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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED March 31, 2004

Commission File Number: 000-33243

HUNTINGTON PREFERRED CAPITAL, INC.

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

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

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of April 30, 2004, 14,000,000 shares of common stock without par value were outstanding, all of which were held by affiliates of the registrant.

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HUNTINGTON PREFERRED CAPITAL, INC.

INDEX

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Part I. Financial Information

Huntington Preferred Capital, Inc.

Condensed Consolidated Balance Sheets

See notes to unaudited consolidated financial statements.

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Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

See notes to unaudited consolidated financial statements.

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Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

See notes to unaudited consolidated financial statements.

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Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See notes to unaudited consolidated financial statements.

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Notes to the Unaudited Condensed Consolidated Financial Statements

Note 1 - Organization

Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. Three related parties own HPCI’s common stock: HPC Holdings-III, Inc. (HPCH-III), Huntington Preferred Capital II, Inc. (HPCII), and Huntington Bancshares Incorporated (Huntington). HPCI and HPCII are subsidiaries of HPCH-III, which is a subsidiary of Huntington Preferred Capital Holdings, Inc. (Holdings). Holdings is a subsidiary 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. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements).

Note 2 - Basis of Presentation and New Accounting Pronouncements

The accompanying unaudited condensed consolidated financial statements of HPCI reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in HPCI’s 2003 Annual Report on Form 10-K (Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

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

All of HPCI’s common stock is owned by Huntington, HPCII, and HPCH-III and, therefore, earnings per common share information is not presented.

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

SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105): On March 9, 2004, the SEC issued SAB 105. This bulletin was issued to inform registrants of the SEC’s view that the fair value of the recorded loan commitments that are required to follow derivative accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. In addition, SAB 105 requires registrants to disclose their accounting policy for loan commitments.

The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The impact of this new pronouncement is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.

AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3): In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt securities acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for loan losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for

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Notes to Consolidated Financial Statements (Continued)

loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. The impact of this new pronouncement is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.

Note 3 - Loan Participation Interests

Participation interests are categorized based on the collateral underlying each loan and were as follows:

There were no underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries, or business activity. Underlying loans were, however, generally collateralized by real estate. Loans made to borrowers in the four states of Ohio, Michigan, Indiana, and Kentucky comprised 93.4%, 94.8%, and 96.1%, of the portfolio at March 31, 2004, December 31, 2003, and March 31, 2003, respectively.

Participations in Non-Performing Loans and Past Due Loans

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

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Notes to Consolidated Financial Statements (Continued)

Note 4 - Allowances for Credit Losses (ACL)

The ACL is comprised of the allowance for loan losses (ALL) and the allowance for unfunded loan participation commitments (AULPC). The following table reflects activity in the ACL for the three month periods ended March 31, 2004, December 31, 2003, and March 31, 2003:

For the three month period ended March 31, 2004, there was a net reduction to the provision for credit losses of $2.3 million. A reduction to the provision for credit losses in the current quarter of $6.6 million was offset by an expense of $4.3 million related to the change in the AULPC. For the three month period ended December 31, 2003, there was a reduction to the provision for credit losses of $7.3 million. There was no provision for loan losses for the first quarter of 2003. Included in the first quarter of 2003 net credit losses of $26.1 million, were $12.2 million of interest receivables that were determined to be uncollectible and were charged off against the allowance for credit losses. These interest receivables related to participations in loans that were previously charged off.

Note 5 - Dividends

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

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

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

The holder of Class D preferred securities, HPCH-III, 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.

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Notes to Consolidated Financial Statements (Continued)

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

Note 6 - Related Party Transactions

HPCI is a party to an Amended and Restated Loan Subparticipation Agreement with Holdings, a Loan Subparticipation Agreement with HPCH-III, and a Loan Participation Agreement with the Bank. Under these agreements, HPCI holds a 100% participation interest and a subparticipation interest in Holdings’ 100% participation interest in loans originated by the Bank and its subsidiaries. The participation and subparticipation interests were in commercial, commercial real estate, residential real estate, and consumer loans that were either directly underwritten by the Bank and its subsidiaries or acquired by the Bank. HPCI expects to continue to purchase such interests, net of ALL, in the future from the Bank or its subsidiaries.

The Bank performs the servicing of the commercial, commercial real estate, residential real estate, and consumer loans underlying the participations held by HPCI in accordance with normal industry practice under the amended participation agreements and subparticipation agreements. As of June 1, 2003, the annual servicing fee the Bank charges was 0.125% of the outstanding principal balances of the underlying commercial and commercial real estate loans, 0.320% of the outstanding principal balances of the underlying consumer loans, and 0.2997% of the outstanding principal balances of the underlying residential real estate loans. Prior to June 1, 2003, the servicing fee the Bank charged, on an annual basis, was 0.125% with respect to the underlying commercial real estate, commercial, and consumer loan balances and 2.35% of the interest income collected on residential real estate loans. In its capacity as servicer, the Bank collects and holds the loan payments received on behalf of HPCI until the end of each month. At month end, the payments are transferred to HPCI and, accordingly, HPCI does not reflect any receivables for payments from the Bank in the accompanying condensed consolidated financial statements. Servicing costs paid to the Bank totaled $2.1 million and $1.6 million for the three month periods ended March 31, 2004 and 2003, respectively.

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 $92,000 and $40,000 for the three month periods ended March 31, 2004 and 2003, respectively.

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Notes to Consolidated Financial Statements (Continued)

The following table represents the current ownership of HPCI’s outstanding common and preferred securities:

As of March 31, 2004, 10.6% of the Class A preferred securities were owned by current and past employees of Huntington and its subsidiaries in addition to the 89.4% owned by HPCH-III. 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, 2004, HPCI board members and executive officers beneficially owned a total of 7,100 shares, or 0.355%, in the aggregate. All of the Class D preferred securities are owned by HPCH-III. 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. Dividends paid to the Class C and D shareholders in the first quarter of 2004 were approximately $1.0 million and $2.4 million, respectively.

Both the Class C and D preferred securities are entitled to one-tenth of one vote per share on all matters submitted to HPCI shareholders. The Class C and D preferred securities are exchangeable, without shareholder approval or any action of shareholders, for preferred securities of the Bank with substantially equivalent terms as to dividends, liquidation preference, and redemption if the Office of the Comptroller of the Currency (OCC) so directs only if the Bank becomes, or may in the near term become, undercapitalized or the Bank is placed in conservatorship or receivership. The Class C and Class D preferred securities are redeemable at HPCI’s option on or after December 31, 2021, and December 31, 2006, respectively, with prior consent of the OCC.

As related parties hold HPCI’s common stock, there is no established public trading market for the stock.

HPCI’s premises and equipment were acquired from the Bank through Holdings. Leasehold improvements were subsequently contributed to HPCLI for its common shares in the fourth quarter of 2001. HPCLI charges rent to the Bank for use of applicable facilities by the Bank. The amount of rental income received by HPCLI during the quarter ended March 31, 2004 and 2003, was $1.5 million and $1.8 million, respectively, and is reflected as a component of non-interest income in the condensed consolidated statements of income.

HPCI has a non-interest bearing receivable from affiliates of $14.7 million at March 31, 2004, $13.7 million at December 31, 2003, and $10.3 million at March 31, 2003.

The Bank is eligible to obtain 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. See Note 7 for further information regarding the pledging of HPCI’s assets in association with the Bank’s advances.

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Notes to Consolidated Financial Statements (Continued)

HPCI maintains and transacts all of its cash activity through a non-interest bearing demand deposit account with the Bank. In addition, to the extent that it does not jeopardize qualification as a REIT, HPCI invests available funds in Eurodollar deposits with the Bank for a term of not more than 30 days. The following amounts were on deposit with the Bank for periods ended March 31, 2004, December 31, 2003, and March 31, 2003:

Note 7 - Commitments and Contingencies

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

The Bank is currently eligible to obtain one or more advances from the FHLB based upon the amount of FHLB capital stock owned by the Bank. As of March 31, 2004, the Bank’s total borrowing capacity under this facility was capped at $1.4 billion. As of this same date, the Bank had borrowings of $1.3 billion under this facility. In addition, the FHLB has separately issued a standby letter of credit for the account of a customer of Huntington totaling $18.2 million secured by loans which have been participated to HPCI.

HPCI has entered into an agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize the Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess of an aggregate amount or percentage of such assets established from time to time by HPCI’s board of directors, including a majority of HPCI’s independent directors. HPCI’s board has set this limit at $1 billion, which limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors. The agreement also provides that the Bank will pay HPCI a monthly fee based upon the pledged collateral held by HPCI. As of March 31, 2004, HPCI’s pledged collateral was limited to 1-4 family residential mortgages and second mortgage loans. As of that same date, HPCI’s participation interests in 1-4 family residential mortgages and second mortgage loans pledged as collateral aggregated $633 million, which represented 80% of its eligible collateral. The Bank paid $0.2 million to HPCI in the first quarter of 2004, representing twelve basis points per year on the collateral pledged, as compensation for making such assets available to the Bank as collateral.

Under the terms of the participation and subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank, either directly, indirectly through Holdings, or indirectly through Holdings and HPCH III, 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, 2004, December 31, 2003, and March 31, 2003, unfunded loan commitments totaled $848.7 million, $923.7 million, and $905.9 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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INTRODUCTION

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

HPCI was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. HPCI’s common stock is owned by three related parties: HPC Holdings-III, Inc. (HPCH-III), Huntington Preferred Capital II, Inc. (HPCII), and Huntington Bancshares Incorporated (Huntington). HPCI and HPCII are subsidiaries of HPCH-III, which is a subsidiary of Huntington Preferred Capital Holdings, Inc. (Holdings). Holdings is a subsidiary 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. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements).

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

Forward-looking Statements

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

By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but not limited to, those set forth under the heading “Business Risks” included in Item 1 of HPCI’s 2003 Annual Report on Form 10-K (Form 10-K) and other factors described in this report and from time to time in other filings with the Securities and Exchange Commission.

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

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Critical Accounting Policies

Note 1 to HPCI’s consolidated financial statements included in its 2003 Annual Report lists critical accounting policies used in the development and presentation of its financial statements. These critical accounting policies, as well as this discussion and analysis and other financial statement disclosures, identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of HPCI, its financial position, results of operations, and cash flows.

Use of Significant Estimates

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

Summary Discussion of Results

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

HPCI’s net income was $64.0 million for the first three months of 2004 versus $69.7 million for the same period a year ago. Net income available to common shareholders was $59.4 million for the first quarter of 2004, compared with $64.6 million for the year-ago first quarter.

HPCI had total assets and total equity of $5.5 billion at March 31, 2004, down slightly from $5.6 billion a year earlier, and up compared to the December 31, 2003 balance of $5.4 billion. At March 31, 2004, December 31, 2003, and March 31, 2003, an aggregate of $5.4 billion, $5.3 billion, and $4.9 billion respectively, consisted of participation interests in loans. Participation interests in specific underlying loans were as follows:

Table 1 - Loan Participation Interests

HPCI’s participation interests in commercial loans declined 30% between March 31, 2003 and March 31, 2004, due to continued portfolio run off and December 2003 asset sales. Commercial loan participations increased $51.7 million during the first quarter of 2004 due to a reclassification between commercial and commercial real estate participation interests, partially offset by

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run off. On February 1, 2004, commercial real estate loan participation interests totalling $62.6 million were reclassified to commercial loan participation interests. The outstanding balance of these loan participations was $57.6 million at March 31, 2004. The reclassification was made to better reflect the loan participation interests based on the collateral underlying the loan. Including the effect of the reclassification, participation interests in commercial real estate loans at March 31, 2004, increased 8% over levels compared to the same period last year and were up slightly when compared to December 31, 2003, due to new loan participation purchases. Consumer loan participation interests increased 15% and 6%, respectively, for the reported periods due to purchases of residential home equity loan participations. Residential real estate loan participation interests increased by $143 million, or 108%, between March 31, 2003 and March 31, 2004. This increase was largely due to HPCI acquisition of $269.8 million of residential real estate participations in June 2003. Participation interests in these loans declined 4% between March 31, 2004 and December 31, 2003.

Interest-bearing and cash balances on deposit with the Bank were $86.9 million, $124.1 million, and $696.8 million at March 31, 2004, December 31, 2003, and March 31, 2003. These declines were due largely to the acquisition of participation interests in loans and capital distributions at the end of 2003. Typically, cash is invested with the Bank in an interest bearing account. These interest-bearing balances are invested overnight or in Eurodollar deposits with the Bank for a term of not more than 30 days.

At March 31, 2004, December 31, 2003, and March 31, 2003, amounts due from affiliates and the Bank were $14.7 million, $13.7 million, and $10.3 million, respectively. Total liabilities were $5.6 million at March 31, 2004, up from $2.1 million at March 31, 2003. This increase was primarily due to the allowance for unfunded loan participation commitments at March 31, 2004.

Shareholders’ equity was $5.5 billion at March 31, 2004, down from $5.6 billion at March 31, 2003, and slightly higher than the December 31, 2003 balance of $5.4 billion. The $0.1 billion decline since March 31, 2003, reflected the return of capital on December 31, 2003, and payment of common and preferred dividends in the fourth quarter of 2003.

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, 2004, HPCI had 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. As of December 31, 2003, HPCI had 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

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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, 2004, HPCI is exempt from registration as an investment company under the Investment Company Act and intends to operate its business in a manner that will maintain this exemption.

RESULTS OF OPERATIONS

Net income for the first quarter 2004 was $64.0 million, down from $69.7 million for the first quarter 2003. Net income applicable to common shares was $59.4 million for the first quarter of 2004 and $64.6 million for the first quarter of 2003, after dividend declarations and payments on preferred stock of $4.6 million and $5.1 million, respectively. Lower interest rates and earning assets adversely impacted the performance of HPCI in the recent quarter. This was partially offset by a first quarter 2004 included a reduction in the provision for credit losses of $2.3 million. There was no provision for credit losses in the first quarter of 2003.

Table 2 - Quarterly Statements of Income