Huntington Preferred Capital (HPCCP) 10-Q 2009 Q1 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 March 31, 2009

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.þ Yeso No

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

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

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

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

As of April 30, 2009, 14,000,000 shares of common stock without par value were outstanding, all of which were held by affiliates of the registrant.

HUNTINGTON PREFERRED CAPITAL, INC.

INDEX

Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2009, December 31, 2008, and March 31, 2008	3
Condensed Consolidated Statements of Income for the three months ended March 31, 2009 and 2008	4
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2009 and 2008	5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures about Market Risk	25
Item 4. Controls and Procedures	25
Item 4T. Controls and Procedures	25
PART II. OTHER INFORMATION
Item 6. Exhibits	25
Signatures	27
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1

2

Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Huntington Preferred Capital, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	March 31,			December 31,			March 31,
(in thousands, except share data)	2009			2008			2008
Assets
Cash and interest bearing deposits with The Huntington National Bank	$	272,375		$	293,009		$	308,359
Due from The Huntington National Bank		95,196			38,423			74,285
Loan participation interests:
Commercial real estate		3,282,302			3,433,872			3,044,112
Consumer and residential real estate		902,608			974,619			1,146,364
Total loan participation interests		4,184,910			4,408,491			4,190,476
Allowance for loan participation losses		(79,889	)		(65,456	)		(63,799	)
Net loan participation interests		4,105,021			4,343,035			4,126,677
Accrued income and other assets		11,683			14,101			15,937
Total assets	$	4,484,275		$	4,688,568		$	4,525,258
Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments	$	2,492		$	2,301		$	2,388
Dividends and distributions payable		1,493			225,000			4,761
Other liabilities		46			50			45
Total liabilities		4,031			227,351			7,194
Shareholders’ Equity
Preferred securities, Class A, 8.000% noncumulative, non- exchangeable; $1,000 par and liquidation value per share; 1,000 shares authorized, issued and outstanding		1,000			1,000			1,000
Preferred securities, Class B, variable-rate, noncumulative, and conditionally exchangeable; $1,000 par and liquidation value per share; authorized 500,000 shares; 400,000 shares issued and outstanding		400,000			400,000			400,000
Preferred securities, Class C, 7.875% noncumulative and conditionally exchangeable; $25 par and liquidation value per share; 2,000,000 shares authorized, issued, and outstanding		50,000			50,000			50,000
Preferred securities, Class D, variable-rate, noncumulative, and conditionally exchangeable; $25 par and liquidation value per share; 14,000,000 shares authorized, issued, and outstanding		350,000			350,000			350,000
Preferred securities, $25 par, 10,000,000 shares authorized; no shares issued or outstanding		—			—			—
Common stock — without par value; 14,000,000 shares authorized, issued, and outstanding		3,660,217			3,660,217			3,660,959
Retained earnings		19,027			—			56,105
Total shareholders’ equity		4,480,244			4,461,217			4,518,064
Total liabilities and shareholders’ equity	$	4,484,275		$	4,688,568		$	4,525,258

See notes to unaudited condensed consolidated financial statements.

3

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2009			2008
Interest and fee income
Interest on loan participation interests:
Commercial real estate		29,326			46,531
Consumer and residential real estate		15,476			19,689
Total loan participation interest income		44,802			66,220
Fees from loan participation interests		269			314
Interest on deposits with The Huntington National Bank		102			1,876
Total interest and fee income		45,173			68,410
Provision for (reduction in) allowances for credit losses		18,988			(1,145	)
Interest income after provision for (reduction in) allowances for credit losses		26,185			69,555
Noninterest income:
Rental income		16			17
Collateral fees		677			776
Total noninterest income		693			793
Noninterest expense:
Servicing costs		2,551			2,835
Other		165			146
Total noninterest expense		2,716			2,981
Net income	$	24,162		$	67,367
Dividends declared on preferred securities		(5,135	)		(11,262	)
Net income applicable to common shares	$	19,027		$	56,105

See notes to unaudited condensed consolidated financial statements.

4

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

	Preferred, Class A				Preferred, Class B				Preferred, Class C
(in thousands)	Shares		Amount		Shares		Amount		Shares		Amount
Three Months Ended March 31, 2008:
Balance, beginning of period		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of the period		1	$	1,000		400	$	400,000		2,000	$	50,000
Three Months Ended March 31, 2009:
Balance, beginning of period		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of the period		1	$	1,000		400	$	400,000		2,000	$	50,000

	Preferred, Class D				Preferred				Common				Retained
(in thousands)	Shares		Amount		Shares		Amount		Shares		Amount		Earnings			Total
Three Months Ended March 31, 2008:
Balance, beginning of period		14,000	$	350,000		—	$	—		14,000	$	3,660,959	$	—		$	4,461,959
Comprehensive Income:
Net income														67,367			67,367
Total comprehensive income																	67,367
Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(4,681	)		(4,681	)
Dividends declared on Class C preferred securities														(984	)		(984	)
Dividends declared on Class D preferred securities														(5,517	)		(5,517	)
Balance, end of the period		14,000	$	350,000		—	$	—		14,000	$	3,660,959	$	56,105		$	4,518,064
Three Months Ended March 31, 2009:
Balance, beginning of period		14,000	$	350,000		—	$	—		14,000	$	3,660,217	$	—		$	4,461,217
Comprehensive Income:
Net income														24,162			24,162
Total comprehensive income																	24,162
Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(1,413	)		(1,413	)
Dividends declared on Class C preferred securities														(984	)		(984	)
Dividends declared on Class D preferred securities														(2,658	)		(2,658	)
Balance, end of the period		14,000	$	350,000		—	$	—		14,000		3,660,217		19,027		$	4,480,244

See notes to unaudited condensed consolidated financial statements.

5

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2009			2008
Operating activities
Net income	$	24,162		$	67,367
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (reduction in) allowances for credit losses		18,988			(1,145	)
Change in due to/from The Huntington National Bank		3,376			8,113
Other, net		2,414			3,992
Net cash provided by operating activities		48,940			78,327
Investing activities
Participation interests acquired		(324,860	)		(460,395	)
Sales and repayments of loans underlying participation interests		483,928			649,464
Net cash provided by investing activities		159,068			189,069
Financing activities
Dividends paid on preferred securities		(3,642	)		(6,501	)
Dividends paid on common stock		(224,258	)		—
Return of capital to common shareholders		(742	)		—
Net cash used for financing activities		(228,642	)		(6,501	)
Increase (decrease) in cash and cash equivalents		(20,634	)		260,895
Cash and cash equivalents at beginning of year		293,009			47,464
Cash and cash equivalents at end of period	$	272,375		$	308,359
Supplemental information:
Dividends and distributions declared, not paid	$	1,493		$	4,761
Non cash change in loan participation activity with The Huntington National Bank		60,149			(39,583	)

See notes to unaudited condensed consolidated financial statements.

6

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Organization

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

HCF, HPCII, and Holdings are direct and indirect subsidiaries of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington Bancshares Incorporated (Huntington). Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At March 31, 2009, the Bank, on a consolidated basis with its subsidiaries, accounted for over 98% of Huntington’s consolidated total assets and over 98% of its net loss. Thus, for purposes of presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington to be substantially the same for these periods.

Note 2 — Basis of Presentation and New Accounting Pronouncements

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

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

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

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

7

FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (Statement No. 160)— Statement No. 160 was issued in December 2008. The Statement requires that noncontrolling interests in subsidiaries be initially measured at fair value and classified as a separate component of equity. The Statement is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this new Statement did not have an impact on HPCI’s condensed consolidated financial statements.

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

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

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

	March 31,		December 31,		March 31,
(in thousands)	2009		2008		2008
Commercial real estate	$	100,675	$	54,246	$	45,827
Consumer and residential real estate		7,035		6,041		4,841
Total participations in non-performing assets	$	107,710	$	60,287	$	50,668
Participations in accruing loans past due 90 days or more	$	4,909	$	9,543	$	6,251

Note 4 — Allowance for Credit Losses (ACL)

The allowance for credit losses (ACL) is comprised of the allowance for loan participation losses (ALPL) and the allowance for unfunded loan participation commitments (AULPC). Loan participations are acquired net of related ALPL. As a result, the related ALPL is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than HPCI 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.

8

The following table reflects activity in the ACL for the three-month periods ended March 31, 2009 and 2008:

	Three Months Ended
	March 31,
(in thousands)	2009			2008
ALPL balance, beginning of period	$	65,456		$	62,275
ALPL for loan participations acquired		4,130			3,873
Net loan losses		(8,494	)		(2,672	)
Provision for ALPL		18,797			323
ALPL balance, end of period	$	79,889		$	63,799
AULPC balance, beginning of period	$	2,301		$	3,856
Provision for (reduction in) AULPC		191			(1,468	)
AULPC balance, end of period	$	2,492		$	2,388
Total ACL	$	82,381		$	66,187

As of March 31, 2009, December 31, 2008, and March 31, 2008, HPCI’s unfunded loan commitments totaled $388.2 million, $486.6 million, and $438.6 million, respectively.

Note 5 — Preferred Dividends

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

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

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

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

9

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

	Three Months Ended
	March 31,
(in thousands)	2009		2008
Class A preferred securities	$	80	$	80
Class B preferred securities		1,413		4,681
Class C preferred securities		984		984
Class D preferred securities		2,658		5,517
Total dividends declared	$	5,135	$	11,262

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 March 31, 2009, without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends on Class A, B, and C preferred securities without regulatory approval. The Office of the Comptroller of the Currency (OCC) has approved the payment of HPCI’s dividends on its preferred securities throughout 2008 and the first quarter of 2009. 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 dividends.

Note 6 — Related Party Transactions

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

The Bank performs the servicing of the commercial real estate, consumer, and residential real estate loans underlying the participations held by HPCI in accordance with normal industry practice under the amended participation and subparticipation agreements. In its capacity as servicer, the Bank collects and holds the loan payments received on behalf of HPCI until the end of each month. Loan servicing costs totaled $2.6 million and $2.8 million for the three-month periods ended March 31, 2009 and 2008, respectively.

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

	January 1, 2008
	through
	March 31, 2009
Commercial real estate		0.125	%
Consumer		0.650	%
Residential real estate		0.267	%

10

Pursuant to the existing participation and sub-participation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time-to-time during the terms of the agreements. In lieu of paying higher servicing costs to the Bank with respect to commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial real estate loans. The Bank and HPCI performed a review of loan servicing fees in 2008, 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 2009.

Huntington’s and the Bank’s personnel handle day-to-day operations of HPCI such as financial analysis and reporting, accounting, tax reporting, and other administrative functions. On a monthly basis, HPCI reimburses the Bank and Huntington for the cost related to the time spent by employees for performing these functions. These personnel costs totaled $0.1 million for both of the three-month periods ended March 31, 2009 and 2008, and are included in other non-interest expense.

The following table represents the ownership of HPCI’s outstanding common and preferred securities as of March 31, 2009:

	Number of
	Common		Number of Preferred Securities
Shareholder:	Shares		Class A		Class B		Class C		Class D
Held by related parties:
HPCII		4,550,000		—		—		—		—
HCF		6,580,000		—		—		—		—
Holdings		2,870,000		895		—		—		14,000,000
HPC Holdings-II, Inc.		—		—		400,000		—		—
Total held by related parties		14,000,000		895		400,000		—		14,000,000
Other shareholders		—		105		—		2,000,000		—
Total shares outstanding		14,000,000		1,000		400,000		2,000,000		14,000,000

As of March 31, 2009, 10.5% of the Class A preferred securities were owned by current and past employees of Huntington and its subsidiaries in addition to the 89.5% owned by Holdings. The Class A preferred securities are non-voting. All of the Class B preferred securities are owned by HPC Holdings-II, Inc., a non-bank subsidiary of Huntington, and are non-voting. In 2001, the Class C preferred securities were obtained by Holdings, who sold the securities to the public. Various board members and executive officers of HPCI have purchased a portion of the Class C preferred securities. At March 31, 2009, HPCI board members and executive officers beneficially owned, in the aggregate, a total of 7,611 shares, or 0.381% of the Class C preferred securities. All of the Class D preferred securities are owned by Holdings. Dividends declared and accrued to the Class C shareholders for the first three months of 2009 were approximately $1.0 million.

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

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

11

HPCI had a non-interest bearing receivable from the Bank of $95.2 million at March 31, 2009, $38.4 million at December 31, 2008, and $74.3 million at March 31, 2008. 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.

HPCI has assets pledged in association with the Bank’s advances from the Federal Home Loan Bank (FHLB). For further information regarding this see Note 7.

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

Note 7 — Commitments and Contingencies

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

Currently, HPCI’s assets have been used to collateralize only one such facility. The Bank has a line of credit from the FHLB, limited to $3.7 billion as of March 31, 2009, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had borrowings of $1.0 billion under this facility. This was down from borrowings of $2.6 billion at December 31, 2008.

HPCI has entered into an Amended and Restated Agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize the Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess of an aggregate dollar amount or aggregate percentage of such assets established from time-to-time by HPCI’s board of directors, including a majority of HPCI’s independent directors. The pledge limit was established by HPCI’s board at 25% of total assets, or approximately $1.1 billion as of March 31, 2009, as reflected in HPCI’s month-end management report. This pledge limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors. The amount of HPCI’s participation interests pledged was $0.8 billion at March 31, 2009. In 2009, the loans pledged consisted of 1-4 family residential mortgage loans. The agreement also provides that the Bank will pay HPCI a monthly fee based upon the total loans pledged by HPCI. The Bank paid HPCI a total of $0.7 million and $0.8 million for the three months ended March 31, 2009 and 2008, respectively, as compensation for making such assets available to the Bank. The fee represented thirty-five basis points per year on total pledged loans.

Under the terms of the participation and subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank, either directly or indirectly through Holdings, so that the Bank may extend credit to any borrowers, or pay letters of credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying HPCI’s participation interests. As of March 31, 2009, December 31, 2008, and March 31, 2008, HPCI’s unfunded loan commitments totaled $388.2 million, $486.6 million, and $438.6 million, respectively.

Note 8 — Segment Reporting

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

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

INTRODUCTION

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

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

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

Forward-looking Statements

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

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

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

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Risk Factors

HPCI is subject to a number of risks that may adversely affect its financial condition or results of operation, many of which are outside of the Company’s direct control, though efforts are made to manage those risks while optimizing returns. Credit risk related to single family homebuilders is of particular concern in the current economy. See “Credit Risk — Single family homebuilders” on page 19 of this report. Additionally, more information on risk is set forth under the heading “Risk Factors” included in Item 1A of HPCI’s Form 10-K, and subsequent filings with the SEC.

Update to Risk Factors

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

In general, credit quality performance continued to be under pressure during the first quarter of 2009, with nonperforming assets (NPAs) both increasing at March 31, 2009, compared with December 31, 2008, and March 31, 2008. If the credit quality of the Bank’s customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, the Bank’s business, financial condition, liquidity, capital, capital ratios, and results of operations could be materially adversely affected. A severe decrease in credit quality could result in a decrease in the Bank’s capital ratios below “well-capitalized” levels.

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

Critical Accounting Policies

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

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Use of Significant Estimates

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

QUALIFICATION TESTS

Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At March 31, 2009, HPCI met all of the quarterly asset tests.

Also, a REIT must annually satisfy two gross income tests: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test plus dividends, interest, and gains from the sale of securities. In addition, a REIT must distribute 90% of the REIT’s taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. For tax year 2008, HPCI met all annual income and distribution tests.

HPCI operates in a manner that will not cause it to be deemed an investment company under the Investment Company Act. The Investment Company Act exempts from registration as an investment company an entity that is primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (Qualifying Interests). Under positions taken by the SEC staff in no-action letters, in order to qualify for this exemption, HPCI must invest at least 55% of its assets in Qualifying Interests and an additional 25% of its assets in real estate-related assets, although this percentage may be reduced to the extent that more than 55% of its assets are invested in Qualifying Interests. The assets in which HPCI may invest under the Internal Revenue Code therefore may be further limited by the provisions of the Investment Company Act and positions taken by the SEC staff. At March 31, 2009, HPCI was exempt from registration as an investment company under the Investment Company Act and intends to operate its business in a manner that will maintain this exemption.

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RESULTS OF OPERATIONS

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

Net income for the first quarter 2009 was $24.2 million, down 64%, from $67.4 million for the first quarter 2008. Net income applicable to common shares was $19.0 million for the first quarter of 2009, a decrease of $37.1 million, or 66%, compared with the first quarter of 2008. The decrease in net income for the first quarter of 2009, compared with same period of 2008, was primarily the result of higher provision for allowance for credit losses, as well as lower interest and fee income.

Table 1 — Quarterly Statements of Income

	2009			2008												1Q09 vs 1Q08
(in thousands)	First			Fourth			Third			Second			First			$ Chg			% Chg
Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	29,326		$	44,591		$	44,375		$	40,551		$	46,531		$	(17,205	)		(37.0	)%
Consumer and residential real estate		15,476			16,614			17,454			18,260			19,689			(4,213	)		(21.4	)
Total loan participation interest income		44,802			61,205			61,829			58,811			66,220			(21,418	)		(32.3	)
Fees from loan participation interests		269			277			274			333			314			(45	)		(14.3	)
Interest on deposits with the Bank		102			498			830			2,082			1,876			(1,774	)		(94.6	)
Total interest and fee income		45,173			61,980			62,933			61,226			68,410			(23,237	)		(34.0	)
Provision for (reduction in) allowances for credit losses		18,988			(1,194	)		(7,437	)		(5,079	)		(1,145	)		20,133			N.M.
Interest income after (reduction in) provision for allowances for credit losses		26,185			63,174			70,370			66,305			69,555			(43,370	)		(62.4	)
Noninterest income:
Rental income		16			16			17			16			17			(1	)		(6	)
Collateral fees		677			745			744			733			776			(99	)		(12.8	)
Total noninterest income		693			761			761			749			793			(100	)		(12.6	)
Non-interest expense:
Servicing costs		2,551			2,675			2,718			2,707			2,835			(284	)		(10.0	)
Other		165			181			182			245			146			19			13.0
Total noninterest expense		2,716			2,856			2,900			2,952			2,981			(265	)		(8.9	)
Net income	$	24,162		$	61,079		$	68,231		$	64,102		$	67,367		$	(43,205	)		(64.1	)
Dividends declared on preferred securities		(5,135	)		(10,188	)		(7,632	)		(7,439	)		(11,262	)		6,127			54.4
Net income applicable to common shares(1)	$	19,027		$	50,891		$	60,599		$	56,663		$	56,105		$	(37,078	)		(66.1	)%

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

N.M. — Not Meaningful.

Interest and Fee Income

HPCI’s primary source of revenue is interest and fee income on its participation interests in loans. At March 31, 2009 and 2008, HPCI did not have any interest-bearing liabilities or related interest expense. Interest income is impacted by changes in the levels of interest rates and earning assets. The yield on earning assets is the percentage of interest income to average earning assets.

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The tables below show HPCI’s average balances, interest and fee income, and yields for the three-month periods ended March 31, 2009 and 2008:

Table 2 — Interest and Fee Income

	Three Months Ended March 31,
	2009							2008
	Average							Average
(in millions)	Balance		Income(1)		Yield			Balance		Income(1)		Yield
Loan participation interests:
Commercial real estate	$	3,383.5	$	29.5		3.53	%	$	3,079.3	$	46.7		6.07	%
Consumer and residential real estate		940.2		15.6		6.73			1,186.7		19.8		6.72
Total loan participations		4,323.7		45.1		4.23			4,266.0		66.5		6.27
Interest bearing deposits in the Bank		176.4		0.1		0.23			225.7		1.9		3.29
Total	$	4,500.1	$	45.2		4.07	%	$	4,491.7	$	68.4		6.12	%

⁽¹⁾ Income includes interest and fees.

Interest and fee income was $45.2 million for the three-months ended March 31, 2009, compared with $68.4 million for the year ago quarter. As shown in Table 2, the decrease in interest and fee income was the result of lower yields, with commercial real estate primarily impacted by lower interest rates. For the three-months ended March 31, 2009 and 2008, the yield decreased 205 basis points to 4.07%, while average earning asset balances increased $8.4 million, or 0.2%. At March 31, 2009, December 31, 2008, and March 31, 2008, approximately 69.6%, 68.8%, and 61.8%, respectively, of the portfolio was comprised of variable interest rate loan participations. The table above includes interest received on participations in loans that are on a non-accrual status in the individual portfolios.

Provision for (reduction in) allowance for credit losses

The provision for (reduction in) allowance for credit losses is the charge (credit) to earnings necessary to maintain the ACL at a level adequate to absorb Management’s estimate of inherent probable losses in the loan portfolio. Loan participations are acquired net of related allowance for loan participation losses (ALPL). As a result, this ALPL is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than HPCI 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 for the quarter ended March 31, 2009 resulted in a provision for credit losses of $19.0 million compared to a reduction in credit losses of $1.1 million for the year-ago quarter. The increase in provision during 2009 was primarily related to the commercial real estate portfolio, and was a reflection of the overall economic slowdown in the Midwest markets. See discussion of allowances for credit losses on page 20.

Noninterest Income and Noninterest Expense

Noninterest income included fees from the Bank for use of HPCI’s assets as collateral for the Bank’s advances from the Federal Home Loan Bank (FHLB). These fees totaled $0.7 million and $0.8 million for the three-months ended March 31, 2009 and 2008, respectively.(See Note 7 to the unaudited condensed consolidated financial statements for more information regarding use of HPCI’s assets as collateral for the Bank’s advances from the FHLB.)

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Noninterest expense for the first quarter of 2009 was $2.7 million compared with $3.0 million for the same period last year. The predominant component of HPCI’s noninterest expense is the fee paid to the Bank for servicing the loans underlying the participation interests. For the first quarter 2009, servicing costs amounted to $2.6 million, compared with $2.8 million for the comparable quarter of the prior year. The annual servicing rates the Bank charged with respect to outstanding principal balances in 2009 and 2008 were:

	January 1, 2008
	through
	March 31, 2009
Commercial real estate		0.125	%
Consumer		0.650	%
Residential real estate		0.267	%

Pursuant to the existing participation and subparticipation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time to time during the terms of the agreements. In lieu of paying higher servicing costs to the Bank with respect to commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial real estate loans. The Bank and HPCI performed a review of loan servicing fees in 2008, and agreed to retain current servicing rates for all loan participation categories, including the continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed in 2009.

Provision for Income Taxes

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

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

CREDIT EXPOSURE MIX

HPCI’s largest credit exposure was commercial real estate loan participation interests, which totaled $3.3 billion and represented 78% of total loan participation interests at March 31, 2009 and December 31, 2008, compared with 73% at March 31, 2008. Total consumer and residential real estate loan participation interests were $0.9 billion and represented 22% of total loan participations at March 31, 2009 and December 31, 2008, compared with 27% at March 31, 2008. These portfolios are discussed in greater detail below in the “Commercial Real Estate Credit” and “Consumer Credit” sections of this report.

Credit Risk

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

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

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

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Commercial Real Estate Credit

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

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

Commercial real estate loan participation interests outstanding by property type and borrower location at March 31, 2009 were as follows:

Table 3 — Commercial Real Estate Loans by Property Type and Borrower Location

	At March 31, 2009
	Geographic Region														Percent
(in thousands of dollars)	Ohio		Michigan		Indiana		Kentucky		Pennsylvania		Other		Total Amount		of Total
Industrial and warehouse	$	383,309	$	175,323	$	55,436	$	16,584	$	5,687	$	42,812	$	679,151		20.7	%
Retail properties		379,770		73,426		59,401		40,449		37,244		85,402		675,692		20.6
Office		324,974		142,095		23,433		18,733		31,648		52,920		593,803		18.1
Raw land and other land uses		196,190		117,316		32,555		10,938		9,794		15,643		382,436		11.7
Single family home builders		163,307		55,761		15,804		9,614		16,692		42,789		303,967		9.3
Multi family		112,481		14,383		65,205		40,100		1,218		12,966		246,353		7.5
Health care		109,299		7,585		1,026		179		2,727		15,097		135,913		4.1
Other		135,388		56,862		10,753		2,093		9,952		49,939		264,987		8.0
Total	$	1,804,718	$	642,751	$	263,613	$	138,690	$	114,962	$	317,568	$	3,282,302		100.0	%

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

Retail properties

HPCI’s portfolio of commercial real estate loans secured by retail properties totaled $0.7 billion, or approximately 16.1% of total loans, and had an ALPL associated with these loans of $14.5 million at March 31, 2009. Credit approval in this loan segment is generally dependant on pre-leasing requirements, and net operating income from the project must cover interest expense by specified percentages when the loan is fully funded.

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

Single family homebuilders

HPCI’s portfolio of commercial real estate loans secured by builders of single family homes totaled $0.3 billion or approximately 7.3% of total loans, and had an ALPL associated with these loans of $12.4 million at March 31, 2009.

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

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Consumer Credit

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

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

Allowance for Credit Losses (ACL)

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

The following table shows the activity in HPCI’s ALPL and AULPC for the last five quarters ended March 31, 2009:

Table 4 — Allowances for Credit Loss Activity

	2009			2008
(in thousands)	First			Fourth			Third			Second			First
ALPL balance, beginning of period	$	65,456		$	72,073		$	66,876		$	63,799		$	62,275
Allowance of loan participations acquired		4,130			4,461			15,828			12,123			3,873
Net loan losses
Commercial real estate		(6,742	)		(9,100	)		(179	)		(2,007	)		(1,197	)
Consumer and residential real estate		(1,752	)		(1,905	)		(2,168	)		(1,772	)		(1,475	)
Total net loan losses		(8,494	)		(11,005	)		(2,347	)		(3,779	)		(2,672	)
Provision for (reduction in) ALPL		18,797			(697	)		(8,284	)		(5,267	)		323
Reserve transfer from AULPC		—			624			—			—			—
ALPL balance, end of period	$	79,889		$	65,456		$	72,073		$	66,876		$	63,799
AULPC balance, beginning of period	$	2,301		$	3,423		$	2,576		$	2,388		$	—
Provision for (reduction in) AULPC		191			(498	)		847			188			(1,468	)
Reserve transfer to ALPL		—			(624	)		—			—			—
AULPC balance, end of period	$	2,492		$	2,301		$	3,423		$	2,576		$	(1,468	)
Total Allowance for Credit Losses	$	82,381		$	67,757		$	75,496		$	69,452		$	62,331
ALPL as a % of total participation interests		1.91	%		1.48	%		1.57	%		1.53	%		1.52	%
ACL as a % of total participation interests		1.97			1.54			1.65			1.59			1.49

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The allowance for credit losses was $82.4 million as of March 31, 2009, up from $67.8 million as of December 31, 2008, and $62.3 million as of March 31, 2008. The provision for ALPL, which is reflected on the income statement, for the three-month period ended March 31, 2009 was $18.8 million, as compared with a provision of $0.3 million from the 2008 first quarter. The increase in allowance and provision during 2009 was primarily related to the commercial real estate portfolio, and was a reflection of the overall economic slowdown in the Midwest markets.

Total net charge-offs for the quarter ended March 31, 2009, were $8.5 million, or an annualized 0.80% of average loan participation interests, up from $2.7 million, or 0.25%, in the same quarter a year ago.

The provision for AULPC, which also is reflected on the income statement, was $0.2 million for the three-month period ended March 31, 2009, compared with a reduction of $1.5 million in the same period of the prior year.

In Management’s judgment, both the ALPL and the AULPC were adequate at March 31, 2009, to cover credit losses inherent in the loan participation portfolio and portfolio of loan participation commitments. Additional information regarding asset quality appears in the “Credit Quality” section of the Form 10-K.

Non-Performing Assets (NPAs)

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

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

Table 5 — Quarterly Non-Performing Assets

	2009			2008
(in thousands)	First			Fourth			Third			Second			First
Participation interests in non-accrual loans
Commercial real estate	$	100,675		$	54,246		$	59,701		$	52,406		$	45,827
Consumer and residential real estate		7,035			6,041			6,834			6,063			4,841
Total Non-Performing Assets	$	107,710		$	60,287		$	66,535		$	58,469		$	50,668
Participations in Accruing Loans
Past Due 90 Days or More	$	4,909		$	9,543		$	8,315		$	6,214		$	5,421
NPAs as a % of total
participation interests		2.57	%		1.37	%		1.45	%		1.34	%		1.21	%
ALPL as a % of NPAs		74			109			108			114			126
ACL as a % of NPAs		76			112			113			119			131

Total NPAs increased to $107.7 million at March 31, 2009, from $60.3 million at December 31, 2008, and from $50.7 million at March 31, 2008, representing 2.57%, 1.37%, and 1.21% of total loan participation interests, respectively. The increase in 2009 was principally related to the commercial real estate loan participations and was spread across the different property types of that portfolio. The increase in NPA did not result in proportionate increase in ALPL, as a predominant portion of the increase was from loans whose allowance for credit losses is subject to specific reserves in accordance with Statement No. 114,Accounting by Creditors for Impairment of a Loan.As substantially all of these loans are supported by commercial real estate collateral, the specific reserve was based on an estimate of the net realizable value of the underlying collateral. At March 31, 2009, the average specific reserve for loans evaluated under Statement No. 114 was 20%, compared with the average specific reserve for such loans of 21% at December 31, 2008. Underlying loan participation interests that were past due ninety days or more but continuing to accrue interest were $4.9 million at March 31, 2009, $9.5 million at December 31, 2008, and $5.4 million at March 31, 2008. The $4.9 million of accruing loan participation interest that were past due ninety days or more at March 31, 2009 were all consumer loan participation interests.

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

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

MARKET RISK

The predominate market risk to which HPCI is exposed is the risk of loss due to a decline in interest rates. If there is a decline in market interest rates, HPCI may experience a reduction in interest income from its loan participation interests and a corresponding decrease in funds available to be distributed to shareholders. When rates rise, HPCI is exposed to declines in the economic value of equity since approximately 30.4% of its loan participation portfolio at March 31, 2009 was fixed rate.

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

Using the income simulation model for HPCI as of March 31, 2009, interest income for the next 12-month period would be expected to increase by $18.7 million, or 14.7%, 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 $9.9 million, or 7.8%, in the event of a gradual 200 basis point decline in rates from the forward rates implied in the yield curve. The gradual 200 basis point decline in market rates over the next 12-month period assumes market interest rates would reach a bottom and not fall below historical levels.

Using the economic value analysis model for HPCI as of March 31, 2009, the fair value of loan participation interests over the next 12 month period would be expected to increase $83.2 million, or 2.0%, based on an immediate 200 basis point decline in rates above the forward rates implied in the yield curve. Many of HPCI’s variable rate loans are based on LIBOR interest rates. Because the gradual 200 basis point decline in market rates over the next 12 month period assumes market interest rates would not fall below 0%, the fair value would be expected to decline only to $68.6 million, or 1.6%.

OFF-BALANCE SHEET ARRANGEMENTS

Under the terms of the participation and subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank, either directly or indirectly through Holdings so that the Bank may extend credit to any borrower, or pay letters of credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying HPCI’s participation interests. At March 31, 2009, December 31, 2008, and March 31, 2008, HPCI’s unfunded commitments totaled $388.2 million, $486.6 million, and $438.6 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.

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LIQUIDITY AND CAPITAL RESOURCES

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

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

At March 31, 2009, December 31, 2008, and March 31, 2008, HPCI maintained interest bearing and non-interest bearing cash balances with the Bank totaling $272.4 million, $293.0 million, and $308.4 million, respectively. HPCI maintains and transacts all of its cash activity with the Bank and may invest available funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

At March 31, 2009, HPCI had no material liabilities or contractual obligations, other than unfunded loan commitments of $388.2 million, with a weighted average remaining maturity of 1.2 years. In addition to anticipated cash flows, as noted above, HPCI has interest bearing and non-interest bearing cash balances with the bank totaling $272.4 million to supplement the funding of these liabilities and contractual commitments.

At each of March 31, 2009, December 31, 2008, and March 31, 2008, shareholders’ equity was $4.5 billion.

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 March 31, 2009, without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends without regulatory approval. The OCC has approved the payment of HPCI’s dividends on its preferred securities throughout 2008 and the first quarter of 2009. 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 dividends.

Regulatory capital ratios are the primary metrics used by regulators in assessing the “safety and soundness” of banks. At March 31, 2009, the Bank met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for “well-capitalized” institutions. The capital ratios for the Bank at the end of the most recent five quarters are as follows:

Table 6 — Regulatory Capital Ratios

	2009			2008
	First			Fourth			Third			Second			First
Tier 1 Leverage Ratio (5.00% “well-capitalized”)		5.95	%		5.99	%		6.36	%		6.37	%		6.24	%
Tier 1 Risk-based Capital Ratio (6.00% “well-capitalized”)		6.79			6.44			7.01			7.10			6.89
Total Risk-based Capital Ratio (10.00% “well-capitalized”)		11.00			10.71			10.25			10.32			10.39

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The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average assets for the quarter, adjusted to exclude period-end goodwill and intangibles. During the 2009 first quarter, Huntington recorded a goodwill impairment charge in its Regional Banking and Insurance reporting units. The impairment lowered the Bank’s period-end goodwill by $2.6 billion compared with the prior period. However, as the impairment was recorded at the end of the period, average assets for the 2009 first quarter were not significantly impacted, and therefore, the impact of the goodwill impairment was not fully reflected in average assets for the 2009 first quarter. If the impact of the impairment had been reflected in average assets for the full quarter, the Tier 1 leverage ratio would have been 49 basis points higher. This inconsistency between average and ending asset balances only impacts the 2009 first quarter ratio. As referenced in the update to risk factors, a continued economic weakness could adversely impact the Bank’s capital ratios.

During 2008, Huntington received $1.4 billion of equity capital by issuing to the U.S. Department of Treasury 1.4 million shares of its Series B Preferred Stock as a result of its participation in the Troubled Asset Relief Program (TARP) voluntary Capital Purchase Plan (CPP). During the 2008 fourth quarter, Huntington contributed $500 million of the capital received to the Bank in the form of subordinated debt qualified as Tier 2 capital, which, in turn, had a positive impact on the Bank’s capital ratios. Subject to the approval of Huntington’s board of directors, a $250 million contribution of Tier 1 capital to the Bank is anticipated to be completed in the second quarter of 2009.

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

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

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 March 31, 2009, to which this report relates, that have materially affected, or are reasonably likely to materially affect, HPCI’s internal control over financial reporting.

Item 4T. Controls and Procedures

Not applicable

PART II. OTHER INFORMATION

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

Item 6. Exhibits

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

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

(a)

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

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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 Consolidated Financial Statements of Huntington Bancshares Incorporated as of and for the three month periods ended March 31, 2009 and 2008.

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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 15th day of May, 2009.

HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant)
By:	/s/ Donald R. KimbleDonald R. Kimble	By:	/s/ Thomas P. ReedThomas P. Reed
	President and Director		Vice President and Director
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit
No.		Description
	3.1.	Amended and Restated Articles of Incorporation (previously filed as Exhibit 3(a)(ii) to Amendment No. 4 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on October 12, 2001, and incorporated herein by reference.)
	3.2.	Code of Regulations (previously filed as Exhibit 3(b) to the Registrant’s Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 17, 2001, and incorporated herein by reference.)
	4.1.	Specimen of certificate representing Class C preferred securities, previously filed as Exhibit 4 to the Registrant’s Amendment No. 1 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 31, 2001, and incorporated herein by reference.
	31.1.	Rule 13a — 14(a) Certification — President (chief executive officer).
	31.2.	Rule 13a — 14(a) Certification — Vice President (chief financial officer).
	32.1.	Section 1350 Certification — President (chief executive officer).
	32.2.	Section 1350 Certification — Vice President (chief financial officer).
	99.1.	Unaudited Condensed Consolidated Financial Statements of Huntington Bancshares Incorporated as of and for the three month periods ended March 31, 2009 and 2008.

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