SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Huntington Preferred Capital, Inc.

(Exact name of registrant as specified in its charter)

Ohio		31-1356967
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
41 S. High Street, Columbus, OH		43287
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (614) 480-8300

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Noncumulative Exchangeable Preferred Securities, Class C (Liquidation Amount $25.00 each)
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes þ No

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant 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 Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(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 Act). o Yes þ No

All common stock is held by affiliates of the registrant as of December 31, 2009. As of February 28, 2010, 14,000,000 shares of common stock without par value were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of the close of business on June 30, 2009: $0.00

Documents Incorporated By Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Information Statement for the 2010 Annual Shareholders’ Meeting.

 

 

HUNTINGTON PREFERRED CAPITAL, INC.

INDEX

Part I.
Item 1. Business			3
Item 1A: Risk Factors			11
Item 1B: Unresolved Staff Comments			17
Item 2. Properties			17
Item 3. Legal Proceedings			17
Item 4. Submission of Matters to a vote of Security Holders			17
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			17
Item 6. Selected Financial Data			18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			34
Item 8. Financial Statements and Supplementary Data			34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			53
Item 9A. Controls and Procedures			53
Item 9A(T). Controls and Procedures			53
Item 9B. Other Information			53
Part III.
Item 10. Directors and Executive Officers and Corporate Governance			53
Item 11. Executive Compensation			53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			54
Item 13. Certain Relationships and Related Transactions, and Director Independence			54
Item 14. Principal Accounting Fees and Services			54
Part IV.
Item 15. Exhibits and Financial Statement Schedules			54
Signatures			55
Exhibits			56
Exhibit 12.1
Exhibit 24.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1

Huntington Preferred Capital, Inc.

Item 1: Business

General

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

HCF, HPCII, and Holdings are direct or 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 December 31, 2009 and 2008, the Bank, on a consolidated basis with its subsidiaries, accounted for over 98% of Huntington’s consolidated assets, and accordingly, Management considers the balance sheets of the Bank to be substantially the same as the balance sheet of Huntington for each of these dates. For periods prior to and including December 31, 2007, the consolidated income statements of the Bank and Huntington are substantially the same. For 2008, a substantial portion of the losses associated with Huntington’s relationship with Franklin Credit Management Corporation (Franklin) was recorded at a direct subsidiary of Huntington. This portion of the losses did not affect the Bank and, thus, affects the comparability of the Bank’s income statement with that of Huntington. Other than the impact of these losses associated with Huntington’s relationship with Franklin, there were no material differences in the income statements of the Bank and Huntington for the year ended December 31, 2008. These changes had no impact on net cash flows of the Bank or of Huntington for the year ended December 31, 2008. There were no material differences in the income statements of the Bank and Huntington for the year ended December 31, 2009. The following chart outlines the relationship among affiliates at December 31, 2009:

General Description of Assets

The Internal Revenue Code requires a REIT to invest at least 75% of the total value of its assets in real estate assets, which includes residential real estate loans and commercial real estate loans, including participation interests in residential or commercial real estate loans, mortgage-backed securities eligible to be held by REITs, cash, cash equivalents which includes receivables, government securities, and other real estate assets (REIT Qualified Assets). HPCI must satisfy other asset and income tests in order to remain qualified as a REIT. In addition, HPCI must satisfy other tests in order to maintain its exemption from the registration requirements of the Investment Company Act. Additional information regarding these tests is set forth in the “Qualification Tests” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this report.

Commercial Real Estate Loans

Participation interests acquired in commercial real estate loans are secured by real property such as office buildings, multi-family properties of five units or more, 1-4 family residences, industrial, warehouse, and self-storage properties, office and industrial condominiums, retail space, strip shopping centers, mixed use commercial properties, mobile home parks, nursing homes, hotels and motels, churches, and farms. Commercial real estate loans may not be fully amortizing. This means that the loans may have a significant principal balance or “balloon” payment due on maturity. Additionally, there is no requirement regarding the percentage of any commercial real estate property that must be leased at the time HPCI acquires a participation interest in a commercial real estate loan secured by such property nor are commercial loans required to have third party guarantees.

The credit quality of a commercial real estate loan may depend on, among other factors, the existence and structure of underlying leases; the physical condition of the property, including whether any maintenance has been deferred; the creditworthiness of tenants; the historical and anticipated level of vacancies; rents on the property and on other comparable properties located in the same region; potential or existing environmental risks; the availability of credit to refinance the loan at or prior to maturity; and the local and regional economic climate in general. Foreclosures of defaulted commercial real estate loans generally are subject to a number of complicating factors, including environmental considerations, which are not generally present in foreclosures of residential real estate loans.

At December 31, 2009, $2.9 billion, or 91%, of the commercial real estate loans underlying HPCI’s participation interests in such loans were secured by a first mortgage or first lien and most bear variable or floating interest rates. The remaining balance is comprised of $0.1 billion of second, third, and fourth mortgages, and $0.1 billion of loans not secured by real property.

Consumer Loans and Residential Real Estate Loans

HPCI owns participation interests in consumer loans primarily secured by a first or junior mortgage on the borrower’s primary residence. Many of these mortgage loans were made for reasons such as home improvements, acquisition of furniture and fixtures, or debt consolidation. These loans are predominately repaid on an installment basis and income is accrued based on the outstanding balance of the loan over original terms that range from 6 to 360 months. Of the loans underlying the consumer loan participations, most bear interest at fixed rates. Huntington has not originated stated income consumer loans that allow negative amortization. Also, Huntington has not originated consumer loans with an LTV ratio greater than 100%, except for infrequent situations with high quality borrowers. However, recent declines in housing prices have likely eliminated a portion of the collateral for this portfolio as some consumer loans with an original LTV ratio of less than 100% currently have an LTV ratio above 100%.

HPCI also owns participation interests in adjustable rate, fixed rate, conforming, and nonconforming residential real estate loans. Conforming residential real estate loans comply with the requirements for inclusion in a loan guarantee or purchase program sponsored by either the Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage Association (FNMA). A majority of the nonconforming residential real estate loans underlying the participation interests acquired by HPCI to date are nonconforming because they have original principal balances which exceeded the requirements for FHLMC or FNMA programs, the original terms are shorter than the minimum requirements for FHLMC or FNMA programs at the time of origination, or generally because they vary in certain other respects from the requirements of such programs other than the requirements relating to creditworthiness of the mortgagors. Huntington does not originate residential real estate loans that allow negative amortization or are “payment option adjustable-rate mortgages”.

Each residential real estate loan is evidenced by a promissory note secured by a mortgage or deed of trust or other similar security instrument creating a first or second lien on single-family residential properties. Residential real estate properties underlying residential real estate loans consist of individual dwelling units, individual condominium units, two- to four-family dwelling units, and townhouses.

Geographic Distribution

The following table shows the geographic location of borrowers underlying HPCI’s loan participations at December 31, 2009:

Table 1 — Total Loan Participation Interests by Geographic Location of Borrower
(in thousands)

										Percentage by
						Aggregate				Aggregate
		Number				Principal				Principal
State		of Loans				Balance				Balance
Ohio			12,134			$	2,228,845				57.5	%
Michigan			6,044				813,071				21.0
Indiana			1,611				299,843				7.7
Kentucky			1,125				166,206				4.3
Pennsylvania			225				129,151				3.3
			21,139				3,637,116				93.8
All other locations			233				236,537				6.2
Total loan participation interests			21,372			$	3,873,653				100.0	%

Dividend Policy and Restrictions

HPCI expects to pay an aggregate amount of dividends with respect to the outstanding shares of its capital stock equal to substantially all of its REIT taxable income, which excludes capital gains. In order to remain qualified as a REIT, HPCI must distribute annually at least 90% of its REIT taxable income to shareholders. Dividends are declared at the discretion of the board of directors after considering its distributable funds, financial condition, and capital needs, the impact of current and pending legislation and regulations, economic conditions, tax considerations, its continued qualification as a REIT, and other factors. Although there can be no assurances, HPCI expects that both its cash available for distribution and its REIT taxable income will be in excess of amounts needed to pay dividends on the preferred securities in the foreseeable future because substantially all of HPCI’s real estate assets and other authorized investments are interest-bearing; all outstanding preferred securities represent, in the aggregate, only approximately 18% of HPCI’s capitalization; and HPCI does not anticipate incurring any indebtedness other than permitted indebtedness, which includes acting as a co-borrower or guarantor of certain obligations of the Bank. HPCI’s board has limited any such pledges to 25% of HPCI’s assets. In addition, HPCI expects its interest-earning assets will continue to exceed the liquidation preference of its preferred securities. For further discussion regarding co-borrower and guarantor obligations, see “Commitments and Contingencies” in the Notes to Financial Statements included in Part II, Item 8 of this report.

Payment of dividends on the preferred securities could also be subject to regulatory limitations if the Bank fails to be “adequately capitalized” for purposes of regulations issued by The Office of the Comptroller of the Currency (OCC). The Bank currently intends to maintain its capital ratios in excess of the “well-capitalized” levels under these regulations. However, there can be no assurance that the Bank will be able to maintain its capital in excess of the “well-capitalized” levels. The Bank’s risk-weighted assets, as defined for regulatory reporting purposes, declined to $43.1 billion at December 31, 2009, from $46.5 billion at December 31, 2008, as both loans outstanding and unfunded loan commitments decreased. At December 31, 2009, the Bank had Tier 1 and Total risk-based capital in excess of the minimum level required to be considered “well-capitalized” of $0.3 billion and $0.5 billion, respectively. Capital ratios for the Bank as of December 31, 2009 and 2008 are as follows:

Table 2 — Capital Ratios for the Bank

		“Well-				“Adequately-
		Capitalized				Capitalized				December 31,
		Minimums”				Minimums”				2009				2008
Tier 1 Risk-Based Capital			6.00	%			4.00	%			6.66	%			6.44	%
Total Risk-Based Capital			10.00				8.00				11.08				10.71
Tier 1 Leverage Ratio			5.00				4.00				5.59				5.99

Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings. The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock. Based on these regulatory dividend limitations, the Bank could not have declared and paid a dividend at December 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 2009. For the foreseeable future, management intends to request approval for any future dividends; however, there can be no assurance that the OCC will continue to approve future dividends.

Conflict of Interests and Related Policies

As of December 31, 2009, the Bank controlled 98.7% of the voting power of HPCI’s outstanding securities. Accordingly, the Bank expects to continue to have the right to elect all of HPCI’s directors, including its independent directors, unless HPCI fails to pay dividends on its Class C and Class D preferred securities. In addition, all of HPCI’s officers and six of its nine directors are also officers of Huntington or the Bank. Because of the nature of HPCI’s relationship with Holdings, HPCII, HCF, and the Bank, conflicts of interest have arisen and may arise in the future with respect to certain transactions, including without limitation, HPCI’s acquisition of assets from the Bank or Holdings, HPCI’s disposition of assets to the Bank or Holdings, servicing of the loans underlying HPCI’s participation interests, particularly with respect to loans placed on nonaccrual status, as well as the modification of the participation and subparticipation agreements. Any future modification of these agreements will require the approval of a majority of HPCI’s independent directors. HPCI’s board of directors also has broad discretion to revise its investment and operating strategy without shareholder approval.

It is the intention of HPCI, Holdings, and the Bank that any agreements and transactions between them and/or their affiliates be fair to all parties and consistent with market terms for such types of transactions. The requirement in HPCI’s articles of incorporation that certain actions be approved by a majority of HPCI’s independent directors also is intended to ensure fair dealings among HPCI, Holdings, the Bank and their respective affiliates. HPCI’s independent directors serve on its audit committee and review material agreements among HPCI, Holdings, the Bank, and their respective affiliates. HPCI’s independent directors have approved an agreement with the Bank with respect to the pledge of HPCI’s assets to collaterize the Bank’s borrowings from the Federal Home Loan Bank (FHLB) as more described in the Risk Factors section of this report.

There are no provisions in HPCI’s articles of incorporation limiting any of its officers, directors, shareholders, or affiliates from having any direct or indirect financial interest in any asset to be acquired or disposed of by HPCI or in any transaction in which it has an interest or from engaging in acquiring, holding, and managing its assets. It is expected that the Bank will have direct interests in transactions with HPCI including, without limitation, the sale of assets to HPCI. At December 31, 2009, there were no direct or indirect financial interests in any asset of HPCI by any of its officers or directors.

Other Management Policies and Programs

General

In administering HPCI’s participation interests and other authorized investments, the Bank has a high degree of autonomy. HPCI has policies to guide its administration with respect to the Bank’s underwriting standards, the acquisition and disposition of assets, credit risk management, and certain other activities. These policies, which are discussed below, may be amended or revised from time to time at the discretion of HPCI’s board of directors, subject in certain circumstances, to the approval of a majority of HPCI’s independent directors, but without a vote of its shareholders.

Underwriting Standards

The Bank has represented to Holdings, and Holdings has represented to HPCI, that the loans underlying HPCI’s participation interests were originated in accordance with underwriting policies customarily employed by the Bank during the period in which the loans were originated. The Bank emphasizes “in-market” lending which means lending to borrowers that are located where the Bank or its affiliates have branches or loan origination offices.

Some of the loans, however, were obtained by the Bank in connection with the acquisition of other financial institutions. Upon renewal, these loans must meet the Bank’s underwriting standards prior to the purchase of any participation or interest by HPCI. As a result of the Sky Financial acquisition, Huntington has a significant loan relationship with Franklin Credit Management Corporation (Franklin). No Franklin loans have been participated to HPCI.

Asset Acquisition and Disposition Policies

It is HPCI’s policy to purchase from the Bank participation interests generally in loans that:

•

are performing, meaning they have no more than two payments past due;

•

are in accruing status;

•

are not made to related parties of HPCI, Huntington, or the Bank;

•

are secured by real property such that they are REIT qualifying; and

•

have not been previously sold, securitized, or charged-off either in whole or in part.

HPCI’s policy also allows for investment in assets that are not REIT-Qualified Assets up to but not exceeding the statutory limitations imposed on organizations that qualify as REITs. In the past, Holdings has purchased from the Bank and sold to HPCI participation interests in loans not secured by real property because of available proceeds from loan repayments and pay-offs. Management, under this policy, also has the discretion to purchase other assets to maximize its return to shareholders.

It is anticipated that from time to time HPCI will receive participation interests in additional real estate loans from the Bank on a basis consistent with secondary market standards pursuant to the loan participation and subparticipation agreements, out of proceeds received in connection with the repayment or disposition of loan participation interests in HPCI’s portfolio. Although HPCI is permitted to do so, it has no present plans or intentions to purchase loans or loan participation interests from unaffiliated third parties. It is currently anticipated that participation interests in additional loans acquired by HPCI will be of the types described above under the heading “General Description of Assets,” although HPCI is not precluded from purchasing additional types of loans or loan participation interests.

HPCI may continue to acquire from time to time limited amounts of participation interests in loans that are not commercial or residential loans, such as automobile loans and equipment loans, or other authorized investments. Although currently there is no intention to acquire any mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans that will be secured by single-family residential, multi-family, or commercial real estate properties located throughout the United States, HPCI is not restricted from doing so. HPCI does not intend to acquire any interest-only or principal-only mortgage-backed securities. HPCI also will not be precluded from investing in mortgage-backed securities when the Bank is the sponsor or issuer. At December 31, 2009, HPCI did not hold any mortgage-backed securities.

HPCI currently anticipates that it will not acquire the right to service any loan underlying a participation interest that it acquires in the future and that the Bank will act as servicer of any such additional loans. HPCI anticipates that any servicing arrangement that it enters into in the future with the Bank will contain fees and other terms that would be substantially equivalent to or more favorable to HPCI than those that would be contained in servicing arrangements entered into with third parties unaffiliated with HPCI.

HPCI’s policy is not to acquire any participation interest in any commercial real estate loan that constitutes more than 5.0% of the total book value of HPCI’s real estate assets at the time of acquisition. In addition, HPCI’s policy prohibits the retention of any loan or any interest in a loan other than an interest resulting from the acquisition of mortgage-backed securities, which loan is collateralized by real estate located in West Virginia or that is made to a municipality or other tax-exempt entity.

HPCI’s policy is to reinvest the proceeds of its assets in other interest-earning assets such that its Funds from Operations (FFO), which represents cash flows from operations, over any period of four fiscal quarters will be anticipated to equal or exceed 150% of the amount that would be required to pay annual dividends on the Class A, Class C, and Class D preferred securities, except as may be necessary to maintain its status as a REIT. FFO is equal to net cash provided by operating activities as reflected in HPCI’s consolidated statement of cash flows. For the years ended December 31, 2009, 2008, and 2007, HPCI’s FFO were $169.9 million, $263.8 million, and $321.2 million, respectively. These significantly exceeded the minimum requirement of 150% of dividends on Class A, Class C, and Class D securities or $19.1 million, $33.3 million, and $42.5 million, for the same periods, respectively. HPCI’s articles of incorporation provide that it cannot amend or change this policy with respect to the reinvestment of proceeds without the consent or affirmative vote of the holders of at least two-thirds of the Class C preferred securities and two thirds of the Class D preferred securities, voting as separate classes.

Credit Risk Management Policies

It is expected that participation interests in each commercial or residential real estate loan acquired in the future will represent a first lien position and will be originated by the Bank, one of its affiliates, or an unaffiliated third party in the ordinary course of its real estate lending activities based on the underwriting standards generally applied by or substantially similar to those applied by the Bank at the time of origination for its own account. It is also expected that all loans will be serviced by or through the Bank pursuant to the participation and subparticipation agreements, which require servicing in conformity with any loan servicing guidelines promulgated by HPCI and, in the case of residential real estate loans, with FNMA and FHLMC guidelines and procedures.

Other Policies

HPCI intends to operate in a manner that will not subject it to regulation under the Investment Company Act. Unless otherwise approved by its board of directors, HPCI does not intend to:

•

invest in the securities of other issuers for the purpose of exercising control over such issuers;

•

underwrite securities of other issuers;

•

actively trade in loans or other investments;

•

offer securities in exchange for property; or

•

make loans to third parties, including, its officers, directors, or other affiliates.

The Investment Company Act exempts entities that, directly or through majority-owned subsidiaries, are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (Qualifying Interests). Under current interpretations by the staff of the Securities and Exchange Commission, in order to qualify for this exemption, HPCI must maintain at least 55% of its assets in Qualifying Interests and also may be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. The assets that HPCI may acquire therefore may be limited by the provisions of the Investment Company Act. HPCI has established a policy, which it monitors monthly, of limiting authorized investments that are not Qualifying Interests to no more than 20% of the value of its total assets.

HPCI is not prohibited by its Articles of Incorporation from repurchasing its capital securities; however, any such action would be taken only in conformity with applicable federal and state laws and regulations and the requirements for qualifying as a REIT.

HPCI distributes to its shareholders, in accordance with the Securities and Exchange Act of 1934, as amended, annual reports containing financial statements prepared in accordance with accounting principles generally accepted in the United States and certified by its independent registered public accounting firm. HPCI’s articles of incorporation provide that it will maintain its status as a reporting company under the Exchange Act for so long as any of the Class C preferred securities are outstanding and held by unaffiliated shareholders.

HPCI currently makes investments and operates its business in such a manner consistent with the requirements of the Internal Revenue Code to qualify as a REIT. However, future economic, market, legal, tax, or other considerations may cause its board of directors, subject to approval by a majority of its independent directors, to determine that it is in HPCI’s best interest and the best interest of its shareholders to revoke HPCI’s REIT status. The Internal Revenue Code prohibits HPCI from electing REIT status for the five taxable years following the year of such revocation.

Employees

At December 31, 2009, HPCI had six executive officers and two additional officers, but no employees. Day-to-day activities and the servicing of the loans underlying HPCI’s participation interests are administered by the Bank. All of HPCI’s officers are also officers or employees of Huntington, the Bank, and/or Holdings. HPCI maintains corporate records and audited financial statements that are separate from those of Huntington, the Bank, and Holdings.

Although there are no restrictions or limitations contained in HPCI’s articles of incorporation or bylaws, HPCI does not anticipate that its officers or directors will have any direct or indirect financial interest in any asset to be acquired or disposed of by HPCI or in any transaction in which HPCI has an interest or will engage in acquiring, holding, and managing assets, other than as borrowers or guarantors of loans underlying HPCI’s participation interests. In cases where HPCI’s officers or directors do have a direct or indirect financial interest as borrower or guarantors of loans underlining HPCI participation interests, the loans would be on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transaction with others and would not involve more than the normal risk of collectability or present other unfavorable features.

Servicing

The loans underlying HPCI’s participation interests are serviced by the Bank pursuant to the terms of (i) the participation agreement between the Bank and HPCI, (ii) the participation agreement between the Bank and Holdings and the subparticipation agreement between Holdings and HPCI.

The participation and subparticipation agreements require the Bank to service the loans underlying HPCI’s participation interests in a manner substantially the same as for similar work performed by the Bank for transactions on its own behalf. The Bank or its affiliates collect and remit principal and interest payments, maintain perfected collateral positions, and submit and pursue insurance claims. The Bank and its affiliates also provide accounting and reporting services required by HPCI for its participation interests. The Bank may, in accordance with HPCI’s guidelines, dispose of any loans that become classified, are placed in a non-performing status, or are renegotiated due to the financial deterioration of the borrower. The Bank is required to pay all expenses related to the performance of its duties under the participation and subparticipation agreements, including any payment to its affiliates for servicing the loans. The Bank or its affiliates 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 mortgaged property underlying a real estate loan by operation of law or otherwise in accordance with the terms of the participation and subparticipation agreements.

Under the participation and subparticipation agreements, the Bank has the right, in the exercise of its reasonable discretion and in accordance with prudent banking practices, to give consents, waivers, and modifications of the loan documents to the same extent as if the loans were wholly owned by the Bank; provided, however, that the Bank shall not grant or agree to any (i) waiver of any payment default, (ii) extension of the maturity, (iii) reduction of the rate or rates of interest with respect to the loans, (iv) forgiveness or reduction of the principal sum of the loans, (v) increase the lending formula or advance rates, (vi) waiver of any right to elect to foreclose on any loan in default, or (vii) amendment or modification of the financial covenants contained in the loan documents that would make such financial covenants less restrictive with respect to any of the borrowers without the prior written consent of Holdings or HPCI, except that the Bank shall be permitted to grant or agree to any of such consents, waivers, or modifications pursuant to and in accordance with guidelines and limitations provided by Holdings or HPCI to the Bank in writing from time to time.

The Bank has the right to accept payment or prepayment of the whole principal sum and accrued interest in accordance with the terms of the loans, waive prepayment charges in accordance with the Bank’s policy for loans in which no participation interest has been granted, and accept additional security for the loans. No specific term is specified in the participation and subparticipation agreements; the agreements may be terminated by mutual agreement of the parties at any time, without penalty. Due to the relationship among HPCI, Holdings, and the Bank, it is not anticipated that these agreements will be terminated by any party in the foreseeable future.

The Bank, in its role as servicer under the terms of the loan participation agreements, receives a loan-servicing fee designed as a reimbursement for costs incurred to service the underlying loan. The amount and terms of the fee are determined by mutual agreement of the Bank, Holdings, and HPCI from time to time during the term of the participation and subparticipation agreements. The fees and other terms contained in the servicing arrangements are substantially equivalent to, but may be more favorable to HPCI, than those that would be attained in agreements with unaffiliated third parties. Additional information regarding the servicing fee rates are set forth under the caption “Non-Interest Income and Non-Interest Expense” of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this report.

Competition

Competition that impacts Huntington’s ability to attract new business, particularly in the form of loans secured by real estate, also affects HPCI’s availability to invest in participation interests in such loans. Huntington is impacted by competition in the form of price and service from other banks and financial companies such as savings and loans, credit unions, finance companies, and brokerage firms which is intense in most of the markets served by Huntington and its subsidiaries. Mergers between and the expansion of financial institutions both within and outside Ohio have provided significant competitive pressure in major markets. Since 1995, when federal interstate banking legislation became effective that made it permissible for bank holding companies in any state to acquire banks in any other state, and for banks to establish interstate branches (subject to certain limitations by individual states), actual or potential competition in each of Huntington’s markets has intensified. Internet banking also competes with Huntington’s business.

Segment Reporting

HPCI’s operations consist of acquiring, holding, and managing its participation interests. Accordingly, HPCI only operates in one segment.

Regulatory Matters

HPCI is an indirect subsidiary of the Bank and, therefore, regulatory authorities have the right to examine HPCI and its activities and, under certain circumstances, to impose restrictions on the Bank or HPCI. The Bank is subject to examination and supervision by the OCC. In addition to the impact of federal and state regulation, the Bank is affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

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). 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. We do not believe these standards and conditions adopted by Huntington will have a significant impact on HPCI’s financial condition or results of operations.

Available Information

HPCI’s investor information is accessible on Huntington’s Internet website, under the “Investor Relations” link found on Huntington’s homepage at www.huntington.com. HPCI makes available free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after those reports have been electronically filed or submitted to the SEC. These filings are also accessible on the SEC’s website at www.sec.gov. The public may read and copy any materials HPCI files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Item 1A: Risk Factors

HPCI is subject to a number of risks, many of which are outside of Management’s control, though Management strives to manage those risks while optimizing returns. In addition to the other information included in this report, readers should carefully consider that the following important factors, among others, could materially impact HPCI’s business, future results of operations, and future cash flows.

A decline in the Bank’s capital levels may result in HPCI’s preferred securities being subject to a conditional exchange into Bank preferred securities at a time when the Bank’s financial condition is deteriorating. Consequently, the likelihood of dividend payments, as well as the liquidation preference, voting rights, and liquidity of securities would be negatively impacted. In addition, this exchange would most likely be a taxable event to shareholders.

The OCC, as the primary regulator of the Bank, has the ability to cause the exchange of HPCI’s Class C preferred securities if:

•

the Bank becomes “undercapitalized;”

•

the OCC, in its sole discretion, anticipates that the Bank will become “undercapitalized” in the near term; or

•

the Bank is placed in conservatorship or receivership.

None of the holders of HPCI’s Class C preferred securities, HPCI, or the Bank can require or force such an exchange. In the event of an OCC-directed exchange, each holder of HPCI’s Class C preferred securities would receive a Class C preferred security from the Bank for each Class C preferred security of HPCI. This would represent an investment in the Bank and not in HPCI. Under these circumstances, there would likely be a significant loss associated with this investment. Also, since preferred shareholders of HPCI would become preferred shareholders of the Bank at a time when the Bank’s financial condition has deteriorated, it is unlikely that the Bank would be in a financial position to make any dividend payments on the Bank’s preferred securities.

In the event of a liquidation of the Bank, the claims of depositors and creditors of the Bank are entitled to priority in payment over the claims of holders of equity interests, such as the Bank preferred securities, and, therefore, preferred shareholders likely would receive substantially less than would have been received had the preferred securities not been exchanged for Bank preferred securities.

The exchange of the preferred securities for Bank preferred securities would most likely be a taxable event to shareholders under the Internal Revenue Code and, in that event, shareholders would incur a gain or loss, as the case may be, measured by the difference between the basis in the preferred securities and the fair market value of the Bank preferred securities received in the exchange.

Although the terms of the Bank preferred securities are substantially similar to the terms of HPCI’s preferred securities, there are differences, such as the Bank preferred securities do not have any voting rights or any right to elect independent directors if dividends are missed. In addition, the Bank preferred securities will not be listed on the NASDAQ Stock Market or any exchange and a market for them may never develop.

The Bank would be considered to be “undercapitalized” if: its Tier 1 risk-based capital (“RBC”) ratio is below 4%, its Total RBC ratio is below 8% or its Tier 1 leverage ratio is below 4%. The Bank currently intends to maintain its capital ratios in excess of the levels it needs to be considered to be “well-capitalized” under regulations issued by the OCC. These guidelines, as well as the Bank’s regulatory capital ratios for December 31, 2009, are discussed in table 2 of Item I, Part 1 of this report.

The Bank is a wholly owned subsidiary of Huntington. Huntington is a one-bank holding company which files annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (the SEC), under the Securities Exchange Act of 1934, as amended (the Exchange Act). At December 31, 2009 and 2008, the Bank, on a consolidated basis with its subsidiaries, accounted for over 98% of Huntington’s consolidated assets, and accordingly, Management considers the balance sheets of the Bank to be substantially the same as the balance sheet of Huntington for each of these dates. For periods prior to and including December 31, 2007, the consolidated income statements of the Bank and Huntington are substantially the same. For 2008, a substantial portion of the losses associated with Huntington’s relationship with Franklin was recorded at a direct subsidiary of Huntington. This portion of the losses did not affect the Bank and, thus, affects the comparability of the Bank’s income statement with that of Huntington. Other than the impact of these losses associated with Huntington’s relationship with Franklin, there were no material differences in the income statements of the Bank and Huntington for the year ended December 31, 2008. These changes had no impact on net cash flows of the Bank or of Huntington for the year ended December 31, 2008. There were no material differences in the income statements of the Bank and Huntington for the year ended December 31, 2009.

These filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov and on the investor relations page of Huntington’s website at http://www.huntington.com. Any document filed by Huntington with the SEC can be read and copied at the SEC’s public reference facilities. Further information on the operation of the public reference facilities can be obtained by calling the SEC at 1-800-SEC-0330. Copies of these SEC filings can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street N.E., Washington, D.C. 20549. In addition, copies of these SEC filings can also be obtained by written request to Investor Relations, Huntington Bancshares Incorporated, 41 South High Street, Columbus, Ohio 43287 or by calling 614-480-4060. Huntington’s financial statements for the fiscal year ended December 31, 2009 are also filed with this report as Exhibit 99.1.

Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity, or stock price.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to the U.S. Treasury Department’s Capital Purchase Plan (CPP) under the Troubled Asset Relief Program (TARP) announced in the fall of 2008 and the new Capital Assistance Program (CAP) announced in spring of 2009, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, has imposed a number of restrictions and limitations on the operations of financial services firms participating in the federal programs.

These programs subject the Bank, and other financial institutions that participate in them, to additional restrictions, oversight, and costs that may have an adverse impact on our business, financial condition, or results of operations. In addition, new proposals for legislation continue to be introduced in the U.S. Congress that could further increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including as related to compensation, interest rates, the impact of bankruptcy proceedings on consumer real property mortgages, and otherwise. Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation, or its application. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, negatively impact the recoverability of certain of our recorded assets, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner.

Huntington participated in TARP in the fall of 2008, as well as other such programs in 2009. A company that participates in the TARP must adopt certain standards for executive compensation and accept restrictions on the payment of dividends and the repurchase of common stock. The United States government also has the ability to impose additional conditions on participants in the TARP. These additional conditions could have an adverse impact on Huntington’s financial position and future results of operations. Because of the nature of HPCI’s relationship with Huntington, this could have an adverse impact on HPCI’s financial position and future results of operations.

A sustained weakness or weakening in business and economic conditions generally or specifically in the markets in which we do business could adversely affect our business and operating results.

Our business could be further adversely affected to the extent that the above-mentioned conditions continue to exert direct or indirect impacts on us or on our customers and counterparties. These conditions could lead, for example, to one or more of the following:

•

A decrease in the demand for loans;

•

An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to us.

An increase in the number of delinquencies, bankruptcies, or defaults could negatively impact our business and result in a higher level of related nonperforming assets, net charge-offs, and provision for credit losses. The markets we serve are dependent, indirectly, on industrial businesses and are vulnerable to adverse changes in economic conditions in these markets.

Our portfolio of commercial real estate loan participation interests has and will continue to be affected by the on-going correction in residential real estate prices and reduced levels of home sales.

At December 31, 2009, we had $3.1 billion of commercial real estate loan participation interests, including $0.2 billion of loan participation interests to builders of single family homes. There continues to be a general slowdown in the housing market across our geographic footprint, reflecting declining prices and excess inventories of houses to be sold. As a result, home builders have shown signs of financial deterioration. We expect the home builder market to continue to be volatile and anticipate continued pressure on the home builder segment in the coming months. As we continue our on-going portfolio monitoring, we will make credit and reserve decisions based on the current conditions of the borrower or project combined with our expectations for the future. If the slow down in the housing market continues, we could experience higher charge-offs and delinquencies in this portfolio.

Declines in home values and reduced levels of home sales in our markets could continue to adversely affect us.

We are subject to the effects of any economic downturn. There has been a slowdown in the housing market across our geographic footprint, reflecting declining prices and excess inventories of houses to be sold. These developments have had, and further declines may continue to have, a negative effect on our financial conditions and results of operations. At December 31, 2009, we had participation interests in $0.7 billion of consumer and residential real estate loans, representing 19% of total loans. Continuing declines in home values are likely to lead to higher charge-offs and delinquencies in each of these portfolios.

We rely on the Bank’s credit underwriting standards and on-going process of credit assessment. There can be no assurance that the Bank’s standards and assessments will protect us from significant credit losses on loans underlying its participation interests.

To date, we have purchased, and intend to continue to purchase, all of our participation interests in loans originated by or through the Bank and its affiliates. After we purchase the participation interests, the Bank continues to service the underlying loans. Accordingly, in managing our credit risk, we rely on the Bank’s credit underwriting standards and on-going process of credit assessment. The Bank’s exposure to credit risk is managed through the use of consistent underwriting standards that emphasize “in-market” lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Bank’s credit administration function employs risk management techniques to ensure that underlying loans adhere to corporate policy and problem loans underlying our participation interests are promptly identified. There can be no assurance that the Bank’s credit underwriting standards and its on-going process of credit assessment will protect us from significant credit losses on loans underlying its participation interests.

We have no control over changes in interest rates and such changes could negatively impact our financial condition, results of operations, and ability to pay dividends.

Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply, and other factors beyond our control may also affect interest rates. Our income consists primarily of interest and fees on loans underlying its participation interests. Changes in interest rates also can affect the value of our loan participation interest. At December 31, 2009, 28% of the loans underlying our participation interests, as measured by the aggregate outstanding principal amount, bore interest at fixed rates and the remainder bore interest at adjustable rates. Adjustable-rate loans decrease the risks associated with increases in interest rates but involve other risks. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, and the increased payment increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on the loans underlying our participation interests as the borrowers refinance their mortgages at lower interest rates. Under these circumstances, we may find it more difficult to acquire additional participation interests with rates sufficient to support the payment of the dividends on the preferred securities. Because the rate at which dividends are required to be paid on the Class A and C preferred securities is fixed, there can be no assurance that a declining interest rate environment would not adversely affect our ability to pay full, or even partial, dividends on our preferred securities.

Bank regulators may limit HPCI’s ability to implement its business plan and may restrict its ability to pay dividends.

Because HPCI is an indirect subsidiary of the Bank, regulatory authorities have the right to examine HPCI and its activities and, under certain circumstances, impose restrictions on the Bank or HPCI. These restrictions could impact HPCI’s ability to conduct its business and could adversely affect its financial condition and results of operations.

If the OCC determines that the Bank’s relationship with HPCI results in an unsafe and unsound banking practice, the OCC and other regulators of the Bank have the authority to restrict HPCI’s ability to transfer assets, restrict its ability to make distributions to shareholders or redeem preferred securities, or require the Bank to sever its relationship with HPCI or divest its ownership in HPCI. Certain of these actions by the OCC would likely result in HPCI’s failure to qualify as a REIT. The payment of dividends on the preferred securities could also be subject to regulatory limitations if the Bank becomes “under-capitalized” for purpose of regulations issued by the OCC, as described under the heading “Dividend Policy and Restrictions” in Item I, part 1 of this report.

Legal and regulatory limitations on the payment of dividends by the Bank could also affect HPCI’s ability to pay dividends to unaffiliated third parties, including the preferred shareholders. Since HPCI, HPCII, HCF, and Holdings are members of the Bank’s consolidated group, payment of common and preferred dividends by the Bank and/or any member of its consolidated group to unaffiliated third parties, including payment of dividends to the shareholders of preferred securities, would require regulatory approval if aggregate dividends on a consolidated basis exceed certain limitations. 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.

At December 31, 2009, the Bank could not declare or pay dividends without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends without regulatory approval. The OCC has approved the payment of HPCI’s dividends on its preferred securities throughout 2008 and 2009. For the foreseeable future, management intends to request approval for any future dividends; however, there can be no assurance that the OCC will continue to approve future dividends

HPCI could suffer adverse tax consequences if it failed to qualify as a REIT.

No assurance can be given that HPCI will be able to continue to operate in such a manner so as to remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex tax law provisions for which there are only limited judicial or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within its control. No assurance can be given that new legislation or new regulations, administrative interpretations, or court decisions will not significantly change the tax laws in the future with respect to qualification as a REIT or the federal income tax consequences of such qualification in a way that would materially and adversely affect HPCI’s ability to operate. Any such new legislation, regulation, interpretation, or decision could be the basis of a tax event that would permit HPCI to redeem all or any preferred securities. If HPCI were to fail to qualify as a REIT, the dividends on preferred securities would not be deductible for federal income tax purposes. HPCI would face a tax liability that could consequently result in a reduction in HPCI’s net earnings after taxes. A reduction in net earnings after taxes could adversely affect its ability to add interest-earning assets to its portfolio and pay dividends to its preferred security holders.

If in any taxable year HPCI fails to qualify as a REIT, unless it is entitled to relief under certain statutory provisions, it would also be disqualified from treatment as a REIT for the five taxable years following the year its qualification was lost. As a result, the amount of funds available for distribution to shareholders would be reduced for the year or years involved.

As a REIT, HPCI generally will be required each year to distribute as dividends to its shareholders at least 90% of REIT taxable income, excluding capital gains. Failure to comply with this requirement would result in earnings being subject to tax at regular corporate rates. In addition, HPCI would be subject to a 4% nondeductible excise tax on the amount by which certain distributions considered as paid with respect to any calendar year are less than the sum of 85% of ordinary income for the calendar year, 95% of capital gains for the calendar year, and 100% of undistributed taxable income from prior periods. Qualification as a REIT also involves application of other specific provisions of the Internal Revenue Code. Two specific provisions are an income test and an asset test. At least 75% of HPCI’s gross income, excluding gross income from prohibited transactions, for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property. Additionally, at least 75% of HPCI’s total assets must be represented by real estate assets. At December 31, 2009, HPCI had qualifying income and qualifying assets that exceeded 75%.

Although HPCI currently intends to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax, or other considerations may cause it to determine that it is in its best interests and the best interests of holders of common and preferred securities to revoke the REIT election. As long as any class of preferred securities is outstanding, any such determination may be made without shareholder approval, but will require the approval of a majority of independent directors.

HPCI is dependent, in virtually every phase of its operations, on the diligence and skill of the officers and employees of the Bank, the Bank’s ability to retain key employees, and its relationship with the Bank may create potential conflicts of interest.

The Bank is involved in virtually every aspect of HPCI’s existence. As of December 31, 2009, all of its officers and six of its nine directors are also officers or directors of the Bank and/or its affiliates. Officers that are common with the Bank devote less than a majority of their time to managing HPCI’s business. The Bank has the right to elect all of HPCI’s directors, including independent directors, except under limited circumstances if it fails to pay dividends. The Bank and its affiliates have interests that are not identical to HPCI’s and, therefore, conflicts of interest could arise in the future with respect to transactions between or among the Bank, Holdings, HPCII, HCF, and HPCI.

The Bank administers HPCI’s day-to-day activities under the terms of participation and sub-participation agreements. The parties to these agreements are all affiliated and, accordingly, these agreements were not the result of arms-length negotiations and may be modified at any time in the future. Although the modification of the agreements requires the approval of a majority of independent directors, the Bank, through its control of voting power of HPCI’s outstanding securities, controls the election of all of the directors, including independent directors. Therefore, HPCI cannot assure shareholders that modifications to the participation and sub-participation agreements will be on terms as favorable to it as those that could have been obtained from unaffiliated third parties.

Huntington, the owner of all the Bank’s common shares, may have investment goals and strategies that differ from those of the holders of HPCI’s preferred securities. In addition, neither Huntington nor the Bank has a policy addressing the treatment of conflicts regarding new business opportunities. Thus, new business opportunities identified by Huntington or the Bank may be directed to affiliates other than HPCI. HPCI’s board of directors has broad discretion to revise its investment and operating strategy without shareholder approval. The Bank, through its direct and indirect ownership of Holdings, HCF, and HPCII’s common stock and their ownership of HPCI’s common stock, controls the election of all of HPCI’s directors, including independent directors. Consequently, HPCI’s investment and operating strategies will largely be directed by Huntington and the Bank.

HPCI is dependent on the diligence and skill of the officers and employees of the Bank for the selection and structuring of the loans underlying its participation interests and other authorized investments. The Bank selected the amount, type, and price of loan participation interests and other assets that were acquired from the Bank and its affiliates. HPCI anticipates that it will continue to acquire all or substantially all of its assets from the Bank or its affiliates for the foreseeable future. Although these acquisitions are made within investment policies, neither HPCI nor the Bank obtained any third-party valuations. HPCI does not intend to do so in the future. Although HPCI has policies to guide the acquisition and disposition of assets, these policies may be revised or exceptions may be approved from time to time at the discretion of the board of directors without a vote of shareholders. Changes in or exceptions made to these policies could permit the acquisition of lower quality assets.

HPCI is dependent on the Bank and others for monitoring and servicing the loans underlying its participation interests. Conflicts could arise as part of such servicing, particularly with respect to loans that are placed on nonaccrual status. HPCI has no control over the actions of the Bank in pursuing collection of any non-performing assets. HPCI’s ability to make timely payments of dividends on the preferred and common securities will depend in part upon the Bank’s prompt collection efforts on its behalf. HPCI pays substantial servicing fees to the Bank. HPCI incurred servicing fees of $9.4 million in 2009, $10.9 million in 2008, and $11.1 million in 2007.

The Bank may seek to exercise its influence over HPCI’s affairs so as to cause the sale of its assets and their replacement by lesser quality assets acquired from the Bank or elsewhere. This could adversely affect HPCI’s business and its ability to make timely payment of dividends on the preferred and common securities.

A change of control of Huntington could result in a change in the way that HPCI operates and this could have an adverse impact on HPCI’s financial position and future results of operations.

HPCI’s assets may be used to guarantee certain of the Bank’s obligations that will have a preference over the holders of HPCI’s preferred securities.

The Bank is eligible to obtain advances from various federal and government-sponsored agencies, such as the Federal Home Loan Bank (FHLB). Any such agency that makes advances to the Bank where HPCI has acted as a co-borrower or guarantor or has pledged its assets as collateral will have a preference over the holders of HPCI’s preferred securities. These holders would receive their liquidation preference only to the extent there are assets available after satisfaction of HPCI’s indebtedness and other obligations under any such guarantee or pledge, if any. 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 $3.2 billion as of December 31, 2009, based on the Bank’s holdings of FHLB stock. As of that same date, the Bank had borrowings of $0.2 billion under the facility.

HPCI has entered into an amended and restated agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize the Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess of an aggregate 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. The pledge limit was established by HPCI’s board at 25% of total assets, or approximately $1.1 billion as of December 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. As of December 31, 2009, HPCI’s total loans pledged consisted of one-to-four family residential mortgage portfolio, which aggregated to $0.7 billion as of that same date. A default by the Bank on its obligations to the FHLB could adversely affect HPCI’s business and its ability to make timely dividend payments on preferred and common securities.

HPCI may redeem the Class C and Class D preferred securities upon the occurrence of certain special events and holders of such securities may receive a redemption amount that is different than the then current market price for the securities.

At any time following the occurrence of certain special events, HPCI will have the right to redeem the Class C and Class D preferred securities in whole, subject to the prior written approval of the OCC. The occurrence of such an event will not, however, give a preferred shareholder any right to request that such Class C or Class D preferred securities be redeemed. A special event includes:

•

a tax event which occurs when HPCI receives an opinion of counsel to the effect that, as a result of a judicial decision or administrative pronouncement, ruling, or other action or as a result of certain changes in the tax laws, regulations, or related interpretations, there is a significant risk that dividends with respect to HPCI’s capital stock will not be fully deductible by HPCI or it will be subject to a significant amount of additional taxes or governmental charges;

•

an investment company event which occurs when HPCI receives an opinion of counsel to the effect that, as a result of certain changes in the applicable laws, regulations, or related interpretations, there is a significant risk that HPCI will be considered an investment company under the Investment Company Act of 1940; and

•

a regulatory capital event which occurs when, as a result of certain changes in the applicable laws, regulations, or related interpretations, there is a significant risk that HPCI’s Class C preferred securities will no longer constitute Tier 1 capital of the Bank (other than as a result of limitations on the portion of Tier 1 capital that may consist of minority interests in subsidiaries of the Bank).

In the event HPCI redeems its Class C or Class D preferred securities, holders of such securities will be entitled to receive the redemption price of $25.00 per share plus accrued and unpaid dividends on such shares. The redemption price may differ from the market price of the Class C preferred securities.

Item 1B: Unresolved Staff Comments

Not Applicable.

Item 2: Properties

HPCI does not own any material physical property or real estate.

Item 3: Legal Proceedings

HPCI is not the subject of any material litigation. HPCI is not currently involved in nor, to Management’s knowledge, is currently threatened with any material litigation with respect to the loans underlying its participation interests other than routine litigation arising in the ordinary course of business.

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the period covered by this report.

Part II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There is no established public trading market for HPCI’s common stock. As of February 28, 2010, there were three common shareholders of record, all of which are affiliates of the Bank. There were no dividends declared to common shareholders in 2009. During 2008 and 2007, dividends of $224.3 million and $266.6 million were declared to common shareholders, respectively. In addition, HPCI had return of capital distributions on common stock of $500.0 million, $0.1 million, and 33.8 million, for the years ended December 31, 2009, 2008, and 2007, respectively. These dividends and distributions were either accrued or paid by the last business day in each year.

Information regarding restrictions on dividends, as required by this item, is set forth in Part I, Item 1 “Dividend Policy and Restrictions”.

HPCI did not sell any unregistered equity securities during the year ended December 31, 2009. Neither HPCI nor any “affiliated purchaser” (as defined by Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) repurchased any equity securities of HPCI in any month within the fourth quarter ended December 31, 2009.

Item 6: Selected Financial Data

The table below represents selected financial data relative to HPCI as of and for the years ended December 31, 2009, 2008, 2007, 2006, and 2005.

Table 3 — Selected Financial Data

(in thousands)		2009				2008				2007				2006				2005
STATEMENTS OF INCOME:
Interest and fee income		$	167,485			$	254,549			$	324,811			$	331,306			$	302,743
Provision for (reduction in) allowance for credit losses			171,926				(14,855	)			3,390				(22,041	)			(19,796	)
Non-interest income			2,569				3,064				12,042				7,525				9,391
Non-interest expense			10,116				11,689				15,587				15,322				17,065
(Loss) income before provision for income taxes		$	(11,988	)		$	260,779			$	317,876			$	345,550			$	314,865
Provision for income taxes			—				—				1,617				1,313				547
Net (loss) income		$	(11,988	)		$	260,779			$	316,259			$	344,237			$	314,318
Dividends declared on preferred securities			16,195				36,521				49,643				47,944				34,634
Net (loss) income applicable to common shares		$	(28,183	)		$	224,258			$	266,616			$	296,293			$	279,684
Dividends and distributions declared on common stock		$	500,000			$	225,000			$	300,410			$	450,000			$	700,000
BALANCE SHEET HIGHLIGHTS:
At year end:
Net loan participation interests		$	3,717,222			$	4,343,035			$	4,276,764			$	4,048,506			$	4,454,795
All other assets			726,133				345,533				189,110				901,230				899,090
Total assets			4,443,355				4,688,568				4,465,874				4,949,736				5,353,885
Total shareholders’ equity			3,933,034				4,461,217				4,461,959				4,495,753				4,649,460
Average balances:
Net loan participation interests		$	3,966,491			$	4,311,659			$	4,289,099			$	4,349,214			$	4,664,505
Total assets			4,503,403				4,588,530				4,653,184				4,816,467				5,217,640
Total shareholders’ equity			4,422,497				4,562,126				4,617,576				4,774,542				5,197,654
KEY RATIOS AND STATISTICS:
Yield on interest earning assets			3.69	%			5.51	%			6.98	%			6.94	%			5.84	%
Return on average assets			(0.26	)			5.68				6.80				7.15				6.02
Return on average equity			(0.27	)			5.72				6.85				7.21				6.05
Average shareholders’ equity to average assets			98.20				99.42				99.23				99.13				99.62
Preferred dividend coverage ratio			(0.74	)x			7.14	x			6.37	x			7.18	x			9.08	x

All of HPCI’s common stock is owned by HCF, HPCII, and Holdings and, therefore, net income per common share information is not presented. At the end of all years presented, HPCI did not have any interest-bearing liabilities and, therefore, no liabilities are presented under this item.

Item 7: 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 Holdings and a Second Amended and Restated Loan Participation Agreement with the Bank. The Bank is required, under the participation and/or subparticipation agreements, to service HPCI’s loan portfolio in a manner substantially the same as for similar work for transactions on its own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral positions, and submits and pursues insurance claims. In addition, the Bank provides to HPCI accounting and reporting services as required. The Bank is required to adhere to HPCI’s policies relating to the relationship between HPCI and the Bank and to pay all expenses related to the performance of the Bank’s duties under the participation and subparticipation agreements. All of HPCI’s 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 plans, or objectives of Management for future operations, and forecasts of its 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 this report and other factors described from time to time in HPCI’s 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 does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies and Use of Significant Estimates

HPCI’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires Management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. Note 1 to the consolidated financial statements included in this report lists significant accounting policies used by Management in the development and presentation of HPCI’s 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 the organization and its financial position, results of operations, and cash flows.

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 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. Management has identified the allowances for credit losses (ACL) as the most significant accounting estimate. At December 31, 2009, the ACL was $158.0 million and represented the sum of the allowance for loan participation losses (ALPL) and allowance for unfunded loan participation commitments (AULPC). The ACL represents Management’s estimate as to the level of allowances considered appropriate to absorb probable inherent credit losses in the loan participation portfolio, as well as unfunded loan participation commitments. All known relevant internal and external factors that affected loan collectability were considered, including analysis of historical charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values. Such factors are subject to regular review and may change to reflect updated performance trends and expectations, particularly in times of severe stress such as have been experienced throughout 2009. HPCI believes the process for determining the ACL considers all of the potential factors that could result in credit losses. However, the process includes judgmental and

quantitative elements that may be subject to significant change. There is no certainty that the ACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy, market conditions, or events adversely affecting specific customers, industries or markets. To the extent actual outcomes differ from estimates, the credit quality of the Bank’s customer base materially decreases, the risk profile of a market, industry, or group of customers changes materially, or if the ACL is determined to not be adequate, additional provision for credit losses could be required, which could adversely affect HPCI’s business, financial condition, liquidity, capital, and results of operations in future periods. At December 31, 2009, the ACL as a percent of total loan participation commitments was 4.08%. To illustrate the potential effect on the financial statements of our estimates of the ACL, a 10 basis point increase in this ratio to 4.18% would require $4.0 million in additional provision for credit losses, and would also negatively impact 2009 net (loss) income by approximately $4.0 million. A discussion about the process used to estimate the ACL is presented in the Credit Risk section of Management’s Discussion and Analysis in this report.

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. For the year ended December 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 the tax year 2009, 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 December 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.

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 stock is considered equity and, therefore, the dividends are not reflected as interest expense.

HPCI reported a net loss of $12.0 million for 2009, as compared with net income of $260.8 million for 2008, and $316.3 million for 2007. The decrease in net income for 2009 was the result of increased provision for allowance for credit losses, particularly from participation interests in commercial real estate. Net loss available to common shares was $28.2 million for 2009, compared to net income available to common shares of $224.3 million in 2008, and $266.6 million for 2007. Return on average assets (ROA) was (0.26) % for 2009, 5.68% for 2008, and 6.80% for 2007. Return on average equity (ROE) was (0.27) % for 2009, 5.72% for 2008, and 6.85% for 2007.

Interest and Fee Income

HPCI’s primary source of revenue is the interest and fee income on its participation interests in loans. At December 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.

The table below shows HPCI’s average annual balances, interest and fee income, and yields for the three years ended December 31:

Table 4 — Interest and Fee Income

		2009												2008												2007
		Average												Average												Average
(in millions)		Balance				Income (1)				Yield				Balance				Income (1)				Yield				Balance				Income (1)				Yield
Loan participation interests:
Commercial real estate		$	3,195.9			$	110.1				3.45	%		$	3,283.0			$	176.8				5.39	%		$	3,178.8			$	231.3				7.28	%
Consumer and residential real estate			848.2				56.2				6.62				1,093.8				72.5				6.63				1,162.8				77.6				6.67
Total loan participations			4,044.1				166.3				4.11				4,376.8				249.3				5.70				4,341.6				308.9				7.12
Interest bearing deposits with The Huntington National Bank			490.4				1.2				0.25				239.2				5.2				2.17				307.2				15.9				5.10
Total		$	4,534.5			$	167.5				3.69	%		$	4,616.0			$	254.5				5.51	%		$	4,648.8			$	324.8				6.98	%

Interest and fee income for the years ended December 31, 2009 and 2008 were $167.5 million and $254.5 million, respectively. As shown in Table 4, the decrease in interest and fee income was the result of lower interest rate yields, as well as a significant increase in non-accrual loan balances. See table 5 for a breakdown fixed and variable rate loans as of December 31, 2009 and 2008. The yield decreased to 3.69% in 2009 from 5.51% in 2008 while average total earning asset balances decreased by $81.5 million, or 1.8%. The table above includes interest received on participations in loans that are on a non-accrual status in the individual portfolios.

Interest and fee income for the years ended December 31, 2008 and 2007 were $254.5 million and $324.8 million, respectively. The decrease in interest and fee income was the result of lower interest rates. For the years ended December 31, 2008 and 2007, the yield decreased from 6.98% to 5.51%, while average total earning asset balances decreased by $32.8 million, or 0.7%.

Provision for (reduction in allowances for) Credit Losses

The provision for (reduction in allowances 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 ALPL. As a result, this ALPL is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than HPCI recording provision for credit losses. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. As loan participations mature, refinance, or other such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL. The provision for credit losses was $171.9 million for 2009, compared with reduction in allowances for credit losses of $14.9 million in 2008 and a provision for credit losses of $3.4 million in 2007. The provision expense during 2009 was primarily the result of a change in estimate resulting from the 2009 fourth quarter review of our ACL practices and assumptions. See discussion of allowances for credit losses within the “Credit Quality” section of this report.

Noninterest Income and Noninterest Expense

Noninterest income was $2.6 million, $3.1 million, and $12.0 million in 2009, 2008, and 2007, respectively. During 2007, non-interest income included rental income received from the Bank related to leasehold improvements owned by HPCLI. On December 31, 2007, HPCLI became a wholly owned subsidiary of Holdings. As a result, HPCI no longer received rental income in periods after that date. Noninterest income included rental income of $6.8 million in 2007. Non-interest income also 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). Collateral fees totaled $2.5 million, $3.0 million, and $5.2 million in 2009, 2008, and 2007, respectively. See Note 9 to the consolidated financial statements included in this report for more information regarding use of HPCI’s assets as collateral for the Bank’s advances from the FHLB.

Noninterest expense was $10.1 million, $11.7 million, and $15.6 million in 2009, 2008, and 2007, respectively. The predominant components of HPCI’s non-interest expense are the fees paid to the Bank for servicing the loans underlying the participation interests. The servicing costs for the years ended December 31, 2009, 2008, and 2007 totaled $9.4 million, $10.9 million, and $11.1 million, respectively.

In 2009, 2008, and 2007, the annual servicing rates the Bank charged with respect to outstanding principal balances were:

		January 1, 2007
		through
		December 31, 2009
Commercial and 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 waives its right to receive any origination fees associated with participation interests in commercial real estate loans. The Bank and HPCI performed a review of loan servicing fees in 2009, and agreed to retain current servicing rates for all loan participation categories, including the continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed in 2010.

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 income taxes. HPCI’s former 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 consolidated financial statements. On December 31, 2007, HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. As a result, HPCLI became a wholly owned subsidiary of Holdings. Thus, HPCI had no provision for income taxes for the years ended December 31, 2009 and 2008.

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. However, 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.

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 only approximately 28% of its loan participation portfolio is 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 December 31, 2009, interest income for the next 12-month period would be expected to increase by $15.7 million, or 12.8%, based on a gradual 200 basis point increase in rates above the forward rates implied in the yield curve. Interest income would be expected to decline $8.9 million, or 7.2%, 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 December 31, 2009, the fair value of loan participation interests over the next 12 month period would be expected to increase $41.0 million, or 1.0%, 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, which was at 0.23% at December 31, 2009. 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 $75.9 million, or 1.9%.

Using the income simulation model for HPCI as of December 31, 2008, interest income for the next 12-month period would be expected to increase by $16.8 million, or 12.3%, 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 $7.4 million, or 5.4%, 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 December 31, 2008, the fair value of loan participation interests over the next 12 month period would be expected to increase $69.7 million, or 1.6%, 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, which was at 1.08% at December 31, 2008. 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 $59.0 million, or 1.3%.

The following table shows data with respect to interest rates of the loans underlying HPCI’s loan participations at December 31, 2009 and 2008, respectively.

Table 5 — Total Loan Participation Interests by Interest Rates

December 31, 2009		Fixed Rate												Variable Rate (1)
										Percentage by												Percentage by
						Aggregate				Aggregate								Aggregate				Aggregate
		Number				Principal				Principal				Number				Principal				Principal
(in thousands)		of Loans				Balance				Balance				of Loans				Balance				Balance
under 3.00%			50				5,750				0.5	%			970				1,693,937				60.5	%
3.00% to 3.99%			28				1,819				0.2				766				455,710				16.3
4.00% to 4.99%			528				33,728				3.1				546				211,845				7.6
5.00% to 5.99%			3,173				207,979				19.5				405				212,002				7.6
6.00% to 6.99%			5,552				387,650				36.2				336				130,880				4.5
7.00% to 7.99%			4,012				283,995				26.5				406				75,700				2.7
8.00% to 8.99%			2,393				102,070				9.5				152				17,677				0.6
9.00% and over			2,035				48,647				4.5				20				4,264				0.2
Total			17,771			$	1,071,638				100.0	%			3,601			$	2,802,015				100.0	%

December 31, 2008		Fixed Rate												Variable Rate (1)
										Percentage by												Percentage by
						Aggregate				Aggregate								Aggregate				Aggregate
		Number				Principal				Principal				Number				Principal				Principal
(in thousands)		of Loans				Balance				Balance				of Loans				Balance				Balance
under 3.00%			28				1,192				0.1	%			506				862,577				28.4	%
3.00% to 3.99%			41				1,548				0.1				1,172				1,328,934				43.8
4.00% to 4.99%			625				39,629				2.9				609				504,378				16.6
5.00% to 5.99%			3,974				282,158				20.6				511				92,039				3.0
6.00% to 6.99%			7,063				504,473				36.7				558				105,076				3.5
7.00% to 7.99%			4,892				356,461				25.9				626				107,165				3.5
8.00% to 8.99%			2,946				129,681				9.4				218				28,849				1.0
9.00% and over			2,468				59,389				4.3				26				4,942				0.2
Total			22,037			$	1,374,531				100.0	%			4,226			$	3,033,960				100.0	%

CREDIT QUALITY

At December 31, 2009, commercial real estate loan participations were 81% of total loan participations up from 78% at December 31, 2008. Consumer and residential real estate loan participations were 19% of total loan participations at December 31, 2009, down from 22% of total loan participations at December 31, 2008. The change in portfolio mix in the current year reflects the decision by HPCI not to purchase any new consumer and residential real estate loan participations in 2009.

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.

Concentration risk is managed with limits on loan type, geographic and industry diversification, country limits, and loan quality factors. The checks and balances in the credit process and the independence of the credit administration and risk management functions are designed to minimize problems and to facilitate the early recognition of problems when they do occur.

The following table provides aging information for the loans underlying HPCI’s loan participations at December 31, 2009 and 2008.

Table 6 — Loan Participation Interests Aging ⁽¹⁾

		December 31, 2009												December 31, 2008
										Percentage by												Percentage by
		Total				Aggregate				Aggregate				Total				Aggregate				Aggregate
		Number				Principal				Principal				Number				Principal				Principal
(in thousands)		of Loans				Balance				Balance				of Loans				Balance				Balance
Current			19,206			$	3,506,912				90.5	%			24,011			$	4,156,094				94.3	%
1 to 30 days past due			1,343				201,739				5.2				1,516				147,936				3.4
31 to 60 days past due			291				43,760				1.1				318				33,368				0.8
61 to 90 days past due			135				17,612				0.5				154				11,565				0.3
over 90 days past due			397				103,630				2.7				264				59,528				1.2
Total			21,372			$	3,873,653				100.0	%			26,263			$	4,408,491				100.0	%

Commercial Real Estate Credit

Commercial real estate (CRE) credit approvals are made by the Bank and are based on, among other factors, the financial strength of the borrower, assessment of the borrower’s management capabilities, industry sector trends, type of exposure, transaction structure, and the general economic outlook. While these are the primary factors considered, there are a number of other factors that may be considered in the decision process. There are two processes for approving credit risk exposures. The first, and more prevalent approach, involves individual approval of exposures. Credit officers that understand each local region and are experienced in the industries and loan structures of the requested credit exposure, make credit extension decisions. All credit exposures greater than $5 million are approved by a senior loan committee, led by our chief credit officer. The second involves a centralized loan approval process for the standard products and structures utilized in small business banking. In this centralized decision environment, where the above primary factors are the basis for approval, certain individuals who understand each local region make credit-extension decisions to preserve our local decision-making focus. In addition to disciplined, consistent, and judgmental factors, a sophisticated credit scoring process is used as a primary evaluation tool in the determination of approving an exposure.

In commercial lending, ongoing credit management is dependent on the type and nature of the loan. We monitor all significant exposures on a periodic basis. All commercial credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-given-default. This two-dimensional rating methodology, which results in 192 individual loan grades, provides granularity in the portfolio management process. The probability-of-default is rated on a scale of 1-12 and is applied at the borrower level. The loss-given-default is rated on a 1-16 scale and is applied based on the type of credit extension and the underlying collateral. The internal risk ratings are assessed and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis. The single family home builder portfolio and retail projects are examples of segments of the portfolio that have received more frequent evaluation at the loan level as a result of the economic environment and performance trends (see “Single Family Home Builder” and “Retail Properties” discussions). The risk rating criteria is continually reviewed and adjusted based on actual experience. The continuous analysis and review process results in a determination of an appropriate ALLL amount for the commercial loan portfolio.

In addition to the initial credit analysis initiated during the approval process, the credit review group performs analyses to provide an independent review and assessment of the quality and/or exposure of the loan. This group is part of the Risk Management area, and reviews individual loans and credit processes and conducts a portfolio review for each of the Bank’s regions on a 15-month cycle. The loan review group validates the internal risk ratings on approximately 60% of the portfolio exposure each calendar year. Similarly, to provide consistent oversight, a centralized portfolio management team monitors and reports on the performance of the small business banking loans.

Credit exposures may be designated as monitored credits when warranted by individual borrower performance, or by industry and environmental factors. Monitored credits are subjected to additional monthly reviews in order to adequately assess the borrower’s credit status and to take appropriate action.

The Special Assets Division (SAD) is a specialized credit group that handles workouts, commercial recoveries, and problem loan sales. This group is involved in the day-to- day management of relationships rated substandard or lower. Its responsibilities include developing an action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual status, and the ultimate collectibility of the managed monitored credits.

Commercial real estate loan participation interests outstanding by property type at December 31, 2009 and 2008, were as follows:

Table 7 — Commercial Real Estate Loan Participation Interests by Property Type and Borrower Location

		At December 31, 2009
		Geographic Region																												Percent
(in thousands of dollars)		Ohio				Michigan				Indiana				Kentucky				Pennsylvania				Other				Total Amount				of Total
Retail properties		$	416,983			$	96,555			$	43,707			$	30,256			$	30,671			$	71,687			$	689,859				22.0	%
Industrial and warehouse			375,420				157,435				62,590				13,258				9,557				36,355				654,615				20.9
Office			304,918				119,331				19,017				12,996				31,758				42,429				530,449				17.0
Raw land and other land uses			195,904				80,422				27,375				16,538				10,265				15,440				345,944				11.1
Multi family			128,847				13,355				67,343				40,103				9,116				12,479				271,243				8.7
Health care			171,363				42,359				1,004				170				18,031				14,805				247,732				7.9
Single family home builders			127,263				30,006				12,764				6,961				12,984				2,011				191,989				6.1
Other			101,358				56,453				6,676				1,434				5,874				25,400				197,195				6.3
Total		$	1,822,056			$	595,916			$	240,476			$	121,716			$	128,256			$	220,606			$	3,129,026				100.0	%

		At December 31, 2008
		Geographic Region																												Percent
(in thousands of dollars)		Ohio				Michigan				Indiana				Kentucky				Pennsylvania				Other				Total Amount				of Total
Industrial and warehouse		$	404,075			$	180,371			$	52,201			$	18,220			$	4,682			$	42,194			$	701,743				20.5	%
Retail properties			390,256				80,335				58,725				40,560				26,244				88,213				684,333				19.9
Office			328,805				149,729				34,581				20,342				40,484				57,403				631,344				18.4
Raw land and other land uses			210,997				124,824				33,818				8,877				12,246				22,706				413,468				12.0
Single family home builders			171,033				61,423				18,300				10,575				17,995				41,904				321,230				9.4
Multi family			114,234				14,558				83,495				39,076				1,237				22,150				274,750				8.0
Health care			111,012				7,853				1,033				181				1,011				16,717				137,807				4.0
Other			140,322				61,465				11,295				3,059				9,647				43,409				269,197				7.8
Total		$	1,870,734			$	680,558			$	293,448			$	140,890			$	113,546			$	334,696			$	3,433,872				100.0	%

At December 31, 2009, HPCI had $3.1 billion of commercial real estate loan participation interests. Our commercial real estate loan participation interests are diversified by customer, as well as throughout our lending area of Ohio, Michigan, Indiana, Kentucky, and Pennsylvania. However, the following segments are noteworthy.

Retail properties

Our portfolio of commercial real estate loans secured by retail properties totaled $0.7 billion, or approximately 22% of total loans, and an ALPL associated with these loans of $34.6 million at December 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 our geographic regions significantly impacted the projects that secure the loans in this portfolio segment. Lower occupancy rates, reduced rental rates, increased unemployment levels compared with recent years, and the expectation that these levels will continue to increase for the foreseeable future are expected to adversely affect our borrowers’ ability to repay these loans. We have increased the level of credit risk management activity to this portfolio segment, and we analyze our retail property loans in detail by combining property type, geographic location, tenants, and other data, to assess and manage our credit concentration risks.

Single family homebuilders

Our portfolio of commercial real estate loans secured by builders of single family homes totaled $0.2 billion or approximately 6% of total loans, and an ALPL associated with these loans of $9.4 million at December 31, 2009. The decrease primarily reflected the reclassification of loans secured by 1-4 family residential real estate rental properties to C&I loans, consistent with industry practices in the definition of this segment. Other factors contributing to the decrease in exposure include no new originations in this portfolio segment in 2009, increased property sale activity, and substantial charge-offs. The increased sale activity was evident throughout 2009.

The housing market across our geographic footprint remained stressed, reflecting relatively lower sales activity, declining prices, and excess inventories of houses to be sold, particularly impacting borrowers in our East Michigan and northern Ohio regions. Further, a portion of the loans extended to borrowers located within our geographic regions was to finance projects outside of our geographic regions. Based on the portfolio management processes, including charge-off activity, over the past 30 months, we believe that we have substantially addressed the credit issues in this portfolio. We do not expect any future significant credit impact from this portfolio segment.

Consumer Credit

Extensions of consumer credit by the Bank are based on, among other factors, the financial strength and payment history of the borrower, type of exposure, and the transaction structure. Consumer credit decisions are generally made in a centralized environment utilizing decision models. However, certain individuals who understand each of the Bank’s local regions have the authority to make credit extension decisions to preserve our local decision-making focus. Each credit extension is assigned a specific probability-of-default and loss-given-default. The probability-of-default is generally based on the borrower’s most recent credit bureau score (FICO), which is updated quarterly, while the loss-given-default is related to the type of collateral and the LTV 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, which may result in changes to future origination strategies. The continuous analysis and review process results in a determination of an appropriate ALLL amount for our consumer loan portfolio. The independent risk management group has a consumer process review component to ensure the effectiveness and efficiency of the consumer credit processes.

Collection action is initiated on an “as needed” basis through a centrally managed collection and recovery function. The collection group employs a series of collection methodologies designed to maintain a high level of effectiveness while maximizing efficiency. In addition to the retained consumer loan portfolio, the collection group is responsible for collection activity on all sold and securitized consumer loans and leases. Please refer to the “Nonperforming Assets” discussion for further information regarding the placement of consumer loans on nonaccrual status and the charging off of balances to the ALPL.

The residential real estate portfolio is primarily located throughout our geographic footprint. The general slowdown in the housing market has impacted the performance of the residential real estate portfolio over the past year. While the degree of price depreciation varies across our markets, all regions throughout our footprint have been affected.

Allowances for Credit Losses (ACL)

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

The ALPL represents the estimate of probable losses inherent in the loan portfolio at the balance sheet date. Additions to the ALPL and AULPC result primarily from an allocation of the purchase price of participations acquired.

It is HPCI’s policy to rely on the Bank’s detailed analysis as of the end of each quarter to estimate the required level of the ALPL and AULPC. The Bank’s methodology to determine the adequacy of the ALPL relies on a number of analytical tools and benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. The allowance is comprised of two components: the transaction reserve and the economic reserve.

The transaction reserve component of the ACL includes both (a) an estimate of loss based on pools of commercial and consumer loans with similar characteristics and (b) an estimate of loss based on an impairment review of each loan greater than $1 million. For commercial loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The reserve factors applied to these portfolios were developed based on internal credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data. In the case of more homogeneous portfolios, such as consumer loans, the determination of the transaction reserve is based on reserve factors that include the use of forecasting models to measure inherent loss in these portfolios. Models and analyses are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies. Adjustments to the reserve factors are made as needed based on observed results of the portfolio analytics.

The economic reserve incorporates the Bank’s determination of the impact of risks associated with the general economic environment on the portfolio. During the 2009 fourth quarter, the Bank performed a review of our ACL practices. The review included an analysis of the adequacy of the ACL in light of current economic conditions, as well as expected future performance. Based on the results of the review, the Bank made the following enhancements:

•

Current market conditions, such as higher vacancy rates and lower rents, have driven commercial real estate values lower and caused loss given default (LGD) experience to rise significantly over the past year. Management of the Bank believes that factors driving the higher losses will continue to be evident for at least the next 18 to 24 months, making it necessary to develop cyclical LGD factors that are collateral specific and based in part on market projections.

•

Probability of Default (PD) factors have recently migrated higher for commercial and commercial real estate loans. Based on this change in market conditions, Management has increased the loss emergence time frame to 24 months from 12 months.

•

Management of the Bank has redefined the general reserve in broader terms to incorporate: (a) current and likely market conditions along with an assessment of the potential impact of those conditions, (b) uncertainty in the risk rating process, and (c) the impact of portfolio performance, portfolio composition, origination channels, and other factors.

•

PD factors were updated to include current delinquency status across all consumer portfolios.

These enhancements allow for a more meaningful discussion of the Bank’s view of the current economic conditions and the potential impact on HPCI’s credit losses. The continued use of quantitative methodologies for the transaction reserve and the economic reserve may result in period-to-period fluctuation in the absolute and relative level of the ACL.

The levels of the ALPL and AULPC are adjusted based on the results of the above-mentioned detailed quarterly analysis. If credit quality deteriorates more than implied by the ALPL acquired, a provision for credit losses is made. If credit quality performance is better than implied by the ALPL acquired, a reduction in the allowance for credit losses is recorded. As loan participations mature, refinance, or other such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL. Such adjustments for the year ended December 31, 2009 resulted in a provision for credit losses of $171.9 million. This compared to a reduction in allowances for credit losses of $14.9 million for 2008 and a provision for credit losses of $3.4 million for 2007.

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

Table 8 — Allowances for Credit Loss Activity

(in thousands)		2009				2008				2007				2006				2005
ALPL balance, beginning of year		$	65,456			$	62,275			$	48,703			$	57,530			$	61,146
Allowance of loan participations acquired			33,632				36,284				26,530				19,404				25,071
Net loan losses
Commercial real estate			(103,261	)			(12,483	)			(12,001	)			(3,370	)			(3,928	)
Consumer and residential real estate			(12,016	)			(7,320	)			(4,295	)			(3,151	)			(4,593	)
Total net loan losses			(115,277	)			(19,803	)			(16,296	)			(6,521	)			(8,521	)
Provision for (reduction in) ALPL			172,620				(13,924	)			3,338				(21,710	)			(19,228	)
Economic Reserve transfer from (to) AULPC			—				624				—				—				(938	)
ALPL balance, end of year		$	156,431			$	65,456			$	62,275			$	48,703			$	57,530
AULPC balance, beginning of year		$	2,301			$	3,856			$	3,804			$	4,135			$	3,765
Provision for (reduction in) AULPC			(694	)			(931	)			52				(331	)			(568	)
Economic Reserve transfer (from) to ALPL			—				(624	)			—				—				938
AULPC balance, end of year		$	1,607			$	2,301			$	3,856			$	3,804			$	4,135
Total Allowances for Credit Losses		$	158,038			$	67,757			$	66,131			$	52,507			$	61,665
ALPL as a % of total participation interests			4.04	%			1.48	%			1.44	%			1.19	%			1.27	%
ACL as a % of total participation interests			4.08				1.54				1.52				1.28				1.37

The $91 million increase in the ALPL was due to both increases in transaction and economic reserves. The increase in transaction reserve primarily reflected an increase in reserves associated with impaired loans and an increase associated with risk-grade migration, predominantly in the commercial real estate (CRE) portfolio. The increase in economic reserve is the result of a change in estimate resulting from the Bank’s 2009 fourth quarter review of our ACL practices and assumptions, with a related impact to HPCI consisting of:

•

Approximately $18 million increase in the judgmental component.

•

Approximately $33 million allocated primarily to the CRE portfolio addressing the severity of CRE loss-given-default percentages and a longer term view of the loss emergence time period.

•

Approximately $1 million from updating the consumer reserve factors to include the current delinquency status.

In Management’s judgment, both the ALPL and the AULPC are adequate at December 31, 2009, to cover probable credit losses inherent in the loan participation portfolio and loan commitments.

HPCI, through reliance on methods utilized by the Bank, allocates the ALPL to each loan participation category based on an expected loss ratio determined by continuous assessment of credit quality based on portfolio risk characteristics and other relevant factors such as historical performance, internal controls, and impacts from mergers and acquisitions. For the commercial real estate loan participations, expected loss factors are assigned by credit grade at the individual underlying loan level at the time the loan is originated by the Bank. On a periodic basis, these credit grades are reevaluated. The aggregation of these factors represents an estimate of the probable inherent loss. The portion of the allowance allocated to the more homogeneous underlying consumer loan participations is determined by developing expected loss ratios based on the risk characteristics of the various portfolio segments and giving consideration to existing economic conditions and trends.

The following table shows the allocation in HPCI’s ALPL and AULPC:

Table 9 — Allowance for Credit Losses by Product ⁽¹⁾

		At December 31,
(in thousands)		2009								2008								2007								2006								2005
Commercial real estate		$	147,893				80.8	%		$	59,827				77.9	%		$	56,668				71.9	%		$	42,560				76.6	%		$	48,938				74.4	%
Consumer and residential real estate			8,538				19.2				5,629				22.1				5,607				28.1				6,143				23.4				8,592				25.6
Total ALPL			156,431				100.0	%			65,456				100.0	%			62,275				100.0	%			48,703				100.0	%			57,530				100.0	%
AULPC			1,607				—				2,301				—				3,856				—				3,804				—				4,135				—
Total		$	158,038				100.0	%		$	67,757				100.0	%		$	66,131				100.0	%		$	52,507				100.0	%		$	61,665				100.0	%

(1)		Percentages represent the percentage of each loan participation interests category to total loan participation interests.

Net Charge-offs

Total net charge-offs were $115.3 million, or 2.85%, of total average loan participations, for the year ended December 31, 2009, an increase from $19.8 million, or 0.45%, for the year ended December 31, 2008. The $95.5 million increase in net charge-offs reflected the continued economic weakness in our regions as the increase was spread across all regions.

Table 10 — Net Charge-offs ⁽¹⁾

(In thousands)		2009								2008								2007								2006								2005
Commercial real estate		$	103,261				3.23	%		$	12,483				0.38	%		$	12,001				0.38	%		$	3,370				0.10	%		$	3,928				0.11	%
Consumer and residential real estate			12,016				1.42				7,320				0.68				4,295				0.37				3,151				0.30				4,593				0.42
Total Net Charge-offs		$	115,277				2.85	%		$	19,803				0.45	%		$	16,296				0.38	%		$	6,521				0.15	%		$	8,521				0.18	%

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 within 180 days past due. 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 years:

Table 11 — Non-Performing Assets

		At December 31,
(in thousands)		2009				2008				2007				2006				2005
Participation interests in non-accrual loans
Commercial real estate		$	165,184			$	54,246			$	42,060			$	20,653			$	20,893
Consumer and residential real estate			5,554				6,041				4,136				4,649				5,722
Total Non-Performing Assets		$	170,738			$	60,287			$	46,196			$	25,302			$	26,615
NPAs as a % of total participation interests			4.41	%			1.37	%			1.06	%			0.62	%			0.59	%
ALPL as a % of NPAs			92				109				135				192				216
ACL as a % of NPAs			93				112				143				208				232
Accruing loans past due 90 days or more		$	8,631			$	9,543			$	4,440			$	5,392			$	3,188

Total NPAs increased to $170.7 million at December 31, 2009 from $60.3 million at December 31, 2008, representing 4.41% and 1.37% of total 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. Additionally, HPCI had $0.1 million of accruing commercial and residential mortgage loans that have been restructured in 2009.

The following table presents a coverage ratio analysis at December 31, 2009 and 2008.

Table 12 — Annual ALPL / Loan Participation Coverage Ratio Analysis

(in thousands)		2009				2008
Loan participation interests ending balances:
Accruing Loans		$	3,702,915			$	4,348,204
Loans subject to reserves measured as a pool			40,040				31,368
Loans subject to specific reserves (1)			130,698				28,919
Total non-accrual loans			170,738				60,287
Total loan participation interests		$	3,873,653			$	4,408,491
Allowance for loan participation interests (ALPL):
Accruing Loans		$	127,405			$	56,570
Loans subject to reserves measured as a pool			10,270				1,965
Loans subject to specific reserves (1)			18,756				6,921
Total non-accrual loans			29,026				8,886
Total ALPL		$	156,431			$	65,456
ALPL as a % of loan participation interests
Accruing Loans			3.44	%			1.30	%
Loans subject to reserves measured as a pool			25.65				6.26
Loans subject to specific reserves (1)			14.35				23.93
Total non-accrual loans			17.00	%			14.74	%
Total loan participation interests			4.04	%			1.48	%

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

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

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 December 31, 2009 and 2008, unfunded commitments totaled $303.7 million and $486.6 million, respectively. It is expected that cash flows generated by the existing portfolio will be sufficient to meet these obligations.

LIQUIDITY AND CAPITAL RESOURCES

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

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

At December 31, 2009 and 2008, HPCI maintained cash and interest bearing deposits with the Bank totaling $715.7 million and $293.0 million, respectively. HPCI maintains and transacts all of its cash activity with the Bank and invests available funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

At December 31, 2009, HPCI had no material liabilities or contractual obligations, other than unfunded loan commitments of $303.7 million, with a weighted average maturity of 1.4 years. In addition to anticipated cash flows, as noted above, HPCI has interest bearing and non-interest bearing cash balances with the bank totaling $715.7 million to supplement the funding of these liabilities and contractual commitments.

Shareholders’ equity was $3.9 billion at December 31, 2009 and $4.5 billion at December 31, 2008. A return of capital was distributed to shareholders through a distribution paid on January 8, 2010, which reduced our cash balances by $500.0 million.

The preferred dividend coverage ratio for 2009 was (0.74)x, compared to 7.14x in 2008. The decrease from the prior year primarily relates to lower income levels, as well as lower dividends as a result of reduced market rates in 2009.

Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings. The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock. Based on these regulatory dividend limitations, the Bank could not have declared and paid a dividend at December 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 2009. For the foreseeable future, management intends to request approval for any future dividends; however, there can be no assurance that the OCC will continue to approve future dividends.

RESULTS FOR THE FOURTH QUARTER

Table 13 — Quarterly Statements of Income

		2009																2008				4Q09 vs 4Q08
(in thousands)		Fourth				Third				Second				First				Fourth				$ Chg				% Chg
Interest and fee income
Interest on loan participation interests:
Commercial real estate		$	26,321			$	26,575			$	27,071			$	29,326			$	44,591			$	(18,270	)			(41.0	)%
Consumer and residential real estate			12,576				13,392				14,278				15,476				16,614				(4,038	)			(24.3	)
Total loan participation interest income			38,897				39,967				41,349				44,802				61,205				(22,308	)			(36.4	)
Fees from loan participation interests			297				379				290				269				277				20				7.2
Interest on deposits with The Huntington National Bank			454				395				284				102				498				(44	)			(8.8	)
Total interest and fee income			39,648				40,741				41,923				45,173				61,980				(22,332	)			(36.0	)
Provision for (reduction in allowances for) credit losses			84,740				27,701				40,497				18,988				(1,194	)			85,934				N.M.
Interest (loss) income after provision for (reduction in allowances for) credit losses			(45,092	)			13,040				1,426				26,185				63,174				(108,266	)			N.M.
Non-interest income:
Rental income			16				17				16				16				16				—				—
Collateral fees			578				609				640				677				745				(167	)			(22.4	)
Total non-interest income			594				626				656				693				761				(167	)			(21.9	)
Non-interest expense:
Servicing costs			2,180				2,264				2,387				2,551				2,675				(495	)			(18.5	)
Other			172				162				235				165				181				(9	)			(5.0	)
Total non-interest expense			2,352				2,426				2,622				2,716				2,856				(504	)			(17.6	)
Net (loss) income		$	(46,850	)		$	11,240			$	(540	)		$	24,162			$	61,079			$	(107,929	)			N.M.	%
Dividends declared on preferred securities			(2,940	)			(3,507	)			(4,613	)			(5,135	)			(10,188	)			(7,248	)			(71.1	)
Net (loss) income applicable to common shares (1)		$	(49,790	)		$	7,733			$	(5,153	)		$	19,027			$	50,891			$	(100,681	)			N.M.	%