months ended September 30, 2011 and 2010, interest and fee income was $110.2 million and $115.6 million, respectively.  As shown in Table 4, the decrease in interest and fee income was the result of lower earning asset balances, as loan yields remained relatively flat.  At September 30, 2011, December 31, 2010, and September 30, 2010, approximately 77%, 75%, and 74%, respectively, of the portfolio was comprised of variable interest rate loan participations.

Provision (reduction in allowance) for credit losses

The provision (reduction in allowance) for credit losses is the charge (credit) to earnings necessary to maintain the ACL at a level appropriate to absorb our estimate of inherent probable losses in the loan portfolio. Loan participations are acquired net of related ALPL.  As a result, this ALPL is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than HPCI having to record a provision expense for ALPL. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. As loan participations mature, refinance, or other such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL.

Such adjustments in the 2011 third quarter resulted in a reduction in allowance for credit losses of $23.1 million compared to a provision for credit losses of $9.3 million in the prior quarter and a reduction in allowance for credit losses of $4.0 million in the year-ago quarter.  For the first nine-month period of 2011, the reduction in allowance for credit losses was $30.2 million, compared to a reduction in allowance for credit losses of $4.5 million in the comparable year-ago period.  See ACL discussion within the Credit Quality section.

Noninterest Income and Noninterest Expense

Noninterest income for the 2011 third quarter was $0.4 million compared with $0.5 million for the same year-ago quarter.  For the nine-month periods ended September 30, 2011 and 2010, noninterest income was $1.2 million and $1.6 million, respectively.  Noninterest income includes fees from the Bank for use of our assets as collateral for the Bank’s advances from the FHLB.  For the 2011 third quarter, these fees totaled $0.4 million, compared with $0.5 million for the prior year quarter.  For the first nine-month period of 2011 and 2010, these fees totaled $1.2 million and $1.6 million, respectively.  See Note 6 to the Financial Statements included in this report for more information regarding the use of our assets as collateral for the Bank’s advances from the FHLB.

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Noninterest expense for the 2011 third quarter was $1.9 million compared with $2.1 million for the same year-ago quarter.  For the nine-month periods ended September 30, 2011 and 2010, noninterest expense was $5.8 million and $6.6 million, respectively. The predominant component of our noninterest expense is the fee paid to the Bank for servicing the loans underlying the participation interests.  For the 2011 third quarter, servicing costs amounted to $1.7 million, compared with $1.9 million for the prior year quarter.   The servicing costs for the nine-month periods ended September 30, 2011 and 2010 totaled $5.3 million and $6.1 million, respectively.  The decrease in the servicing costs from the comparable periods reflected lower average loan balances. The annual servicing rates the Bank charged with respect to outstanding principal balances in 2011 and 2010 were:

	January 1, 2010
	through
	September 30, 2011
Commercial and commercial real estate		0.125	%
Consumer		0.650
Residential real estate		0.267

Pursuant to the Agreements, the amount and terms of the loan-servicing fee between the Bank and us 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 CRE loans, we waive our right to receive any origination fees associated with participation interests in CRE loans.  We, along with the Bank, performed a review of loan servicing fees in 2011, and agreed to retain current servicing rates for all loan participation categories, including the continued waiver by us of our right to origination fees, until such time as servicing fees are reviewed in 2012.

Provision for Income Taxes

We have elected to be treated as a REIT for federal income tax purposes and intend to maintain compliance with the provisions of the IRC and, therefore, are not subject to federal income taxes.  Thus, we had no provision for income taxes for the first nine-month periods of 2011 and 2010.

RISK MANAGEMENT AND CAPITAL

Risk awareness, identification and assessment, reporting, and active management are key elements to overall risk management.  The Bank manages risk to an aggregate moderate-to-low risk profile strategy through a control framework and by monitoring and responding to potential risks.  Management relies on the Bank’s credit management processes and procedures in evaluating and responding to risk within the loan participation interest portfolio.

Credit Risk

(This section should be read in conjunction with Note 3 of Notes to the Unaudited Condensed Financial Statements.)

Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation.  The significant change in the economic conditions and the resulting changes in borrower behavior over the past several years resulted in the focusing of significant resources to the identification, monitoring, and managing of credit risk.  In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, additional quantitative measurement capabilities have been implemented that utilize external data sources, enhanced use of modeling technology, and internal stress testing processes.

Under the Agreements, the Bank may, in accordance with our guidelines, dispose of any underlying loan participation interest that is rated as Substandard or lower, is placed in a nonaccrual status, or is renegotiated due to the financial deterioration of the borrower.  The Bank may, in accordance with our 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 Agreements.  Prior to completion of foreclosure or liquidation, the loan participation interest is sold to the Bank at fair market value.  The Bank then incurs all costs associated with repossession and foreclosure.

Loan Participation Interest Credit Exposure Mix

At September 30, 2011, CRE loan participation interests were 87% of total loan participation interests compared with 83% at September 30, 2010.   Total consumer and residential real estate loan participation interests were 13% of total loan participation interests at September 30, 2011, compared with 17% at September 30, 2010.  The change in the portfolio mix over the past 12 months reflects not purchasing any new consumer and residential real estate loan participation interests during this period.

Commercial Real Estate Credit

CRE 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 capabilities, appraised collateral value, industry sector trends, type of exposure, transaction structure, and the general economic outlook.

In commercial lending, on-going credit management is dependent on the type and nature of the loan. The Bank monitors all significant credit extensions on an on-going basis.  All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s PD and LGD (severity of loss). This two-dimensional rating methodology provides granularity in the portfolio management process. The PD is rated and applied at the borrower level. The LGD is rated and applied based on the type of credit extension and the underlying collateral.  The internal risk ratings are assessed and updated with each periodic monitoring event.  There is also extensive macro portfolio management analysis on an on-going basis.  As an example, the retail properties class of the CRE portfolio has received more frequent evaluation at the individual loan level given the weak environment and our portfolio composition (see Retail Properties discussion).  The Bank continually reviews and adjusts the risk-rating criteria based on actual experience, which provides the current risk level in the portfolio, and is the basis for determining an appropriate allowance amount for the portfolio.

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The Bank’s Credit Review group performs testing to provide an independent review and assessment of the quality and / or risk of new loan originations.  This group is part of the Bank’s Risk Management area, and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, as well as test the consistency of credit processes.

The CRE portfolio is diversified by customer size, as well as geographically throughout the Bank’s footprint.  No outstanding CRE loan participation interests comprised an industry or geographic concentration of lending.   CRE loan participation interests outstanding by property type and borrower location at September 30, 2011, were as follows:

Table 5 - Commercial Real Estate Loan Participation Interests by Property Type and Borrower Location

	September 30, 2011
(dollar amounts in thousands)	Ohio			Michigan				Indiana				Pennsylvania				Kentucky				Other				Total Amount				%
Industrial and warehouse	$	421,947			$	180,919			$	46,041			$	16,042			$	13,851			$	17,062			$	695,862			23	%
Retail properties		404,475				99,905				47,139				21,692				13,595				105,310				692,116			22
Office		331,863				95,622				12,424				54,491				13,874				28,662				536,936			17
Multi family		127,321				11,270				19,625				7,440				26,149				8,901				200,706			7
Other commercial real estate		529,149				253,326				38,474				41,921				35,131				62,748				960,749			31
Total	$	1,814,755			$	641,042			$	163,703			$	141,586			$	102,600			$	222,683			$	3,086,369			100	%
% of total portfolio		59	%			21	%			5	%			5	%			3	%			7	%			100	%

RETAIL PROPERTIES

The portfolio of CRE loan participation interests secured by retail properties totaled $0.7 billion, or approximately 22% of total CRE loan participation interests at September 30, 2011. Credit approval in this class is generally dependent on preleasing 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 loan participation interests in this portfolio segment.  Lower occupancy rates, reduced rental rates, and the expectation that these levels will remain stressed for the foreseeable future may adversely affect some borrowers’ ability to repay these loan participation interests.  The Bank has increased the level of credit risk management activity to this portfolio segment, and these loans are analyzed in detail by the Bank by combining property type, geographic location, and other data, to assess and manage credit concentration risks.

Consumer and Residential Real Estate Credit

Consumer credit approvals by the Bank are based on, among other factors, the financial strength and payment history of the borrower, type of exposure, and the transaction structure.  Consumer credit decisions are generally made in a centralized environment utilizing decision models.

Credit Quality

Credit quality performance during the 2011 third quarter, reflected improvement compared to the 2011 second quarter, as key quality metrics improved including a 10% decline in NCOs and a 14% decline in NPAs.  For a further discussion of Credit Quality, see HPCI’s Form 10-K for the year ended December 31, 2010.

NPAs

NPAs consist of loan participation interests in underlying loans that are no longer accruing interest.  Any loan participation interest in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt.

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Underlying CRE loan participation interests are placed on nonaccrual status at 90-days past due. Underlying first-lien and second-lien loan participation interests in consumer and residential real estate loans are placed on nonaccrual status at 150-days past due and 120-days past due, respectively.  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.  When, in Management’s judgment, the borrower’s ability to make required principal and interest payments has resumed and collectability is no longer in doubt, the loan participation interest is returned to accrual status.

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

Table 6 - Quarterly Nonperforming Assets

	2011									2010
(dollar amounts in thousands)	September 30,			June 30,			March 31,			December 31,			September 30,
Participation interest in nonaccrual assets:
Commercial real estate	$	54,150		$	65,062		$	40,849		$	53,953		$	87,302
Consumer and residential real estate		6,706			5,916			4,406			4,790			4,979
Total nonperforming assets	$	60,856		$	70,978		$	45,255		$	58,743		$	92,281
Accruing loan participation interests past due 90 days or more	$	3,261		$	2,710		$	3,215		$	4,802		$	4,737
NPAs as a % of total loan participation interests		1.71	%		2.00	%		1.29	%		1.67	%		2.60	%
ALPL as a % of NPAs		153			159			212			187			160
ACL as a % of NPAs		154			160			215			190			162

The $2.1 million, or 4%, increase in total NPAs compared with December 31, 2010, was essentially entirely centered in the consumer and residential real estate portfolio and reflected the negative impacts of the current weak economic conditions and the continued decline in residential real estate property values.  The slight increase in CRE NPAs primarily reflected the negative impact of two relatively large CRE relationships placed on nonaccrual status in the 2011 second quarter, almost entirely offset by the positive impacts of NCO activity and problem credit resolutions.

ACL

We maintain two reserves, both of which are available to absorb credit losses inherent in the loan participation interests portfolio:  the ALPL and the AULPC.  When summed together, these reserves constitute the total ACL.  Additions to the ALPL and AULPC result primarily from an allocation of the purchase price of loan participation interests acquired.

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The following table shows the activity in HPCI’s ALPL and AULPC for the last five quarters ended September 30, 2011, and for the nine-month periods ended September 30, 2011 and 2010:

Table 7 - Allowance for Credit Loss Activity

				2011						2010
(dollar amounts in thousands)	Third			Second			First			Fourth			Third
ALPL balance, beginning of period	$	112,514		$	95,866		$	110,103		$	147,607		$	144,097
Allowance of loan participation interests acquired		12,705			16,689			8,519			12,959			19,135
Net charge-offs:
Commercial real estate		(6,251	)		(7,899	)		(4,040	)		(8,991	)		(8,822	)
Consumer and residential real estate		(2,836	)		(2,146	)		(2,366	)		(2,975	)		(2,537	)
Total net charge-offs		(9,087	)		(10,045	)		(6,406	)		(11,966	)		(11,359	)
(Reduction in) Provision for ALPL		(23,233	)		10,004			(16,350	)		(38,497	)		(4,266	)
ALPL balance, end of period	$	92,899		$	112,514		$	95,866		$	110,103		$	147,607
AULPC balance, beginning of period	$	834		$	1,583		$	1,598		$	1,919		$	1,610
(Reduction in) Provision for AULPC		166			(749	)		(15	)		(321	)		309
AULPC balance, end of period	$	1,000		$	834		$	1,583		$	1,598		$	1,919
Total allowance for credit losses, end of period	$	93,899		$	113,348		$	97,449		$	111,701		$	149,526
ALPL as a % of total loan participation interests		2.61	%		3.17	%		2.74	%		3.13	%		4.16	%
ACL as a % of total loan participation interests		2.64			3.20			2.78			3.18			4.22

	Nine Months Ended September 30,
(dollar amounts in thousands)	2011			2010
ALPL balance, beginning of period	$	110,103		$	156,431
Allowance of loan participation interests acquired		37,913			44,082
Net charge-offs:
Commercial real estate		(18,190	)		(38,323	)
Consumer and residential real estate		(7,348	)		(9,739	)
Total net charge-offs		(25,538	)		(48,062	)
Provision for (reduction in) ALPL		(29,579	)		(4,844	)
ALPL balance, end of period	$	92,899		$	147,607
AULPC balance, beginning of period	$	1,598		$	1,607
Provision for (reduction in) AULPC		(598	)		312
AULPC balance, end of period	$	1,000		$	1,919
Total allowance for credit losses, end of period	$	93,899		$	149,526

The ACL decreased $17.8 million to $93.9 million, or 2.64% of period-end loan participation interests at September 30, 2011, compared with $111.7 million, or 3.18%, at December 31, 2010.  The decrease in the ACL was the result of an improvement in credit quality in the CRE portfolio, reflecting lower NCOs as well as a decrease in specific reserves.  The ACL as a percentage of period-end NPAs decreased to 154% from 190%.

Credit quality trends in the entire portfolio have generally improved since the 2010 third quarter and throughout 2011, and it is believed that this improvement will continue.  However, the continued weakness in the residential real estate market and the overall economic conditions remained stressed, and additional risks emerged during the first nine-month period of 2011.  These additional risks included the European banking sector stress, the continued budget issues in local governments, flat domestic economic growth, and the variety of policy proposals regarding job growth, debt management, and domestic tax policy.  Continued high unemployment, among other factors, has slowed any significant recovery.  In the near-term, Management anticipates a continued high unemployment rate and the concern around the U.S. and local government budget issues will continue to negatively impact the financial condition of some retail and commercial borrowers. The pronounced downturn in the residential real estate market that began in early 2007 has resulted in significantly lower residential real estate values.  The impact of the downturn in real estate values has had a significant impact on some borrowers as evidenced by the higher delinquencies and NCOs since late 2007. Management does not anticipate any meaningful economic improvement in the near-term.  All of these factors are impacting consumer confidence, as well as business investments and acquisitions.  Given the combination of these noted factors, Management believes that the ACL is appropriate and its coverage level is reflective of the quality of our portfolio and the current operating environment.

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NCOs

Any loan participation interest in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred.  Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment.

CRE loan participation interests are either charged-off or written down to net realizable value at 90-days past due.  First-lien and second-lien consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral at 150-days past due and 120-days past due, respectively.

The table below reflects NCO detail for each of the last five quarters and for the nine-month periods ended September 30, 2011 and 2010:

Table 8 - Net Charge-offs (1)

	2011												2010
(dollar amounts in thousands)	September 30,				June 30,				March 31,				December 31,				September 30,
Commercial real estate	$	6,251	0.80	%	$	7,899	1.05	%	$	4,040	0.55	%	$	8,991	1.23	%	$	8,822	1.18	%
Consumer and residential real estate		2,836	2.33			2,146	1.67			2,366	1.73			2,975	2.03			2,537	1.59
Total net charge-offs	$	9,087	1.00	%	$	10,045	1.14	%	$	6,406	0.73	%	$	11,966	1.36	%	$	11,359	1.25	%

	Nine months ended September 30,
(dollar amounts in thousands)	2011				2010
Commercial real estate	$	18,190	0.81	%	$	38,323	1.69	%
Consumer and residential real estate		7,348	1.91			9,739	1.91
Total net charge-offs	$	25,538	0.97	%	$	48,062	1.73	%

(1) Percentages represent the annualized percentage of related average loan participation interests.

The $1.0 million, or 10%, decline in NCOs for the 2011 third quarter compared to the prior quarter reflected a decline in CRE NCOs as a result of an improvement in the underlying credit quality of the portfolio as well as a lower level of large-dollar chargeoffs.  This decline was partially offset by an increase in consumer and residential real estate NCOs primarily reflecting the negative impacts of the weakened overall economy and the continued decline in residential real estate property values.

The $22.5 million, or 47%, decline in NCOs for the first nine-month period of 2011 compared to the first nine-month period of 2010 was primarily centered in the CRE portfolio and primarily reflected significant credit quality improvement in the underlying portfolio.

Market Risk

The predominate market risk to which we are exposed is the risk of loss due to a decline in interest rates.  If there is a decline in market interest rates, we may experience a reduction in interest income from our loan participation interests and a corresponding decrease in funds available to be distributed to shareholders.  When rates rise, we are exposed to declines in the economic value of equity since only approximately 23% of our loan participation portfolio is fixed rate.

Huntington conducts its monthly interest rate risk management on a centralized basis and does not manage our 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 12-month period.  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 us as of September 30, 2011, interest income for the next 12-month period would be expected to increase by $16.7 million, or 16.2% 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 $6.9 million, or 6.6%, 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.

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Using the economic value analysis model for us as of September 30, 2011, the fair value of loan participation interests over the next 12-month period would be expected to decline $35.9 million, or 1.0%, based on an immediate 200 basis point increase in rates above the forward rates implied in the yield curve.   Many of our 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 can not fall below 0%.  If they fell to zero, the fair value would be expected to increase only $3.6 million, or 0.1%.

Off-Balance Sheet Arrangements

Under the terms of the Agreements, we are obligated to make funds or credit available to the Bank, either directly or indirectly through Holdings so that the Bank may extend credit or pay letters-of-credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying our participation interests. At September 30, 2011, December 31, 2010, and September 30, 2010, HPCI’s unfunded commitments totaled $234.4 million, $195.7 million, and $194.5 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 our liquidity management is to ensure the availability of sufficient cash flows to fund our 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, we take 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, we 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 IRC 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, 2011, December 31, 2010, and September 30, 2010, we maintained cash and interest-bearing balances with the Bank totaling $220.0 million, $638.2 million, and $516.6 million, respectively.  We maintain and transact all of our 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, 2011, we had no material liabilities or contractual obligations, other than unfunded loan commitments of $234.4 million, with a weighted average remaining maturity of 1.50 years.  In addition to anticipated cash flows, as noted above, we have cash and interest bearing balances with the bank totaling $220.0 million to supplement the funding of  these liabilities and contractual commitments.

As of September 30, 2011, and December 31, 2010, shareholders’ equity was $3.7 billion and $3.6 billion, respectively. Shareholders’ equity as of September 30, 2010, was $4.0 billion.  During the 2011 first quarter, we paid common stock dividends and returned capital to common shareholders totaling $500.0 million.

Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings.  The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock.  Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend at September 30, 2011, without regulatory approval.  As a subsidiary of the Bank, we are also restricted from declaring or paying dividends without regulatory approval.  The OCC has approved the payment of dividends on our Class A, B, and C Preferred securities throughout 2010 and 2011. For the foreseeable future, Management intends to request approval for any future dividends; however, there can be no assurance that the OCC will approve future Class A, B, and C Preferred dividends.

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Regulatory capital ratios are the primary metrics used by regulators in assessing the safety and soundness of banks.  At September 30, 2011, Huntington and the Bank met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for Well-capitalized institutions.  The capital ratios for Huntington and the Bank at the end of the most recent five quarters are as follows:

Table 9 - Regulatory Capital Ratios

	2011									2010
	September 30,			June 30,			March 31,			December 31,			September 30,
Tier 1 leverage ratio (5.00% Well-capitalized)
Huntington		10.24	%		10.25	%		9.80	%		9.41	%		10.54	%
Bank		7.79			7.62			7.23			6.97			6.85
Tier 1 risk-based capital ratio (6.00% Well-capitalized)
Huntington		12.37			12.14			12.04			11.55			12.82
Bank		9.40			9.01			8.87			8.51			8.28
Total risk-based capital ratio (10.00% Well-capitalized)
Huntington		15.11			14.89			14.85			14.46			15.08
Bank		13.54			13.17			13.11			12.82			12.69

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 material 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, 2011, to which this report relates, that have materially affected, or are reasonably likely to materially affect, HPCI's internal control over financial reporting.

PART II. OTHER INFORMATION

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

Item 6. Exhibits

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

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

3.1.	Second Amended and Restated Articles of Incorporation (previously filed as Exhibit 3.1 to Current Report on Form 8-K (File No. 000-33243), filed with the Securities and Exchange Commission on November 2, 2010, 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.)

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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 Financial Statements of Huntington Bancshares Incorporated as of and for the three-month and nine-month periods ended September 30, 2011 and 2010.
101**	The following material from HPCI’s Form 10-Q Report for the quarterly period ended September 30, 2011, formatted in XBRL: (i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Income, (iii) Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.

**  Furnished, not filed.

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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 14th day of November, 2011.

HUNTINGTON PREFERRED CAPITAL, INC.

(Registrant)

By:	/s/ Donald R. Kimble	By:	/s/ David S. Anderson
	Donald R. Kimble		David S. Anderson
	President and Director (Principal Executive Officer)		Vice President and Director (Principal Financial and Accounting Officer)

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