10-K

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

For the fiscal year ended December 31, 2005

or

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

Commission file Number 000-33243

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 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

     All common stock is held by affiliates of the registrant as of December 31, 2005. As of February 28, 2006, 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, 2005: $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 2006 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	32
Item 8. Financial Statements and Supplementary Data	32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	50
Item 9A. Controls and Procedures	50
Item 9B. Other Information	50
Part III.
Item 10. Directors and Executive Officers of the Registrant	50
Item 11. Executive Compensation	50
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	50
Item 13. Certain Relationships and Related Transactions	50
Item 14. Principal Accounting Fees and Services	51
Part IV.
Item 15. Exhibits and Financial Statement Schedules	51
Signatures	52
Exhibits
Exhibit 21
Exhibit 24
Exhibit 31(A)
Exhibit 31(B)
Exhibit 32(A)
Exhibit 32(B)
Exhibit 99(A)
Exhibit 99(B)

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Huntington Preferred Capital, Inc.

Part I

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. At December 31, 2004, three related parties owned HPCI’s common stock: HPC Holdings-III, Inc. (HPCH-III), 67.37%; Huntington Preferred Capital II, Inc. (HPCII), 32.5%; and Huntington Bancshares Incorporated (Huntington), 0.13%. Effective February 18, 2005, Huntington Preferred Capital Holdings, Inc. (Holdings) transferred 34% of its ownership in HPCH-III to Huntington Capital Financing LLC (HCF). On March 31, 2005, HPCH-III liquidated into Holdings and HCF. As a result of liquidation, since March 31, 2005, four related parties own HPCI’s common stock: HCF, 47%; HPCII, 32.5%; Holdings, 20.37%; and Huntington, 0.13%. 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. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. The Bank, on a consolidated basis with its subsidiaries, at December 31, 2005, accounted for 99% of Huntington’s consolidated total assets and, for the year ended December 31, 2005, accounted for 94% of Huntington’s consolidated net income. Thus, consolidated financial statements for the Bank and for Huntington were substantially the same for these periods. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). The following chart outlines the relationship among affiliates at December 31, 2005:

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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 and Commercial Real Estate Loans

     HPCI owns participation interests in unsecured commercial loans and commercial loans secured by non-real property such as industrial equipment, livestock, furniture and fixtures, and inventory. 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, 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 and 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 or commercial real estate property that must be leased at the time HPCI acquires a participation interest in a commercial or commercial real estate loan secured by such property nor are commercial loans required to have third party guarantees.

     The credit quality of a commercial or 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 or 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, 2005, $3.0 billion, or 89.4%, of the commercial and 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 $0.2 billion of second, third, and fourth mortgages, and $0.2 billion of loans secured by non-real property.

Consumer Loans

     HPCI owns participation interests in consumer loans secured by automobiles, trucks, equipment, or 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 terms that range from 6 to 360 months. Of the loans underlying the consumer loan participations, most bear interest at fixed rates.

Residential Real Estate Loans

     HPCI 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.

     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.

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Geographic Distribution

     The following table shows the geographic location of loans underlying HPCI’s loan participations at December 31, 2005:

Table 1 — Total Loan Participation Interests by Geographic Location

(in thousands of dollars)					Percentage by
			Aggregate		Aggregate
	Number		Principal		Principal
State	of Loans		Balance		Balance
Ohio		18,094	$	2,434,838		54.0	%
Michigan		9,631		1,277,467		28.3
Indiana		2,384		384,782		8.5
Kentucky		1,916		228,011		5.1
		32,025		4,325,098		95.9
All other locations		356		187,227		4.1
Total loan participation interests		32,381	$	4,512,325		100.0	%

Principal Balances

     The following table shows data with respect to the principal balance of the loans underlying HPCI’s loan participations at December 31, 2005:

Table 2 — Total Loan Participation Interests by Principal Balances

(in thousands of dollars)					Percentage by
			Aggregate		Aggregate
	Number		Principal		Principal
Size	of Loans		Balance		Balance
Less than $50,000		19,548	$	417,034		9.2	%
Greater than $50,000 to $100,000		5,807		416,074		9.2
Greater than $100,000 to $250,000		3,987		604,151		13.4
Greater than $250,000 to $500,000		1,438		509,379		11.3
Greater than $500,000 to $1,000,000		819		572,519		12.7
Greater than $1,000,000 to $3,000,000		594		994,666		22.0
Greater than $3,000,000 to $5,000,000		126		483,374		10.7
Greater than $5,000,000 to $10,000,000		44		283,135		6.3
Greater than $10,000,000		18		231,993		5.2
Total loan participation interests		32,381	$	4,512,325		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 17.2% 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.

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     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. Capital ratios for the Bank as of December 31, 2005 and 2004 are as follows:

Table 3 — Capital Ratios for the Bank

	“Well-			“Adequately-
	Capitalized			Capitalized			December 31,
	Minimums”			Minimums”			2005			2004
Tier 1 Risk-Based Capital		6.00	%		4.00	%		6.82	%		6.08	%
Total Risk-Based Capital		10.00			8.00			10.55			10.16
Tier 1 Leverage Ratio		5.00			4.00			6.21			5.66

Conflict of Interests and Related Policies

     As of December 31, 2005, the Bank continued to control 98.6% 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, 2005, 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

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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. The Bank avoids transactions perceived to have unacceptably high risk, as well as excessive industry and other concentrations.

     Some of the loans, however, were acquired by the Bank in connection with the acquisition of other financial institutions. Prior to acquiring any financial institution, the Bank performed a number of due diligence procedures to assess the overall quality of the target institution’s loan portfolio. These procedures included the examination of underwriting standards used in the origination of loan products by the target institution, the review of loan documents and the contents of selected loan files, and the verification of the past due status and payment histories of selected borrowers. Through its due diligence procedures, the Bank obtained a sufficient level of comfort pertaining to the underwriting standards used by the target institution and their influence on the quality of the portfolio. Even though the Bank did not and does not warrant those standards, the Bank found them acceptable in comparison to HPCI’s underwriting standards in cases where the Bank had made a favorable decision to acquire the institution as a whole.

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, 2005, 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.

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     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. For each of the years ended December 31, 2005, 2004, and 2003, HPCI’s FFO were $274.3 million, $273.6 million, and $288.2 million, respectively. These significantly exceeded the minimum requirement of 150% of dividends on Class A, Class C, and Class D securities of $32.0 million, $22.3 million, and $21.0 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 generally accepted accounting principles 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.

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Employees

     At December 31, 2005, 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 which case such 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 collectibility 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

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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 been 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.

Formal Regulatory Supervisory Agreements

     On March 1, 2005, Huntington announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), as well as the Bank entering into a formal written agreement with the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreements called for independent third-party reviews, as well as the submission of written plans and progress reports by Huntington’s management and remain in effect until terminated by the banking regulators.

     On October 6, 2005, Huntington announced that the OCC had terminated its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. Huntington was verbally advised that it was in full compliance with the financial holding company and financial subsidiary requirement under the Gramm-Leach-Bliley Act (GLB Act). This notification reflected that Huntington and the Bank met both the “well-capitalized” and “well-managed” criteria under the GLB Act. Huntington’s management believes that the changes it has already made, and is in the process of making, will address the FRBC issues fully and comprehensively. No assurances, however, can be provided as to the ultimate timing or outcome of these matters, including any effects on HPCI.

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.

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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.

     HPCI relies 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 HPCI from significant credit losses on loans underlying its participation interests.

     To date, HPCI has purchased, and intends to continue to purchase, all of its participation interests in loans originated by or through the Bank and its affiliates. After HPCI purchases the participation interests, the Bank continues to service the underlying loans. Accordingly, in managing its credit risk, HPCI relies 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 HPCI’s 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 HPCI from significant credit losses on loans underlying its participation interests.

     The loans underlying HPCI’s participation interests are concentrated in Ohio, Indiana, Kentucky, and Michigan. Adverse conditions in those states, in particular, could negatively impact HPCI’s result of operations and ability to pay dividends.

     At December 31, 2005, 95.9% of the underlying loans in all participation interests consisted of loans located in these four states. Consequently, the portfolio may experience a higher default rate in the event of adverse economic, political, or business developments or natural hazards in these states and may affect the ability of borrowers to make payments of principal and interest on the underlying loans. In the event of any adverse development or natural disaster, HPCI’s results of operations and ability to pay dividends on preferred and common securities could be adversely affected.

     The loans underlying participation interests are subject to local economic conditions that could negatively affect the value of the collateral securing such loans and/or the results of HPCI’s operations.

     The value of the collateral underlying HPCI’s loans and/or the results of its operations could be affected by various conditions in the economy, all of which are beyond HPCI’s control. These include:

• local and other economic conditions affecting real estate and other collateral values;

• the continued financial stability of a borrower;

• the borrower’s ability to make loan principal and interest payments, which may be adversely affected by job loss, recession, divorce, illness, or personal bankruptcy;

• the tenant’s ability to make lease payments;

• the ability of a property to attract and retain tenants, which may be affected by conditions such as an oversupply of space or a reduction in demand for rental space in the area, the attractiveness of properties to tenants, competition from other available space, and the ability of the owner to pay leasing commissions, provide adequate maintenance and insurance, pay tenant improvement costs, and make other tenant concessions.

     Furthermore, interest rate levels and the availability of credit to refinance loans at or prior to maturity and increased operating costs, including energy costs, real estate taxes, and costs of compliance with environmental controls and regulations, are also various conditions in the economy that effect the value of the underlying collateral and the result of HPCI’s operations.

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     HPCI’s concentration in participation interests in commercial real estate loans is subject to certain risks inherent in the underlying commercial real estate assets.

     At December 31, 2005, 61.8% of HPCI’s assets, as measured by aggregate outstanding principal amount, consisted of participation interests in commercial real estate loans. Commercial real estate loans generally tend to have shorter maturities than residential real estate loans and may not be fully amortizing, meaning they may have a significant principal balance or “balloon” payment due on maturity. Commercial real estate properties tend to be unique and are more difficult to value than single-family residential real estate properties. They are also subject to relatively greater environmental risks and to the corresponding burdens and costs of compliance with environmental laws and regulations. Due to these risks, HPCI may experience higher rates of default on its participation interests in commercial real estate loans.

     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, taxation, voting rights, and liquidity of securities would be negatively impacted.

     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, 2005, are discussed in table 3 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). The financial statements of the Bank and Huntington are substantially the same and thus current or future holders of HPCI’s preferred securities can obtain important information on an ongoing basis about the Bank and Huntington by reviewing Huntington’s SEC filings. 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

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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, 2005 are also filed with this report as Exhibit 99 (b).

     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.

     Dividends are not cumulative; preferred shareholders are not entitled to receive dividends unless declared by HPCI’s board of directors.

     Dividends on the preferred securities are not cumulative. Consequently, if the board of directors does not declare a dividend on the preferred securities for any quarterly period, including if prevented by bank regulators, preferred shareholders will not be entitled to receive that dividend whether or not funds are or subsequently become available. The board of directors may determine that it would be in HPCI’s best interests to pay less than the full amount of the stated dividends on the preferred securities or no dividends for any quarter even though funds are available. Factors that would generally be considered by the board of directors in making this determination are:

• the amount of distributable funds;

• HPCI’s financial condition and capital needs;

• the impact of current and pending legislation and regulations;

• economic conditions;

• tax considerations; and

• HPCI’s continued qualification as a REIT.

If full dividends on the Class A, Class C, and Class D preferred securities have not been paid for six full dividend periods, the holders of the Class C and Class D preferred securities, voting together as one class, will have the right to elect two independent directors in addition to those already on the board.

     HPCI is dependent, in virtually every phase of its operations, on the diligence and skill of the officers and employees of the Bank, 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, 2005, 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 future 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 subparticipation agreements. The parties to these agreements are all affiliated and, accordingly, these agreements were not the result of arms-length

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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 modifications to the participation and subparticipation 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’s, 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 paid servicing fees of $11.2 million in 2005, $9.9 million in 2004, and $7.6 million in 2003.

     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.

     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 defination 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 secure only one such facility. The Bank has obtained a line of credit from the FHLB, which line was capped by the Bank’s holdings of FHLB stock at $1.7 billion as December 31, 2005. As of that same date, the Bank had borrowings of $1.2 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. Prior to October 31, 2004, the aggregate FHLB advance limit established by HPCI’s board was $1.0 billion. Effective as of October 31, 2004, the limit was adjusted to 25% of HPCI’s total assets, or $1.3 billion as of December 31, 2005, as reflected in HPCI’s month-end management report for the previous month. This limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors. As of December 31, 2005, HPCI’s total loans pledged were limited to one-to-four family residential mortgage portfolio and consumer second mortgage loans, which aggregated to $1.1 billion as of that same date. A default

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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.

     New, or changes in existing, tax, accounting, and regulatory laws, regulations, rules, standards, policies, and interpretations could significantly impact HPCI’s strategic initiatives, results of operations, cash flows, financial condition, and ability to pay dividends.

     Future governmental regulations could impose significant additional limitations on HPCI’s operations. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which companies conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on HPCI, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange Commission, Public Company Accounting Oversight Board, and various taxing authorities to respond by adopting and/or proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on HPCI’s business, results of operations, and ability to pay dividends; however, it is impossible to predict at this time the extent to which any such adoption, change, or repeal would impact HPCI.

     The extended disruption of Huntington’s vital infrastructure could negatively impact HPCI’s business, results of operations, financial condition, and ability to pay dividends.

     HPCI’s operations depend upon, among other things, Huntington’s and the Bank’s infrastructure, including their equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of Huntington’s or the Bank’s control could have a material adverse impact on the financial services industry as a whole and on HPCI’s business, results of operations, cash flows, financial condition, and ability to pay dividends in particular. Huntington’s business recovery plan may not work as intended or may not prevent significant interruptions of our operations.

     HPCI has no control over changes in interest rates and such changes could negatively impact its financial condition, results of operations, and ability to pay dividends.

     HPCI’s income consists primarily of interest and fees on loans underlying its participation interests. At December 31, 2005, 33% of the loans underlying its 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 HPCI’s participation interests as the borrowers refinance their mortgages at lower interest rates. Under these circumstances, HPCI 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 HPCI’s ability to pay full, or even partial, dividends on its preferred securities.

     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

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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 net income 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, 2005, 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 are outstanding, any such determination may be made without shareholder approval, but will require the approval of a majority of independent directors.

     Environmental liabilities associated with real property securing loans underlying HPCI’s participation interests could reduce the fair market value of its participation interests and make the property more difficult to sell.

     In its capacity of servicer, the Bank may be forced to foreclose on a defaulted commercial mortgage and/or residential mortgage loan underlying HPCI participation interest to recover HPCI’s investment in the mortgage loan. The Bank may be subject to environmental liabilities in connection with the underlying real property, which could exceed the value of the real property. Although the Bank exercises due diligence to discover potential environmental liabilities prior to the acquisition of any property through foreclosure, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on properties during the Bank’s ownership or after a sale to a third party. Even though HPCI may sell to the Bank, at fair value, the participation interest in any loan at the time the real property securing that loan becomes foreclosed property, the discovery of these liabilities, any associated costs for removal of hazardous substances, wastes, contaminants, or pollutants, and the difficulty in selling the underlying real estate, could have a material adverse effect on the fair value of that loan and therefore HPCI may not recover any or all of its investment in the underlying loan.

     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 less 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

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• 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 $25.00 per share plus accrued and unpaid dividends on such shares. The redemption amount may be significantly lower than the then current market price of the Class C 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, 2006, there were four common shareholders of record, all of which are affiliates of the Bank. During 2005, 2004, and 2003, dividends of $279.7 million, $263.8 million and $289.6 million were declared to common shareholders, respectively. These dividends 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, 2005. 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, 2005.

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Item 6: Selected Financial Data

     The table below represents selected financial data relative to HPCI as of and for the years ended December 31, 2005, 2004, 2003, 2002, and 2001.

Table 4 — Selected Financial Data

(in thousands of dollars)	2005			2004			2003			2002			2001
STATEMENTS OF INCOME:
Interest and fee income	$	302,743		$	262,215		$	274,401		$	347,754		$	526,445
(Reduction in allowance) provision for credit losses		(19,796	)		(31,591	)		(41,219	)		(161	)		48,510
Non-interest income		9,391			7,249			6,901			6,759			1,646
Non-interest expense		17,065			16,260			13,886			13,282			10,015
Net income		314,318			284,542			308,539			341,437			469,540
Dividends declared on preferred securities		34,634			20,744			18,911			23,814			21,827
Net income applicable to common shares		279,684			263,798			289,628			317,623			447,713
Dividends declared on common stock		279,684			263,798			289,628			382,840			539,170
BALANCE SHEET HIGHLIGHTS:
At period end:
Net loan participation interests	$	4,454,795		$	4,828,127		$	5,218,536		$	4,893,137		$	5,203,286
All other assets		899,090			845,464			187,442			623,884			745,473
Total assets		5,353,885			5,673,591			5,405,978			5,517,021			5,948,759
Total shareholders’ equity		4,649,461			5,069,776			5,405,978			5,516,351			5,948,728
Average balances:
Net loan participation interests	$	4,664,505		$	5,075,815		$	5,027,857		$	5,098,098		$	6,261,235
Total assets		5,217,640			5,530,253			5,647,772			6,052,136			7,044,550
Total shareholders’ equity		5,197,654			5,497,479			5,643,692			6,044,404			7,043,309
KEY RATIOS AND STATISTICS:
Net interest margin		5.84	%		4.74	%		4.77	%		5.82	%		7.46	%
Return on average assets		6.02			5.15			5.46			5.64			6.67
Return on average equity		6.05			5.18			5.47			5.65			6.67
Dividend payout ratio		100.00			100.00			100.00			121.00			121.00
Average shareholders’ equity to average assets		99.62			99.41			99.93			99.87			99.98
Preferred dividend coverage ratio		9.08	x		13.72	x		16.32	x		14.34	x		21.51	x

     All of HPCI’s common stock is owned by Huntington, 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.

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Item 7: Managements’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

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

     HPCI 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, 2005, the ACL was $61.7 million and represented the sum of the allowance for loan losses (ALL) 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. Many factors affect the ACL, some quantitative, some subjective. Management believes the process for determining the ACL considers the potential factors that could result in credit losses. However, the process includes judgment and quantitative elements that may be subject to significant change. To the extent actual outcomes differ from Management estimates, additional provision for credit losses could be required, which could

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adversely affect earnings or financial performance in future periods. At December 31, 2005, the ACL as a percent of total loan participation commitments was 1.37%. Based on the December 31, 2005 balance sheet, a 10 basis point increase in this ratio to 1.47% would require $4.5 million in additional provision for credit losses, and would also negatively impact 2005 net income by approximately $4.5 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.

Summary Discussion of Results

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

     HPCI reported net income before preferred dividends of $314.3 million for 2005, $284.5 million for 2004, and $308.5 million for 2003. The increase in net income before dividends for 2005 was primarily the result of increased interest income from commercial real estate and consumer loan participation interests, partially offset by a decline in the reduction in allowances for credit losses. Net income available to common shares was $279.7 million, $263.8 million, and $289.6 million for the same respective periods. Return on average assets (ROA) was 6.02% for 2005, 5.15% for 2004, and 5.46% for 2003. Return on average equity (ROE) was 6.05% for 2005, 5.18% for 2004, and 5.47% for 2003.

     HPCI had total assets of $5.4 billion at December 31, 2005, a decrease compared to the December 31, 2004 balance of $5.7 billion. Total assets consists principally of participation interests in loans which were an aggregate of $4.5 billion and $4.9 billion at December 31, 2005 and 2004, respectively. The decline in total loan participation interests and total assets is due to the reduced availability of new loan participation purchases that meet HPCI’s policies, primarily commercial real estate loans. In the first quarter of 2006, the Bank released HPCI’s consumer loans from being pledged as collateral with the FHLB. This release will provide HPCI the opportunity for more loan participation purchases.

     The following table shows the composition of HPCI’s gross participation interests in loans at the end of the most recent five years.

Table 5 — Loan Participation Interests ⁽¹⁾

(in thousands of dollars)	2005				2004				2003				2002				2001
At December 31,
Commercial	$	46,559	0.9	%	$	106,179	1.9	%	$	147,211	2.7	%	$	344,858	6.3	%	$	646,509	10.9	%
Commercial real estate		3,311,275	61.8			3,738,930	65.9			4,245,092	78.5			3,922,467	71.1			3,678,061	61.8
Consumer		997,094	18.6			819,250	14.4			622,575	11.5			612,357	11.1			783,735	13.2
Residential real estate		157,397	2.9			224,914	4.0			288,190	5.3			153,808	2.8			270,671	4.6
Total	$	4,512,325	84.2	%	$	4,889,273	86.2	%	$	5,303,068	98.0	%	$	5,033,490	91.3	%	$	5,378,976	90.5	%

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

     HPCI’s participation interests in commercial loans represented 0.9% and 1.9% of total assets as of December 31, 2005 and 2004, respectively. The decrease was due to continued portfolio run off. Participation interests in commercial real estate loans at December 31, 2005, which represented 61.8% of total assets, decreased compared to the same period last year primarily due to run off and decreased new loan purchases. Consumer loan participation interests were 18.6% of total assets at December 31, 2005, compared to 14.4% of total assets for the same date in 2004. This increase was due to purchases of consumer home equity loan participations. Residential real estate loan participation interests represented 2.9% and 4.0% of total assets as of December 31, 2005 and 2004, respectively. The balance decline was due to portfolio run off as there were no additional residential real estate loan purchases in this time period.

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

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     Cash and interest-bearing deposits with the Bank totaled $810.1 million and $800.3 million at December 31, 2005 and 2004, respectively. Typically, cash is invested with the Bank in an interest-bearing account. These interest-bearing balances are invested overnight or may be invested in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

     HPCI also had an amount due from the Bank of $46.3 million at December 31, 2005, and $0.2 million at December 31, 2004. The increase primarily relates to the reclassification of a receivable from cash and interest bearing deposits with The Huntington National Bank to due from The Huntington National Bank. The amount reclassified represents principal and interest payments on loan participations remitted by customers directly to the Bank but not yet received by HPCI. The receivable was settled with the Bank shortly after period-end.

     Total liabilities were $704.4 million, and $603.8 million at December 31, 2005, and 2004, respectively. The increase was due to a larger dividends and distributions payable.

     Shareholders’ equity was $4.6 billion at December 31, 2005, compared to the December 31, 2004 balance of $5.1 billion. This decline reflected the aggregate dividends and distributions declared on common and preferred securities offset by the $314.3 million of net income in 2005.

QUALIFICATION TESTS

     Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At December 31, 2005, 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 2005, HPCI met all annual income and distribution tests.

     HPCI operates in a manner that will not cause it to be deemed an investment company under the Investment Company Act. The Investment Company Act exempts from registration as an investment company an entity that is primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (Qualifying Interests). Under positions taken by the SEC staff in no-action letters, in order to qualify for this exemption, HPCI must invest at least 55% of its assets in Qualifying Interests and an additional 25% of its assets in real estate-related assets, although this percentage may be reduced to the extent that more than 55% of its assets are invested in Qualifying Interests. The assets in which HPCI may invest under the Internal Revenue Code therefore may be further limited by the provisions of the Investment Company Act and positions taken by the SEC staff. At December 31, 2005, 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

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, 2005 and 2004, HPCI did not have any interest-bearing liabilities or related interest expense. Interest income is impacted by changes in the levels of interest rates and earning assets. The yield on earning assets is the percentage of interest income to average earning assets.

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

Table 6 — Interest and Fee Income

	2005							2004							2003
	Average							Average							Average
(in millions of dollars)	Balance		Income(1)		Yield			Balance		Income(1)		Yield			Balance		Income(1)		Yield
Loan participation interests:
Commercial	$	77.1	$	4.7		6.05	%	$	157.7	$	7.8		4.97	%	$	249.3	$	11.4		4.53	%
Commercial real estate		3,566.4		211.1		5.92			4,033.5		183.5		4.55			4,066.2		191.7		4.65
Consumer		892.1		61.0		6.84			702.6		51.4		7.31			575.1		50.8		8.84
Residential real estate		189.2		10.3		5.45			257.8		13.5		5.23			254.4		14.2		5.55
Total loan participations		4,724.8		287.1		6.08			5,151.6		256.2		4.97			5,145.0		268.1		5.16
Interest bearing deposits with The Huntington National Bank		457.4		15.7		3.43			376.3		6.0		1.60			546.3		6.3		1.14
Total	$	5,182.2	$	302.8		5.84	%	$	5,527.9	$	262.2		4.74	%	$	5,691.3	$	274.4		4.77	%

⁽¹⁾ Income includes interest and fees.

     Interest and fee income for the years ended December 31, 2005 and 2004 was $302.8 million and $262.2 million, respectively. The increase in interest and fee income was the result of higher yields partially offset by lower earning assets balances. For the years ended December 31, 2005 and 2004, the yield increased from 4.74% to 5.84%, or an effective 1.1%, while average total earning asset balances decreased by $345.7 million or 6.3%. The tables above include interest received on participations in loans that are on a non-accrual status in the individual portfolios.

(Reduction in Allowance) Provision for Credit Losses

     The (reduction in allowance) provision for credit losses is the charge (or 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. The reduction in allowance for credit losses was a credit of $19.8 million for 2005, versus a credit of $31.6 million and $41.2 million for 2004 and 2003, respectively. The continued reduction in the allowance was indicative of lower net charge-offs during the year.

Non-Interest Income and Non-Interest Expense

     Non-interest income was $9.4 million, $7.2 million, and $6.9 million in 2005, 2004, and 2003, respectively. This income consists of rental income received from the Bank related to leasehold improvements owned by HPCLI and includes fees from the Bank for use of HPCI’s assets as collateral for the Bank’s advances from the Federal Home Loan Bank (FHLB). Collateral fees totaled $3.0 million, $0.7 million, and $0.7 million in 2005, 2004, and 2003, respectively. The increase in collateral fees was due to an Amended and Restated Agreement, between the Bank and HPCI, effective April 1, 2005, which changed the fees from 12 basis points per year on certified collateral to 35 basis points per year on total pledged loans. In the first quarter of 2006, the Bank released approximately $1.0 billion of HPCI’s consumer loans pledged as collateral with the FHLB. This will result in lower collateral fee income in 2006. See note 10 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.

     Non-interest expense was $17.1 million, $16.3 million, and $13.9 million in 2005, 2004, and 2003, respectively. The predominant components of HPCI’s non-interest expense are the fees paid to the Bank for servicing the loans underlying the participation interests and depreciation and amortization on its premises and equipment. The servicing costs for the years ended December 31, 2005, 2004 and 2003 totaled $11.2 million, $9.9 million, and $7.6 million, respectively. The increases were due to higher service fee rates on loan participation balances. Depreciation and amortization expenses totaled $4.4 million, $5.3 million, and $5.5 million for the years ended December 31, 2005, 2004, and 2003, respectively.

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     In 2005 and 2004 the annual servicing rates the Bank charged with respect to outstanding principal balances were:

	July 1, 2005			July 1, 2004			January 1, 2004
	thru			thru			thru
	December 31, 2005			June 30, 2005			June 30, 2004
Commercial & Commercial Real Estate		0.125	%		0.125	%		0.125	%
Consumer		0.650	%		0.750	%		0.320	%
Residential Real Estate		0.267	%		0.267	%		0.299	%

     Pursuant to the existing participation and subparticipation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time to time during the terms of the agreements. Effective July 1, 2004, in lieu of paying higher servicing costs to the Bank with respect to commercial and commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial and commercial real estate loans transferred on or after July 1, 2004. This waiver was subsequently extended until such time as loan servicing fees are reviewed in 2006. Effective July 1, 2005, in connection with the periodic review of the servicing fees, the parties reduced the current servicing rate on outstanding principal balances of underlying consumer loans to 0.650% from 0.750%. On an annualized basis, it is expected that this change will decrease non-interest expense by approximately $0.9 million. No changes were made to the servicing rates for the commercial, commercial real estate, or residential real estate portfolios.

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 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.

MARKET RISK

     Market risk represents the risk of loss due to a decline in interest rates, which is the primary risk to which HPCI has exposure. If there is a decline in market interest rates, HPCI may experience a reduction in interest income from its loan participation interests and a corresponding decrease in funds available to be distributed to shareholders. Market risk arises in the normal course of business when HPCI purchases a participation interest in a fixed-rate loan, and as of December 31, 2005, approximately 33% of the loan participation portfolio had fixed rates.

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

     Using the income simulation model for HPCI as of December 31, 2005, interest income for the next 12-month period would be expected to increase by $18.3 million, or 7.4%, based on a gradual 200 basis point increase in rates above the forward rates implied in the yield curve. Interest income would be expected to decline $18.5 million, or 7.5%, in the event of a gradual 200 basis point decline in rates from the forward rates implied in the yield curve.

     Using the economic value analysis model for HPCI as of December 31, 2005, the fair value of loan participation interests over the next 12 month period would be expected to increase $74.8 million, or 1.7%, based on a immediate 200 basis point decline in rates above the forward rates implied in the yield curve. The fair value would be expected to decline $76.2 million, or 1.7%, in the event of a immediate 200 basis point increase in rates from the forward rates implied in the yield curve.

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     The following table shows data with respect to interest rates of the loans underlying HPCI’s loan participations at December 31, 2005 and 2004, respectively.

Table 7 — Total Loan Participation Interests by Interest Rates

December 31, 2005	Fixed Rate							Variable Rate (1)
					Percentage by							Percentage by
			Aggregate		Aggregate					Aggregate		Aggregate
(in thousands of	Number		Principal		Principal			Number		Principal		Principal
dollars)	of Loans		Balance		Balance			of Loans		Balance		Balance
under 5.00%		1,012	$	75,246		5.0	%		169	$	64,947		2.1	%
5.00% to 5.99%		5,562		431,815		29.0			936		426,780		14.1
6.00% to 6.99%		7,000		513,784		34.4			2,351		1,688,238		55.9
7.00% to 7.99%		4,603		255,189		17.1			1,773		742,617		24.6
8.00% to 8.99%		3,914		123,568		8.3			525		84,570		2.8
9.00% to 9.99%		2,339		56,476		3.8			95		12,201		0.4
10.00% to 10.99%		1,084		23,499		1.6			12		1,658		0.1
11.00% to 11.99%		384		7,621		0.5			2		153		0.0
12.00% and over		618		3,863		0.3			2		100		0.0
Total		26,516	$	1,491,061		100.0	%		5,865	$	3,021,264		100.0	%

December 31, 2004	Fixed Rate							Variable Rate (1)
					Percentage by							Percentage by
			Aggregate		Aggregate					Aggregate		Aggregate
(in thousands of	Number		Principal		Principal			Number		Principal		Principal
dollars)	of Loans		Balance		Balance			of Loans		Balance		Balance
under 5.00%		1,108	$	98,962		7.5	%		2,087	$	2,185,158		61.1	%
5.00% to 5.99%		4,757		398,757		30.3			2,293		939,245		26.3
6.00% to 6.99%		4,990		351,767		26.7			1,456		289,217		8.1
7.00% to 7.99%		4,142		212,507		16.2			610		116,826		3.3
8.00% to 8.99%		4,178		134,303		10.2			239		37,489		1.0
9.00% to 9.99%		2,809		66,015		5.0			58		5,294		0.2
10.00% to 10.99%		1,434		31,183		2.4			8		441		0.0
11.00% to 11.99%		540		10,541		0.8			1		17		0.0
12.00% and over		2,251		11,490		0.9			1		61		0.0
Total		26,209	$	1,315,525		100.0	%		6,753	$	3,573,748		100.0	%

⁽¹⁾ The variable rate category includes loan participation interests with variable and adjustable rates.

CREDIT QUALITY

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 ALL is transferred from the Bank to HPCI on loans underlying the participations at the time the participations are acquired.

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     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 delinquency information for the loans underlying HPCI’s loan participations at December 31, 2005.

Table 8 — Loan Participation Interests Delinquencies

					Percentage by
	Total		Aggregate		Aggregate
	Number		Principal		Principal
(in thousands of dollars)	of Loans		Balance		Balance
Current		29,348	$	4,171,160		92.5	%
1 to 30 days past due		2,078		276,300		6.1
31 to 60 days past due		447		36,129		0.8
61 to 90 days past due		219		10,189		0.2
over 90 days past due(1)		289		18,547		0.4
Total		32,381	$	4,512,325		100.0	%

⁽¹⁾ Includes non-accrual loans.

Commercial Credit

     Commercial credit approvals are made by the Bank and are based on, among other factors, the financial strength of the borrower, assessment of the borrower’s management, industry sector trends, type of exposure, transaction structure, and the general economic outlook. There are two processes for approving credit risk exposures. The first involves a centralized loan approval process for the standard products and structures utilized in small business lending, where individual credit authority is granted to certain individuals on a regional basis to preserve the Company’s local decision-making focus. The second, and more prevalent approach, involves individual approval of exposures. These approvals are consistent with the authority delegated to officers located in the geographic regions who are experienced in the industries and loan structures over which they have responsibility.

     All commercial (C&I) and commercial real estate (CRE) credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-in-event-of-default. This two dimensional rating methodology, which has 192 individual loan grades, provides improved 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-in-event-of-default is rated on a 1-16 scale and is associated with each individual credit exposure based on the type of credit extension and the underlying collateral.

     In commercial lending, ongoing credit management is dependent on the type and nature of the loan. In general, quarterly monitoring is normal for all significant exposures. The internal risk ratings are revised and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis to continually update default probabilities and to estimate future losses.

     In addition to the initial credit analysis initiated by the portfolio manager during the underwriting process, the loan review group performs independent credit reviews. The loan review group reviews individual loans and credit processes and conducts a portfolio review at each of the regions on a regular basis.

     Borrower exposures may be designated as “watch list” accounts when warranted by individual company performance, or by industry and environmental factors. Such accounts are subjected to additional quarterly reviews by the business line management, the loan review group, and credit administration in order to adequately assess the borrower’s credit status and to take appropriate action.

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     The Bank has also established a specialized credit workout group to manage problem credits. The group handles commercial recoveries, workouts, and problem loan sales, as well as the day-to-day management of relationships rated substandard or worse. The group is responsible for developing an action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual status, and the ultimate collectibility of the credits managed.

Consumer Credit

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

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

Allowances for Credit Losses (ACL)

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

     The ALL represents the estimate of probable losses inherent in the loan portfolio at the balance sheet date. Additions to the ALL 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 ALL and AULPC. The Bank’s methodology to determine the adequacy of the ALL relies on a number of analytical tools and benchmarks. No single statistic or measurement, in itself, determines the adequacy of the allowance. For determination purposes, the allowance is comprised of two components: the transaction reserve and the economic reserve.

     Transaction Reserve

     The transaction reserve component of the ACL includes both (a) an estimate of loss based on characteristics of each commercial and consumer loan, lease, or loan commitment in the portfolio and (b) an estimate of loss based on an impairment review of each loan greater than $500,000 that is considered to be impaired. For commercial and commercial real estate loans, the estimate of loss is based on characteristics of each loan through the use of a standardized loan grading system, which 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 the Bank’s own portfolio and external industry data.

     Huntington’s management analyzes each commercial and commercial real estate loan over $500,000 for impairment when the loan is non-performing or has a grade of substandard or lower. The impairment tests are done in accordance with applicable accounting standards and regulations. For loans determined to be impaired, an estimate of loss is reserved for the amount of the impairment. In the case of more homogeneous portfolios, such as consumer loans and leases, and residential mortgage loans, the determination of the transaction reserve is conducted at an aggregate, or pooled, level. For such portfolios, the development of the reserve factors includes 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.

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     Economic Reserve

     Changes in the economic environment are a significant judgmental factor Huntington’s management considers in determining the appropriate level of the ACL. The economic reserve incorporates a determination of the impact on the portfolio of risks associated with the general economic environment. The economic reserve is designed to address economic uncertainties and is determined based on a variety of economic factors that are correlated to the historical performance of the loan portfolio. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period to period.

     In an effort to be as quantitative as possible in the ACL calculation, Huntington’s management developed a revised methodology for calculating the economic reserve portion of the ACL in 2004. The revised methodology is specifically tied to economic indices that have a high correlation to the Company’s historic charge-off variability. The indices currently in the model consists of the U.S. Index of Leading Economic Indicators, U.S. Profits Index, U.S. Unemployment Index, and the University of Michigan Current Consumer Confidence Index. Beginning in 2004, the calculated economic reserve was determined based upon the variability of credit losses over a credit cycle. The indices and time frame may be adjusted as actual portfolio performance changes over time. Huntington’s management has the capability to judgmentally adjust the calculated economic reserve amount by a maximum of +/– 20% to reflect, among other factors, differences in local versus national economic conditions. This adjustment capability is deemed necessary given the newness of the model and the continuing uncertainty of forecasting economic environment changes.

     This methodology allows 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 ALL and AULPC are adjusted based on the results of the above-mentioned detailed quarterly analysis. This adjustment may be either an increase (provision) or a reduction. Such adjustments for the year ended December 31, 2005 resulted in reductions of the allowance of $19.8 million. These reductions compared to reductions of $31.6 million for the year ended December 31, 2004. The continued reduction of the allowances for credit losses was indicative of Management’s judgment regarding the adequacy of those allowances particularly in light of lower net loan losses in the current year.

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

Table 9 — Allowances for Credit Loss Activity

(in thousands of dollars)	2005			2004			2003			2002			2001
ALL balance, beginning of period	$	61,146		$	84,532		$	140,353		$	175,690		$	91,826
Allowance of loan participations acquired		25,071			21,201			45,397			37,020			113,291
Distribution of participations in Florida-related loans		—			—			—			—			(18,604	)
Net loan (losses) recoveries Commercial		1,247			1,594			(20,973	)		(29,686	)		(32,959	)
Commercial real estate		(5,175	)		(5,032	)		(13,525	)		(21,599	)		(7,574	)
Consumer		(4,362	)		(5,458	)		(22,999	)		(20,911	)		(18,800	)
Residential real estate		(231	)		(335	)		(2,502	)		—			—
Total net loan losses		(8,521	)		(9,231	)		(59,999	)		(72,196	)		(59,333	)
(Reduction in) provision for ALL		(19,228	)		(35,356	)		(41,219	)		(161	)		48,510
Economic Reserve transfer to AULPC		(938	)		—			—			—			—
ALL balance, end of period	$	57,530		$	61,146		$	84,532		$	140,353		$	175,690
AULPC balance, beginning of period	$	3,765		$	—		$	—		$	—		$	—
(Reduction in) provision for AULPC		(568	)		3,765			—			—			—
Economic Reserve transfer from ALL		938			—			—			—			—
AULPC balance, end of period	$	4,135		$	3,765		$	—		$	—		$	—
Total Allowances for Credit Losses	$	61,665		$	64,911		$	84,532		$	140,353		$	175,690
ALL as a % of total participation interests		1.27	%		1.25	%		1.59	%		2.79	%		3.27	%
ACL as a % of total participation interests		1.37			1.33			1.59			2.79			3.27

27

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

     Effective March 31, 2004, HPCI reclassified $4.3 million of its ALL to a separate liability on the balance sheet titled AULPC. The AULPC is based on expected losses derived from historical experience. HPCI believes that this reclassification better reflects the nature of this reserve and represents improved financial statement disclosure. Prior period financial statements have not been revised due to immateriality.

     In Management’s judgment, both the ALL and the AULPC are adequate at December 31, 2005, 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 ALL 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 and 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 ALL and AULPC:

Table 10 — Allowance for Credit Losses by Product ⁽¹⁾

	At December 31,
(in thousands of dollars)	2005				2004				2003				2002				2001
Commercial	$	635	1.0	%	$	9,148	2.2	%	$	25,375	2.8	%	$	75,264	6.9	%	$	103,119	12.0	%
Commercial real estate		48,303	73.4			44,105	76.4			47,561	80.1			26,605	77.8			33,886	68.4
Consumer		800	22.1			1,614	16.8			8,096	11.7			9,979	12.2			17,030	14.6
Residential real estate		7,792	3.5			6,279	4.6			3,500	5.4			2,883	3.1			1,766	5.0
Unallocated		—	—			—	—			—	—			25,622	—			19,889	—
Total ALL		57,530	100.0	%		61,146	100.0	%		84,532	100.0	%		140,353	100.0	%		175,690	100.0	%
AULPC		4,135	—			3,765	—			—	—			—	—			—	—
Total	$	61,665	100.0	%	$	64,911	100.0	%	$	84,532	100.0	%	$	140,353	100.0	%	$	175,690	100.0	%

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

Net Charge-offs

     Total net charge-offs were $8.5 million, or 0.18%, of total average loan participations, for the year ended December 31, 2005, down from $9.2 million, or 0.18%, for the year ended December 31, 2004. The decline in net charge-offs reflects the improvements made in underwriting, the origination of higher quality loans, and the success in lowering individual concentrations in larger commercial and commercial real estate credits.

Table 11 — Net Charge-offs ⁽¹⁾

(In thousands of dollars)	2005					2004					2003				2002				2001
Commercial	$	(1,247	)	(1.62	)%	$	(1,594	)	(1.01	)%	$	20,973	8.41	%	$	29,686	5.90	%	$	32,959	5.88	%
Commercial real estate		5,175		0.15			5,032		0.12			13,525	0.33			21,599	0.56			7,574	0.18
Consumer		4,362		0.49			5,458		0.78			22,999	4.00			20,911	3.00			18,800	1.76
Residential real estate		231		0.12			335		0.13			2,502	0.98			—	—			—	—
Total Net Charge-offs	$	8,521		0.18		$	9,231		0.18		$	59,999	1.17		$	72,196	1.37		$	59,333	0.93

⁽¹⁾ Percentages represent the percentage in each loan category to average loan participation interests.

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Non-Performing Assets (NPAs)

     NPAs consist of participation interests in underlying loans that are no longer accruing interest. Underlying commercial and commercial real estate loans are placed on non-accrual status and stop accruing interest when collection of principal or interest is in doubt or generally when the underlying loan is 90 days past due. Underlying residential real estate loans are generally placed on non-accrual status within 180 days past due as to principal and 210 days past due as to interest. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. Consumer loans are placed on non-accrual status within 180 days past due. At September 30, 2004, HPCI adopted a new policy of placing consumer home equity loan participations on non-accrual status when they exceed 180 days past due. Prior practice was to continue to accrue interest until collection or resolution of the loan participations. Such loan participations were previously classified as accruing loans past due 90 days or more.

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

Table 12 — Non-Performing Assets

	At December 31,
(in thousands of dollars)	2005			2004			2003			2002			2001
Participation interests in non-accrual loans
Commercial	$	147		$	425		$	5,176		$	57,112		$	156,874
Commercial Real Estate		20,746			6,990			12,987			32,979			32,492
Consumer (1)		2,799			2,692			—			—			—
Residential Real Estate		2,923			4,205			4,157			6,455			8,232
Total Non-Performing Assets	$	26,615		$	14,312		$	22,320		$	96,546		$	197,598
NPAs as a % of total participation interests		0.59	%		0.29	%		0.42	%		1.92	%		3.67	%
ALL as a % of NPAs		216			427			379			145			89
ACL as a % of NPAs		232			454			379			145			89

⁽¹⁾ At September 30, 2004, HPCI adopted a new policy of placing consumer home equity loan participations on non-accrual status when they exceed 180 days past due. Prior practice was to continue to accrue interest until collection or resolution of the loan participations. Such loan participations were previously classified as accruing loans past due 90 days or more.

     Total NPAs increased to $26.6 million at the end of 2005 from $14.3 million at December 31, 2004, representing 0.59% and 0.29% of total participation interests, respectively. The increase primarily related to commercial real estate loans.

     The reductions from 2001 levels were the result of an improving economy, tightening of credit underwriting standards, and the redesign of the credit approval process. As well, in early 2002, the Bank’s credit workout group was further strengthened, with the objective of aggressively seeking economically advantageous opportunities to reduce the level of NPAs, including NPA sales. These efforts were reflected in HPCI’s NPA portfolio sales in 2002, 2003, and 2004.

     Underlying loans past due ninety days or more but continuing to accrue interest were $3.2 million at the end of 2005 and $11.7 million at December 31, 2004.

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

29

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, 2005 and 2004, unfunded commitments totaled $827.3 million and $761.4 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, 2005 and 2004, HPCI maintained cash and interest bearing deposits with the Bank totaling $810.1 million and $800.3 million, respectively. HPCI maintains and transacts all of its cash activity with the Bank and may invest available funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

     At December 31, 2005, HPCI had no material liabilities or contractual obligations, other than unfunded loan commitments of $827.3 million, with a weighted average maturity of 2.1 years, and dividend and distributions payable of $700.0 million.

     Shareholders’ equity was $4.6 billion at December 31, 2005, compared to the December 31, 2004 balance of $5.1 billion. This decline reflected the aggregate dividends and distributions declared on common and preferred securities offset by the $314.3 million of net income in 2005.

     The preferred dividend coverage ratio for 2005 was 9.08, compared to 13.72 in 2004. The decrease from the prior year primarily relates to higher dividends declared on Class B and Class D preferred securities due to an increase in the three-month LIBOR rates.

30

RESULTS FOR THE FOURTH QUARTER

Table 13 — Quarterly Statements of Income

	2005												2004			4Q05 vs 4Q04
(in thousands of dollars)	Fourth			Third			Second			First			Fourth			$Chg			%Chg
Interest and fee income
Interest on loan participation interests:
Commercial	$	982		$	1,006		$	1,264		$	1,380		$	1,679		$	(697	)		(41.5	)%
Commercial real estate		55,053			54,013			51,982			48,753			46,931			8,122			17.3
Consumer		16,268			15,465			14,687			13,925			13,208			3,060			23.2
Residential real estate		2,341			2,420			2,647			2,896			3,069			(728	)		(23.7	)
Total loan participation interest income		74,644			72,904			70,580			66,954			64,887			9,757			15.0
Fees from loan participation interests		320			539			491			629			605			(285	)		(47.1	)
Interest on deposits with The Huntington National Bank		7,200			4,439			2,570			1,473			3,736			3,464			92.7
Total interest and fee income		82,164			77,882			73,641			69,056			69,228			12,936			18.7
(Reduction in allowance) provision for credit losses		(4,409	)		(8,106	)		(3,840	)		(3,441	)		(13,153	)		8,744			66.5
Interest income after (reduction in allowance)
provision for for credit losses		86,573			85,988			77,481			72,497			82,381			4,192			5.1
Non-interest income:
Rental income		1,590			1,590			1,591			1,591			1,591			(1	)		(0.1	)
Collateral fees		976			907			965			181			177			799			N.M.
Total non-interest income		2,566			2,497			2,556			1,772			1,768			798			45.1
Non-interest expense:
Servicing costs		2,730			2,717			2,899			2,864			2,735			(5	)		(0.2	)
Depreciation		1,045			1,086			1,102			1,137			1,235			(190	)		(15.4	)
Loss on disposal of fixed assets		4			45			388			145			155			(151	)		(97	)
Other		288			205			169			241			170			118			69.4
Total non-interest expense		4,067			4,053			4,558			4,387			4,295			(228	)		(5.3	)
Income before provision for income taxes		85,072			84,432			75,479			69,882			79,854			5,218			6.5
Provision for income taxes		251			173			25			98			58			193			N.M.
Net income	$	84,821		$	84,259		$	75,454		$	69,784		$	79,796		$	5,025			6.3
Dividends declared on preferred securities		(10,050	)		(9,023	)		(8,256	)		(7,305	)		(6,208	)		(3,842	)		(61.9	)
Net income applicable to common shares (1)	$	74,771		$	75,236		$	67,198		$	62,479		$	73,588		$	1,183			1.6	%

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

N.M., Not Meaningful

     Net income for the fourth quarter 2005 was $84.8 million, up 6.3% from $79.8 million for the fourth quarter 2004. Net income applicable to common shares was $74.8 million for the fourth quarter of 2005, an increase from $73.6 million, or 1.6%, compared to the fourth quarter of 2004. Dividend declarations on preferred stock increased by 61.9% in the most recent quarter to $10.1 million compared to $6.2 million for the fourth quarter 2004, due to higher three-month LIBOR rates on which payments on Class B and Class D preferred shares are based.

     Interest and fee income for the recent quarter was $82.2 million, which was up from $69.2 million for the prior year quarter, due to higher interest rates on variable rate loans, increased consumer loan balances, and interest income from deposits with the Bank. The yield on earning assets increased to 6.17% from 4.89% for the same respective quarterly periods.

     Total assets decreased to $5.4 billion at the end of 2005, from $5.7 billion at December 31, 2004. The reduction primarily related to lower commercial real estate balances.

31

     The ACL increased to 1.37% of total loan participation interests at December 31, 2005, from 1.33% at the end of the prior year quarter. Net charge-offs in the fourth quarter of 2005 were $1.0 million versus $2.0 million for the fourth quarter of 2004. This represents 0.09% and 0.17% of average loan participations for the same respective quarterly periods.

     HPCLI received rent from the Bank of $1.6 million for each of the fourth quarters of 2005 and 2004, which is reflected in non-interest income. Non-interest expense included depreciation and amortization expense for all premises and equipment, which amounted to $1.0 million and $1.2 million for the fourth quarters of 2005 and 2004. Servicing fees paid by HPCI were $2.7 million for each of the fourth quarters of 2005 and 2004. HPCLI is a taxable REIT subsidiary and therefore provisions of $0.3 million and $0.1 million for income taxes applied to its taxable income are reflected in the fourth quarters of 2005 and 2004, respectively.

Item 7A: Quantitative and Qualitative Disclosures about Market Risk.

     Information required by this item is set forth in the caption “Market Risk” included in Item 7 above.

Item 8: Financial Statements and Supplementary Data

     The following consolidated financial statements of HPCI at December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004, and 2003 are included in this report at the pages indicated. Quarterly statements of income are found on page 31 of this report.

	Page
Report of Management		33
Report of Independent Registered Public Accounting Firm		35
Consolidated Balance Sheets		36
Consolidated Statements of Income		37
Consolidated Statement of Changes in Shareholders’ Equity		38
Consolidated Statements of Cash Flows		39
Notes to Consolidated Financial Statements		40

32

Report of Management

     The management of HPCI (the Company) is responsible for the financial information and representations contained in the consolidated financial statements and other sections of this report. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. In all material respects, they reflect the substance of transactions that should be included based on informed judgments, estimates, and currently available information.

     Management maintains a system of internal accounting controls, which includes the careful selection and training of qualified personnel, appropriate segregation of responsibilities, communication of written policies and procedures, and a broad program of internal audits. The costs of the controls are balanced against the expected benefits. During 2005, the audit committee of the board of directors met regularly with Management, HPCI’s internal auditors, and the independent registered public accounting firm, Deloitte & Touche LLP, to review the scope of the audits and to discuss the evaluation of internal accounting controls and financial reporting matters. The independent registered public accounting firm and the internal auditors have free access to, and meet confidentially with, the audit committee to discuss appropriate matters. Also, HPCI maintains a disclosure review committee. This committee’s purpose is to design and maintain disclosure controls and procedures to ensure that material information relating to the financial and operating condition of HPCI is properly reported to its chief executive officer, chief financial officer, internal auditors, and the audit committee of the board of directors in connection with the preparation and filing of periodic reports and the certification of those reports by the chief executive officer and the chief financial officer.

Report on Management’s Assessment of Internal Control Over Financial Reporting

     Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, including accounting and other internal control systems that, in the opinion of Management, provide reasonable assurance that (1) transactions are properly authorized, (2) the assets are properly safeguarded, and (3) transactions are properly recorded and reported to permit the preparation of the financial statements in conformity with accounting principles generally accepted in the United States. HPCI’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on that assessment, Management believes that, as of December 31, 2005, the Company’s internal control over financial reporting is effective based on those criteria. Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has issued an attestation report on Management’s assessment of the Company’s internal control over financial reporting.

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

March 23, 2006

33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Huntington Preferred Capital, Inc.
Columbus, Ohio

We have audited management’s assessment, included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting, that Huntington Preferred Capital, Inc. and subsidiary (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2005 of the Company and our report dated March 23, 2006 expressed an unqualified opinion on those financial statements.

Columbus, Ohio

March 23, 2006

34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Huntington Preferred Capital, Inc.
Columbus, Ohio

We have audited the accompanying consolidated balance sheets of Huntington Preferred Capital, Inc. and subsidiary (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company for the year ended December 31, 2003 were audited by other auditors whose report, dated March 19, 2004, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated 2005 and 2004 financial statements present fairly, in all material respects, the financial position of Huntington Preferred Capital, Inc. and subsidiary at December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 23, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Columbus, Ohio
March 23, 2006

35

Huntington Preferred Capital, Inc.

Consolidated Balance Sheets

	December 31,			December 31,
(in thousands of dollars, except share data)	2005			2004
Assets
Cash and interest bearing deposits with The Huntington National Bank	$	810,102		$	800,253
Due from The Huntington National Bank		46,321			175
Loan participation interests:
Commercial		46,559			106,179
Commercial real estate		3,311,275			3,738,930
Consumer		997,094			819,250
Residential real estate		157,397			224,914
Total loan participation interests		4,512,325			4,889,273
Allowance for loan losses		(57,530	)		(61,146	)
Net loan participation interests		4,454,795			4,828,127
Premises and equipment		21,683			26,635
Accrued income and other assets		20,984			18,401
Total assets	$	5,353,885		$	5,673,591
Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments	$	4,135		$	3,765
Dividends and distributions payable		700,000			600,000
Other liabilities		290			50
Total liabilities		704,425			603,815
Shareholders’ equity
Preferred securities, Class A, 8.000% noncumulative, non-exchangeable; $1,000 par and liquidation value per share; 1,000 shares authorized, issued and outstanding		1,000			1,000
Preferred securities, Class B, variable-rate noncumulative and conditionally exchangeable; $1,000 par and liquidation value per share; authorized 500,000 shares; 400,000 shares issued and outstanding		400,000			400,000
Preferred securities, Class C, 7.875% noncumulative and conditionally exchangeable; $25 par and liquidation value; 2,000,000 shares authorized, issued, and outstanding		50,000			50,000
Preferred securities, Class D, variable-rate noncumulative and conditionally exchangeable; $25 par and liquidation value; 14,000,000 shares authorized, issued, and outstanding		350,000			350,000
Preferred securities, $25 par, 10,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock — without par value; 14,000,000 shares authorized, issued and outstanding		3,848,460			4,268,776
Retained earnings		—			—
Total shareholders’ equity		4,649,460			5,069,776
Total liabilities and shareholders’ equity	$	5,353,885		$	5,673,591

See notes to consolidated financial statements.

36

Huntington Preferred Capital, Inc.

Consolidated Statements of Income

	Year Ended
	December 31,
(in thousands of dollars)	2005			2004			2003
Interest and fee income
Interest on loan participation interests:
Commercial	$	4,632		$	7,810		$	11,042
Commercial real estate		209,801			182,047			185,750
Consumer		60,345			50,543			49,523
Residential real estate		10,304			13,474			14,095
Total loan participation interest income		285,082			253,874			260,410
Fees from loan participation interests		1,979			2,337			7,736
Interest on deposits with The Huntington National Bank		15,682			6,004			6,255
Total interest and fee income		302,743			262,215			274,401
Reduction in allowances for credit losses		(19,796	)		(31,591	)		(41,219	)
Interest income after reduction in allowance for credit losses		322,539			293,806			315,620
Non-interest income:
Rental income		6,362			6,503			6,183
Collateral fees		3,029			746			718
Total non-interest income		9,391			7,249			6,901
Non-interest expense:
Servicing costs		11,210			9,923			7,559
Depreciation and amortization		4,370			5,273			5,527
Loss on disposal of fixed assets		582			218			336
Other		903			846			464
Total non-interest expense		17,065			16,260			13,886
Income before provision for income taxes		314,865			284,795			308,635
Provision for income taxes		547			253			96
Net income	$	314,318		$	284,542		$	308,539
Dividends declared on preferred securities		(34,634	)		(20,744	)		(18,911	)
Net income applicable to common shares	$	279,684		$	263,798		$	289,628

See notes to consolidated financial statements.

37

Huntington Preferred Capital, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

	Preferred, Class A				Preferred, Class B				Preferred, Class C
(in thousands)	Shares		Securities		Shares		Securities		Shares		Securities
Balance, January 1, 2003		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, December 31, 2003		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, December 31, 2004		1	$	1,000		400	$	400,000		2,000	$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, December 31, 2005		1	$	1,000		400	$	400,000		2,000	$	50,000

	Preferred, Class D				Preferred				Common					Retained
(in thousands)	Shares		Securities		Shares		Securities		Shares		Stock			Earnings			Total
Balance, January 1, 2003		14,000	$	350,000		—	$	—		14,000	$	4,715,351		$	—		$	5,516,351
Comprehensive Income:
Net income															308,539			308,539
Total comprehensive income																		308,539
Dividends declared on Class A preferred securities															(80	)		(80	)
Dividends declared on Class B preferred securities															(4,910	)		(4,910	)
Dividends declared on Class C preferred securities															(3,938	)		(3,938	)
Dividends declared on Class D preferred securities															(9,983	)		(9,983	)
Dividends declared on common stock															(289,628	)		(289,628	)
Return of capital												(110,373	)					(110,373	)
Balance, December 31, 2003		14,000	$	350,000		—	$	—		14,000	$	4,604,978		$	—		$	5,405,978
Comprehensive Income:
Net income															284,542			284,542
Total comprehensive income																		284,542
Dividends declared on Class A preferred securities															(80	)		(80	)
Dividends declared on Class B preferred securities															(5,887	)		(5,887	)
Dividends declared on Class C preferred securities															(3,938	)		(3,938	)
Dividends declared on Class D preferred securities															(10,839	)		(10,839	)
Dividends declared on common stock															(263,798	)		(263,798	)
Return of capital												(336,202	)					(336,202	)
Balance, December 31, 2004		14,000	$	350,000		—	$	—		14,000	$	4,268,776		$	—		$	5,069,776
Comprehensive Income:
Net income															314,318			314,318
Total comprehensive income																		314,318
Dividends declared on Class A preferred securities															(80	)		(80	)
Dividends declared on Class B preferred securities															(13,296	)		(13,296	)
Dividends declared on Class C preferred securities															(3,938	)		(3,938	)
Dividends declared on Class D preferred securities															(17,320	)		(17,320	)
Dividends declared on common stock															(279,684	)		(279,684	)
Return of capital												(420,316	)					(420,316	)
Balance, December 31, 2005		14,000	$	350,000		—	$	—		14,000	$	3,848,460		$	—		$	4,649,460

See notes to consolidated financial statements.

38

Huntington Preferred Capital, Inc.

Consolidated Statements of Cash Flows

	Year Ended
	December 31,
(in thousands of dollars)	2005			2004			2003
Operating activities
Net Income	$	314,318		$	284,542		$	308,539
Adjustments to reconcile net income to net cash provided by operating activities:
Reduction of allowances for credit losses		(19,796	)		(31,591	)		(41,219	)
Depreciation and amortization		4,370			5,273			5,527
Deferred income tax expense (benefit)		178			(1,307	)		(84	)
Loss on disposal of fixed assets		582			218			336
(Increase) decrease in due from The Huntington National Bank		(24,404	)		13,477			(6,212	)
Increase (decrease) in other liabilities		239			50			(670	)
Other, net		(1,150	)		2,936			22,002
Net cash provided by operating activities		274,337			273,598			288,219
Investing activities
Participation interests acquired		(2,885,454	)		(4,273,356	)		(5,967,359	)
Sales and repayments of loans underlying participation interests		3,255,600			4,696,670			5,687,784
Proceeds from the sale of fixed assets		—			—			99
Net cash provided by (used for) investing activities		370,146			423,314			(279,476	)
Financing activities
Dividends paid on preferred securities		(34,634	)		(20,744	)		(18,911	)
Dividends paid on common stock		(263,798	)		—			(289,628	)
Return of capital to common shareholders		(336,202	)		—			(110,373	)
Net cash used for financing activities		(634,634	)		(20,744	)		(418,912	)
Change in cash and cash equivalents		9,849			676,168			(410,169	)
Cash and cash equivalents at beginning of year		800,253			124,085			534,254
Cash and cash equivalents at end of period	$	810,102		$	800,253		$	124,085
Supplemental information:
Income taxes paid	$	40		$	1,886		$	611
Dividends and return of capital declared, not paid		700,000			600,000			—
Change in loan participation activity due from Huntington National Bank		21,742			—			—

See notes to consolidated financial statements.

39

Notes to the Consolidated Financial Statements

Note 1 — Significant Accounting Policies

Basis of Presentation: The consolidated financial statements include the accounts of Huntington Preferred Capital, Inc. (HPCI) and its subsidiary and are presented in conformity with accounting principles generally accepted in the United States (GAAP). The consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

Business: Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. At December 31, 2004, three related parties owned HPCI’s common stock: HPC Holdings-III, Inc. (HPCH-III), 67.37%; Huntington Preferred Capital II, Inc. (HPCII), 32.5%; and Huntington Bancshares Incorporated (Huntington), 0.13%. Effective February 18, 2005, Huntington Preferred Capital Holdings, Inc. (Holdings) transferred 34% of its ownership in HPCH-III to Huntington Capital Financing LLC (HCF). On March 31, 2005, HPCH-III liquidated into Holdings and HCF. As a result of liquidation, since March 31, 2005, four related parties own HPCI’s common stock: HCF, 47%; HPCII, 32.5%; Holdings, 20.37%; and Huntington, 0.13%. 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. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. The Bank, on a consolidated basis with its subsidiaries, at December 31, 2005, accounted for 99% of Huntington’s consolidated total assets and, for the year ended December 31, 2005, accounted for 94% of Huntington’s consolidated net income. Thus, consolidated financial statements for the Bank and for Huntington were substantially the same for these periods. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). HPCI’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.

Use of Estimates: The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from those estimates.

Due from The Huntington National Bank: HPCI’s due from The Huntington National Bank primarily consists of principal and interest payments on loan participations remitted by customers directly to the Bank but not yet received by HPCI. The receivable also includes earned but not collected amounts for collateral fees, leased premises, and interest on interest bearing deposits. The receivable is settled with the Bank shortly after period-end.

Loan participation interests: Loan participation interests are purchased from the Bank either directly or through Holdings by HPCI at the Bank’s carrying value, which is the principal amount outstanding plus accrued interest, net of unearned income, if any, less an allowance for loan losses. The purchase price paid approximates fair value on the date the loan participations are purchased. Participation interests are categorized based on the collateral securing the underlying loan. HPCI does not purchase loan participation interests in loans made to Huntington’s directors or executive officers.

     Interest income is accrued based on unpaid principal balances of the underlying loans as earned. The underlying commercial and commercial real estate loans are placed on non-accrual status and stop accruing interest when collection of principal or interest is in doubt. 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 underlying consumer loans are charged off in accordance with regulatory statutes governing the Bank. At September 30, 2004, HPCI adopted a new policy of placing consumer home equity loan participations on non-accrual status when they exceed 180 days past due. Prior practice was to continue to accrue interest until collection or resolution of the loan participations. Such loan participations were previously classified as accruing loans past due 90 days or more. Residential real estate loans are placed on non-accrual status when principal payments are 180 days past due or interest payments are 210 days past due. A charge-off on a residential real estate loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the collateral.

40

     HPCI uses the cost recovery method in accounting for cash received on non-accrual loans. Under this method, cash receipts are applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. When, in Management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes, the loan is returned to accrual status.

     The Financial Accounting Standards Board (FASB) Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases (FAS 91), addresses the timing of recognition of loan and lease origination fees and certain expenses. The statement requires that such fees and costs be deferred and amortized over the estimated life of the asset. HPCI began to defer origination fees prospectively for all loans purchased after June 30, 2003.

     A loan is considered impaired when, based on current information and events, it is probable that it will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower. This includes the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loan impairment is measured on a loan-by-loan basis by comparing the recorded investment in the loan to the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s estimated market price, or the fair value of the collateral if the loan is collateral dependent. Impaired loans are taken into consideration when evaluating the allowance for loan losses.

Allowances for Credit Losses (ACL): The ACL is comprised of the allowance for loan losses (ALL) and the allowance for unfunded loan participation commitments (AULPC). 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 ALL and AULPC. The ACL represents Management’s estimate as to the level of reserves considered appropriate to absorb inherent probable credit losses in the loan portfolio, as well as unfunded loan participation commitments. This judgment is based on a review of individual loans underlying the participations, historical loss experience of similar loans owned by the Bank, economic conditions, portfolio trends, and other factors. ALL is transferred to HPCI either directly or through Holdings from the Bank on loans underlying the participations at the time the participations are acquired. When necessary, the allowance for loan losses will be adjusted through either a provision for credit losses charged to earnings or a reduction in allowance for credit losses credited to earnings. Credit losses are charged against the allowance when Management believes the loan balance, or a portion thereof, is uncollectible. Subsequent recoveries, if any, are credited to the allowance.

     The ACL consists of two components, the transaction reserve, which includes a specific reserve in accordance with Statement No. 114, Accounting by Creditors for Impairment of a Loan, and the economic reserve. Loan and lease losses related to the transaction reserve are recognized and measured pursuant to Statement No. 5, Accounting for Contingencies, and Statement No. 114, while losses related to the economic reserve are recognized and measured pursuant to Statement No. 5. The two components are more fully described below.

     Transaction Reserve

     The transaction reserve component of the ACL includes both (a) an estimate of loss based on characteristics of each commercial and consumer loan, lease, or loan commitment in the portfolio and (b) an estimate of loss based on an impairment review of each loan greater than $500,000 that is considered to be impaired. For commercial and commercial real estate loans, the estimate of loss is based on characteristics of each loan through the use of a standardized loan grading system, which 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 the Bank’s own portfolio and external industry data.

     Huntington’s management analyzes each commercial and commercial real estate loan over $500,000 for impairment when the loan is non-performing or has a grade of substandard or lower. The impairment tests are done in accordance with applicable accounting standards and regulations. For loans determined to be impaired, an estimate of loss is reserved for the amount of the impairment. In the case of more homogeneous portfolios, such as consumer loans and leases, and residential mortgage loans, the determination of the transaction reserve is conducted at an aggregate, or pooled, level. For such portfolios, the development of the reserve factors includes the use of forecasting models to measure inherent loss in these portfolios. Models and analyses are

41

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.

     Economic Reserve

     Changes in the economic environment are a significant judgmental factor Huntington’s management considers in determining the appropriate level of the ACL. The economic reserve incorporates a determination of the impact on the portfolio of risks associated with the general economic environment. The economic reserve is designed to address economic uncertainties and is determined based on a variety of economic factors that are correlated to the historical performance of the loan portfolio. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period to period.

     In an effort to be as quantitative as possible in the ACL calculation, Huntington’s management developed a revised methodology for calculating the economic reserve portion of the ACL in 2004. The revised methodology is specifically tied to economic indices that have a high correlation to the Company’s historic charge-off variability. The indices currently in the model consists of the U.S. Index of Leading Economic Indicators, U.S. Profits Index, U.S. Unemployment Index, and the University of Michigan Current Consumer Confidence Index. Beginning in 2004, the calculated economic reserve was determined based upon the variability of credit losses over a credit cycle. The indices and time frame may be adjusted as actual portfolio performance changes over time. Huntington’s management has the capability to judgmentally adjust the calculated economic reserve amount by a maximum of +/– 20% to reflect, among other factors, differences in local versus national economic conditions. This adjustment capability is deemed necessary given the newness of the model and the continuing uncertainty of forecasting economic environment changes.

     This methodology allows 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 ALL and AULPC are adjusted based on the results of the above-mentioned detailed quarterly analysis. This adjustment may be either an increase (provision) or a reduction. Such adjustments for the year ended December 31, 2005 resulted in reductions of the allowance of $19.8 million. These reductions compared to reductions of $31.6 million for the year ended December 31, 2004. The continued reduction of the allowances for credit losses was indicative of Management’s judgment regarding the adequacy of those allowances particularly in light of lower net loan losses in the current year.

Premises and Equipment: Premises and equipment, primarily leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is computed principally by the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over an average of 30 to 40 years. Land improvements are depreciated over 10 years. Leasehold improvements are amortized over the lesser of the asset life or term of the related leases.

Net Income per Share: All of HPCI’s common stock is owned by Huntington, HCF, HPCII, and Holdings and, therefore, net income per common share information is not presented.

Income Taxes: HPCI has elected to be treated as a REIT for federal income tax purposes and intends to comply with the provisions of the Internal Revenue Code. Accordingly, HPCI will not be subject to federal income tax to the extent it distributes its earnings to stockholders and as long as certain asset, income, and stock ownership tests are met in accordance with the Internal Revenue Code. As HPCI expects to maintain its status as a REIT for federal income tax purposes, only a provision for income taxes is included in the accompanying financial statements for its subsidiary’s taxable income. HPCLI is a taxable REIT subsidiary for federal income tax purposes. Deferred tax amounts relate primarily to depreciation of fixed assets. At December 31, 2005, net deferred taxes are included in accrued income and other assets.

Statement of Cash Flows: Cash, cash equivalents, and interest-bearing deposits are defined as “Cash and cash equivalents.”

42

Note 2 — New Accounting Pronouncements

     AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3): In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt securities purchased or acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities prior to the receipt of cash. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as a current period adjustment of yield or valuation allowance, such as the allowance for loan losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004. In the normal course of business, HPCI does not purchase loan participation interests in loans that have exhibited a deterioration in credit quality since origination. Therefore, the impact of this new pronouncement was not material to HPCI’s financial condition, results of operations, or cash flows.

     FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47) – In March 2005, the FASB issued FIN 47, which clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 became effective for fiscal years ending after December 15, 2005. There was no impact from adopting the provisions of FIN 47 in the fourth quarter of 2005.

     Financial Accounting Standards Board (FASB) Statement No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154) – In May 2005, the FASB issued Statement 154, which replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this new pronouncement is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.

Note 3 — Loan Participation Interests

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

(in thousands of dollars)	2005		2004
Commercial	$	46,559	$	106,179
Commercial real estate		3,311,275		3,738,930
Consumer		997,094		819,250
Residential real estate		157,397		224,914
Total Loan Participation Interests	$	4,512,325	$	4,889,273

     There were no underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries, or business activity. Underlying loans were, however, generally collateralized by real estate and were made primarily to borrowers in the four states of Ohio, Michigan, Indiana, and Kentucky, which comprise 95.9% and 96.6% of the portfolio at December 31, 2005 and 2004, respectively.

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Participations in Non-Performing Loans and Past Due Loans

     At December 31, 2005 and 2004, the participations in loans in non-accrual status and loans past due 90 days or more and still accruing interest, were as follows:

(in thousands of dollars)	2005		2004
Commercial	$	147	$	425
Commercial real estate		20,746		6,990
Consumer		2,799		2,692
Residential real estate		2,923		4,205
Total Participations in Non-Accrual Loans	$	26,615	$	14,312
Participations in Accruing Loans Past Due 90 Days or More	$	3,188	$	11,686

     The amount of interest that would have been recorded under the original terms for participations in loans classified as non-accrual was $2.7 million for 2005, $0.9 million for 2004, and $2.6 million for 2003. Amounts actually collected and recorded as interest income for these participations totalled $0.7 million, $0.5 million, and $1.2 million over the same respective years.

Note 4 — Allowances for Credit Losses (ACL)

     An allowance for credit losses (ACL) is transferred to HPCI from the Bank on loans underlying the participations at the time the participations are acquired. The ACL is comprised of the allowance for loan losses (ALL) and the allowance for unfunded loan participation commitments (AULPC).

     The following tables reflect activity in the ACL for the three years ended December 31:

(in thousands of dollars)	2005			2004			2003
ALL balance, beginning of period	$	61,146		$	84,532		$	140,353
Allowance of loan participations acquired		25,071			21,201			45,397
Net loan losses		(8,521	)		(9,231	)		(59,999	)
Reduction in ALL		(19,228	)		(35,356	)		(41,219	)
Economic reserve transfer to AULPC		(938	)		—			—
ALL balance, end of period	$	57,530		$	61,146		$	84,532
AULPC balance, beginning of period	$	3,765		$	—		$	—
(Reduction in) provision for AULPC		(568	)		3,765			—
Economic reserve transfer from ALL		938			—			—
AULPC balance, end of period	$	4,135		$	3,765		$	—
Total ACL	$	61,665		$	64,911		$	84,532
Recorded Balance of Impaired Loans, at end of year (1):
With specific reserves assigned to the loan balances	$	15,038		$	6,047		$	18,162
With no specific reserves assigned to the loan balances		7,816			7,169			—
Total	$	22,854		$	13,216		$	18,162
Average Balance of Impaired Loans for the Year (1)	$	13,863		$	10,074		$	39,866
Allowance for Loan Losses on Impaired Loans (1)		4,802			3,617			5,583

⁽¹⁾ Includes impaired commercial and commercial real estate loans. A loan is impaired when it is probable that Huntington will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of interest recognized on impaired loans while they were considered impaired was less than $0.1 million in 2005 and $0.2 million in 2004. There was no interest recognized in 2003 on impaired loans while they were considered impaired.

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

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     Effective March 31, 2004, HPCI reclassified $4.3 million of its ALL to a separate liability on the balance sheet titled AULPC. The AULPC is based on expected losses derived from historical experience. HPCI believes that this reclassification better reflects the nature of this reserve and represents improved financial statement disclosure. Prior period financial statements have not been revised due to immateriality.

Note 5 — Premises and Equipment

     At December 31, premises and equipment stated at cost were comprised of the following:

(in thousands of dollars)	2005			2004
Land and land improvements	$	365		$	365
Buildings		533			533
Leasehold improvements		101,056			103,235
Total premises and equipment		101,954			104,133
Accumulated depreciation and amortization		(80,271	)		(77,498	)
Net Premises and Equipment	$	21,683		$	26,635

     Premises and equipment related depreciation and amortization, in the amounts of $4.4 million, $5.3 million, and $5.5 million, were charged to expense in the years ended December 31, 2005, 2004, and 2003, respectively.

Note 6 – Dividends

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

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

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

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

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

(in thousands of dollars)	2005		2004		2003
Class A preferred securities	$	80	$	80	$	80
Class B preferred securities		13,296		5,887		4,910
Class C preferred securities		3,938		3,938		3,938
Class D preferred securities		17,320		10,839		9,983
Total preferred dividends declared	$	34,634	$	20,744	$	18,911

     As of December 31, 2005 and 2004, all declared dividends on preferred securities were paid to shareholders.

     For HPCI to meet its statutory requirement for a REIT to distribute 90% of its taxable income to its shareholders, the holders of common shares received dividends declared by the board of directors, subject to any preferential dividend rights of the outstanding preferred securities. Dividends on common stock declared for each of the years ended December 31, 2005, 2004, and 2003, were $279.7 million, $263.8 million, and $289.6 million, respectively.

Note 7 — Related Party Transactions

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

     The Bank performs the servicing of the commercial, commercial real estate, residential real estate, and consumer loans underlying the participations held by HPCI in accordance with normal industry practice under the participation and subparticipation agreements. In its capacity as servicer, the Bank collects and holds the loan payments received on behalf of HPCI until the end of each month. Servicing costs paid to the Bank totaled $11.2 million, $9.9 million, and $7.6 million for the respective years ended 2005, 2004, and 2003.

     In 2005 and 2004 the annual servicing rates the Bank charged with respect to outstanding principal balances were:

	July 1, 2005			July 1, 2004			January 1, 2004
	thru			thru			thru
	December 31, 2005			June 30, 2005			June 30, 2004
Commercial & Commercial Real Estate		0.125	%		0.125	%		0.125	%
Consumer		0.650	%		0.750	%		0.320	%
Residential Real Estate		0.267	%		0.267	%		0.299	%

     Pursuant to the existing participation and subparticipation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time to time during the terms of the agreements. Effective July 1, 2004, in lieu of paying higher servicing costs to the Bank with respect to commercial and commercial real estate loans, HPCI waived its right to receive any origination fees associated with participation interests in commercial and commercial real estate loans transferred on or after July 1, 2004. This waiver was subsequently extended until such time as loan servicing fees are reviewed in 2006. Effective July 1, 2005, in connection with the periodic review of the servicing fees, the parties reduced the current servicing rate on outstanding principal balances of underlying consumer loans to 0.650% from 0.750%. On an annualized basis, it is expected that this change will decrease non-interest expense by approximately $0.9 million. No changes were made to the servicing rates for the commercial, commercial real estate, or residential real estate portfolios.

     Huntington’s and the Bank’s personnel handle day-to-day operations of HPCI such as financial analysis and reporting, accounting, tax reporting, and other administrative functions. On a monthly basis, HPCI reimburses the Bank

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and Huntington for the cost related to the time spent by employees for performing these functions. These personnel costs totaled $0.5 million, $0.6 million, and $0.3 million for the years ended December 31, 2005, 2004, and 2003, respectively, and are recorded in other non-interest expense.

     The following table represents the ownership of HPCI’s outstanding common and preferred securities as of December 31, 2005:

	Number of
	Common		Number of Preferred Securities
Shareholder:	Shares		Class A		Class B		Class C		Class D
Held by related parties:
HPCII		4,550,000		—		—		—		—
HCF		6,580,000		—		—		—		—
Holdings		2,851,333		895		—		—		14,000,000
HPC Holdings-II, Inc.		—		—		400,000		—		—
Huntington		18,667		—		—		—		—
Total held by related parties		14,000,000		895		400,000		—		14,000,000
Other shareholders		—		105		—		2,000,000		—
Total shares outstanding		14,000,000		1,000		400,000		2,000,000		14,000,000

     As of December 31, 2005, 10.5% of the Class A preferred securities were owned by current and past employees of Huntington and its subsidiaries in addition to the 89.5% owned by Holdings. The Class A preferred securities are non-voting. All of the Class B preferred securities are owned by HPC Holdings-II, Inc., a non-bank subsidiary of Huntington and are non-voting. In 2001, the Class C preferred securities were obtained by Holdings, who sold the securities to the public. Various board members and executive officers of HPCI have purchased a portion of the Class C preferred securities. At December 31, 2005, HPCI board members and executive officers beneficially owned, in the aggregate, a total of 4,713 shares, or 0.236%. All of the Class D preferred securities are owned by Holdings. In the event HPCI redeems its Class C or Class D preferred securities, holders of such securities will be entitled to receive $25.00 per share plus accrued and unpaid dividends on such shares. The redemption amount may be significantly lower than the then current market price of the Class C preferred securities.

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

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

     HPCI’s premises and equipment were acquired from the Bank through Holdings. Leasehold improvements were subsequently contributed to HPCLI for its common shares in the fourth quarter of 2001. HPCLI charges rent to the Bank for use of applicable facilities by the Bank. The amount of rental income received by HPCLI was $6.4 million, $6.5 million, and $6.2 million for years ended December 31, 2005, 2004, and 2003, respectively. Rental income is reflected as a component of non-interest income in the consolidated statements of income.

     HPCI had a non-interest bearing receivable from the Bank of $46.3 million at December 31, 2005, and $0.2 million at December 31, 2004. The increase primarily relates to the reclassification of a receivable from cash and interest bearing deposits with The Huntington National Bank to due from The Huntington National Bank. The amount reclassified represents principal and interest payments on loan participations remitted by customers directly to the Bank but not yet received by HPCI. The receivable was settled with the Bank shortly after period-end.

     The Bank is eligible to obtain collateralized advances from various federal and government-sponsored agencies such as the Federal Home Loan Bank (FHLB). From time to time, HPCI may be asked to act as guarantor of the Bank’s obligations under such advances and/or pledge all or a portion of its assets in connection with those advances. See Note 10 for further information regarding the pledging of HPCI’s assets in association with the Bank’s advances.

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

Note 8 — Quarterly Results of Operations (Unaudited)

     The following is a summary of the unaudited quarterly results of operations for the years ended December 31:

(in thousands of dollars)	Fourth			Third			Second			First
2005
Interest and fee income	$	82,164		$	77,882		$	73,641		$	69,056
Reduction in allowance for credit losses		(4,409	)		(8,106	)		(3,840	)		(3,441	)
Non-interest income		2,566			2,497			2,556			1,772
Non-interest expense		4,067			4,053			4,558			4,387
Income before provision for income taxes		85,072			84,432			75,479			69,882
Provision for income taxes		251			173			25			98
Net income		84,821			84,259			75,454			69,784
Dividends declared on preferred securities		(10,050	)		(9,023	)		(8,256	)		(7,305	)
Net income applicable to common shares	$	74,771		$	75,236		$	67,198		$	62,479
2004
Interest and fee income	$	69,228		$	65,291		$	63,946		$	63,750
Reduction in allowance for credit losses		(13,153	)		(6,874	)		(9,301	)		(2,263	)
Non-interest income		1,768			1,770			2,045			1,666
Non-interest expense		4,295			4,389			3,945			3,631
Income before provision for income taxes		79,854			69,546			71,347			64,048
Provision for income taxes		58			88			84			23
Net income		79,796			69,458			71,263			64,025
Dividends declared on preferred securities		(6,208	)		(5,406	)		(4,488	)		(4,642	)
Net income applicable to common shares	$	73,588		$	64,052		$	66,775		$	59,383

Note 9 — Fair Value of Financial Instruments

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

Cash and interest-bearing deposits, and due from The Huntington National Bank - The carrying value approximates the fair value.

Loan participation interests – Underlying variable rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of probable losses in the loan portfolio. Based upon the calculations, the carrying values disclosed in the accompanying consolidated balance sheets approximate fair value.

Note 10 — Commitments and Contingencies

     The Bank is eligible to obtain advances from various federal and government-sponsored agencies such as the FHLB. From time to time, HPCI may be asked to act as guarantor of the Bank’s obligations under such advances and/or pledge all or a portion of its assets in connection with those advances. Any such guarantee and/or pledge would rank senior to HPCI’s common and preferred securities upon liquidation. Accordingly, any federal or government-sponsored agencies that make advances to the Bank where HPCI has acted as guarantor or has pledged all or a portion of its assets as collateral will have a liquidation preference over the holders of HPCI’s securities. Any such guarantee

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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 secure only one such facility. The Bank has obtained a line of credit from the FHLB, which line was capped by the Bank’s holdings of FHLB stock at $1.7 billion as of December 31, 2005. As of that same date, the Bank had borrowings of $1.2 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 dollar amount or aggregate percentage of such assets established from time-to-time by HPCI’s board of directors, including a majority of HPCI’s independent directors. Prior to October 31, 2004, the pledge limit established by HPCI’s board was $1.0 billion. Effective as of October 31, 2004, the pledge limit was adjusted to 25% of HPCI’s total assets, or approximately $1.3 billion as of December 31, 2005, as reflected in the HPCI’s month-end management report for the previous month. This pledge limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors. The agreement also provides that the Bank will pay HPCI a monthly fee based upon the total loans pledged by HPCI. As of December 31, 2005, HPCI’s total participation interests pledged was limited to 1-4 family residential mortgage portfolio and consumer second mortgage loans. As of that same date, HPCI’s participation interests in 1-4 family residential mortgages and second mortgage loans pledged totaled $1.1 billion. The Bank paid HPCI a total of $3.0 million, $0.7 million, and $0.7 million in the respective annual periods ended December 31, 2005, 2004, and 2003. The fee represented thirty-five basis points per year on total pledged loans after April 1, 2005, and twelve basis points per year on the certified collateral prior to April 1, 2005, as compensation for making such assets available to the Bank. In the first quarter of 2006, the Bank released approximately $1.0 billion of HPCI’s second mortgage loans pledged as collateral with the FHLB.

     Under the terms of the participation and subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank, either directly or indirectly through Holdings, so that the Bank may extend credit to any borrowers, or pay letters of credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying HPCI’s participation interests. As of December 31, 2005 and 2004, the unfunded loan commitments totaled $827.3 million and $761.4 million, respectively.

Note 11 — Formal Regulatory Supervisory Agreements

     On March 1, 2005, Huntington announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), as well as the Bank entering into a formal written agreement with the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreements called for independent third-party reviews, as well as the submission of written plans and progress reports by Huntington’s management and remain in effect until terminated by the banking regulators.

     On October 6, 2005, Huntington announced that the OCC had terminated its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. Huntington was verbally advised that it was in full compliance with the financial holding company and financial subsidiary requirement under the Gramm-Leach-Bliley Act (GLB Act). This notification reflected that Huntington and the Bank met both the “well-capitalized” and “well-managed” criteria under the GLB Act. Huntington’s management believes that the changes it has already made, and is in the process of making, will address the FRBC issues fully and comprehensively. No assurances, however, can be provided as to the ultimate timing or outcome of these matters, including any effects on HPCI.

Note 12 — Segment Reporting

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

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Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     Not Applicable

Item 9A: Controls and Procedures

Disclosure Controls and Procedures

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

Internal Controls Over Financial Reporting

     Information required by this item is set forth in “Report of Management” and “Report of Independent Registered Public Accounting Firm” included in Part II, Item 8 of this report.

Changes in Internal Control Over Financial Reporting

     There have not been any changes in HPCI’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2005 to which this report relates that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Item 9B: Other Information

     Not applicable.

Part III

Item 10: Directors and Executive Officers of the Registrant

     Information required by this item is set forth under the caption “Election of Directors” and under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” of HPCI’s 2006 Information Statement, and is incorporated herein by reference.

Item 11: Executive Compensation

     Information required by this item is set forth under the caption “Compensation of Directors and Executive Officers” of HPCI’s 2006 Information Statement and is incorporated herein by reference.

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     No HPCI securities were issued under equity compensation plans. Additional information required by this item is set forth under the caption “Ownership of Voting Stock” of HPCI’s 2006 Information Statement and is incorporated herein by reference.

Item 13: Certain Relationships and Related Transactions

     Information required by this item is set forth under the caption “Transactions with Directors and Officers” and “Transactions with Certain Beneficial Owners” of HPCI’s 2006 Information Statement and is incorporated herein by reference.

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Item 14: Principal Accounting Fees and Services

     Information required by this item is set forth under the caption “Proposal to Ratify the Appointment of Independent Registered Public Accounting Firm” of HPCI’s 2006 Information Statement and is incorporated herein by reference.

Part IV

Item 15: Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

(1)	The report of independent registered public accounting firm and consolidated financial statements appearing in Item 8.
(2)	HPCI is not filing separately financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the notes thereto.
(3)	The exhibits required by this item are listed in the Exhibit Index on pages 53 and 54 of this Form 10-K.

(b)	The exhibits to this Form 10-K begin on page 55.
(c)	See Item 15 (a) (2) above.

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Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March, 2006.

HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant)

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 24th day of March, 2006.

Richard A. Cheap * Richard A. Cheap	Director
Stephen E. Dutton * Stephen E. Dutton	Director
R. Larry Hoover * R. Larry Hoover	Director
Edward J. Kane * Edward J. Kane	Director
Roger E. Kephart * Roger E. Kephart	Director
James D. Robbins * James D. Robbins	Director
Karen D. Roggenkamp * Karen D. Roggenkamp	Director
/s/ Donald R. Kimble Donald R. Kimble

* Attorney-in fact for each of the persons indicated.

52

Exhibit Index

     This document incorporates by reference certain documents listed below that HPCI has previously filed with the SEC (file number 000-33243). The documents incorporated by reference may be read and copied at the Public Reference Room of the SEC at 100 F Street N.E., Washington, D.C. 20549. The SEC also maintains an internet world-wide web site that contains reports, proxy statements, and other information about issuers, like HPCI, who file electronically with the SEC. The address of the site is http://www.sec.gov.

3. (i).	Amended and Restated Articles of Incorporation (previously filed as Exhibit 3(a)(ii) to Amendment No. 4 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on October 12, 2001, and incorporated herein by reference.)
3. (ii).	Code of Regulations (previously filed as Exhibit 3(b) to the Registrant’s Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 17, 2001, and incorporated herein by reference.)
4.	Specimen of certificate representing Class C preferred securities, previously filed as Exhibit 4 to the Registrant’s Amendment No. 1 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 31, 2001, and incorporated herein by reference.
10.(a).	Third Amended and Restated Loan Participation Agreement, dated May 12, 2005, between The Huntington National Bank and Huntington Preferred Capital Holdings, Inc. (previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, and incorporated herein by reference).
(b).	Third Amended and Restated Loan Subparticipation Agreement, dated May 12, 2005, between Huntington Preferred Capital Holdings, Inc. and Huntington Preferred Capital, Inc. (previously filed as Exhibit 10(b) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, and incorporated herein by reference).
(c).	Second Amended and Restated Loan Participation Agreement, dated May 12, 2005, between The Huntington National Bank and Huntington Preferred Capital, Inc. (previously filed as Exhibit 10(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, and incorporated herein by reference).
(d).	Subscription Agreement, dated October 15, 2001, for the Class C preferred securities between Huntington Preferred Capital, Inc., The Huntington National Bank, and Huntington Preferred Capital Holdings, Inc. (previously filed as Exhibit 10(f) to Annual Report on Form 10-K for the year ended December 31, 2001, and incorporated herein by reference).
(e).	Subscription Agreement, dated October 15, 2001, for the Class D preferred securities between Huntington Preferred Capital, Inc., The Huntington National Bank, and Huntington Preferred Capital Holdings, Inc. (previously filed as Exhibit 10(g) to Annual Report on Form 10-K for the year ended December 31, 2001, and incorporated herein by reference).
(f).	Leasehold Improvements Lease dated August 12, 2004 between HPCLI, Inc. and The Huntington National Bank (previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference).
(g).	Amended and Restated Agreement dated June 1, 2005 between Huntington Preferred Capital, Inc. and The Huntington National Bank to govern the terms on which Huntington Preferred Capital Inc. may pledge certain of its assets as collateral for the Huntington National Bank’s borrowings from the Federal Home Loan Bank of Cincinnati under a secured revolving loan facility (previously filed as Exhibit 99.1 to Form 8-K dated June 1, 2005, and incorporated herein by reference).
(h).	Limited Waiver of Contract Provision, dated August 11, 2005, with Huntington Preferred Capital Holdings, Inc., Huntington Preferred Capital, Inc., and The Huntington National Bank (previously filed as Exhibit 10(e) to Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, and incorporated herein by reference).
14.	Code of Business Conduct and Ethics dated January 14, 2003 and revised on February 14, 2006 and Financial Code of Ethics for Chief Executive Officer and Senior Financial Officers, adopted January 18, 2003 and

53

	revised on April 19, 2005, as applicable to all of its affiliated companies, and ratified by HPCI’s Board of Directors on March 25, 2004, are available on Huntington Bancshares Incorporated’s website at http://www.investquest.com/iq/h/hban/main/cg/cg.htm.
21.	List of Subsidiaries.
24.	Power of Attorney.
31.(a).	Rule 13a-14(a) Certification – Chief Executive Officer.
31.(b).	Rule 13a-14(a) Certification – Chief Financial Officer.
32.(a).	Section 1350 Certification – Chief Executive Officer.
32.(b).	Section 1350 Certification – Chief Financial Officer.
99.(a).	Opinion of Ernst & Young LLP, Independent Registered Public Accounting Firm.
99.(b).	Consolidated Financial Statements of Huntington Bancshares Incorporated as of and for the year ended December 31, 2005.

54

EX-21

Exhibit 21

List of Subsidiaries

     Huntington Preferred Capital, Inc. has one wholly owned subsidiary, HPCLI, Inc. Its state or jurisdiction of incorporation or organization is Ohio.

EX-24

Exhibit 24

POWER OF ATTORNEY

     Each director and officer of Huntington Preferred Capital, Inc. (the “Corporation”), whose signature appears below hereby appoints Donald R. Kimble and Thomas P. Reed, or any of them, as his or her attorney-in-fact, to sign, in his or her name and behalf and in any and all capacities stated below, and to cause to be filed with the Securities and Exchange Commission, the Corporation’s Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2005, and likewise to sign and file any amendments, including post-effective amendments, to the Annual Report, and the Corporation hereby also appoints such persons as its attorneys-in-fact and each of them as its attorney-in-fact with like authority to sign and file the Annual Report and any amendments thereto in its name and behalf, each such person and the Corporation hereby granting to such attorney-in-fact full power of substitution and revocation, and hereby ratifying all that such attorney-in-fact or his substitute may do by virtue hereof.

     IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney, in counterparts if necessary, effective as of March 24, 2006.

DIRECTORS/OFFICERS:

Signatures	Title
/s/ Donald R. Kimble Donald R. Kimble	President and Director (Principal Executive Officer)
/s/ Thomas P. Reed Thomas P. Reed	Vice President and Director (Principal Financial and Accounting Officer)
/s/ Richard A. Cheap Richard A. Cheap	Director
/s/ Stephen E. Dutton Stephen E. Dutton	Director
/s/ R. Larry Hoover R. Larry Hoover	Director
/s/ Edward J. Kane Edward J. Kane	Director
/s/ Roger E. Kephart Roger E. Kephart	Director
/s/ James D. Robbins James D. Robbins	Director
/s/ Karen D. Roggenkamp Karen D. Roggenkamp	Director

EX-31.A

Exhibit 31.(a)

CERTIFICATION

I, Donald R. Kimble, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Huntington Preferred Capital, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 24, 2006

/s/ Donald R. Kimble

Donald R. Kimble, President

(chief executive officer)

EX-31.B

Exhibit 31.(b)

CERTIFICATION

I, Thomas P. Reed, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Huntington Preferred Capital, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 24, 2006

/s/ Thomas P. Reed

Thomas P. Reed, Vice President

(chief financial officer)

EX-32.A

Exhibit 32.(a)

SECTION 1350 CERTIFICATION

     In connection with the Annual Report of Huntington Preferred Capital, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald R. Kimble, President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Donald R. Kimble

Donald R. Kimble

(chief executive officer)

March 24, 2006

EX-32.B

Exhibit 32.(b)

SECTION 1350 CERTIFICATION

     In connection with the Annual Report of Huntington Preferred Capital, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas P. Reed, Vice President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Thomas P. Reed

Thomas P. Reed

(chief financial officer)

March 24, 2006

EX-99.A

Exhibit 99.(a)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Huntington Preferred Capital, Inc. and Subsidiary

We have audited the accompanying consolidated statements of income, changes in shareholders’ equity, and cash flows of Huntington Preferred Capital, Inc. and subsidiary (“the Company”) for the year ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the accompanying consolidated statements of income, changes in shareholder’s equity, and cash flows of Huntington Preferred Capital, Inc. and subsidiary, present fairly, in all material respects, the consolidated results of their operations and their cash flows for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Columbus, Ohio
March 19, 2004

EX-99.B

Exhibit 99.(b)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HUNTINGTON BANCSHARES INCORPORATED

To the Board of Directors and Shareholders of

Huntington Bancshares Incorporated

Columbus, Ohio

We have audited the accompanying consolidated balance sheets of Huntington Bancshares Incorporated and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company for the year ended December 31, 2003 were audited by other auditors whose report, dated January 16, 2004 (except for Note 25, as to which the date is January 27, 2004), expressed an unqualified opinion on those financial statements and included an explanatory paragraph that described the adoption of new accounting guidance for variable interest entities in 2003.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated 2005 and 2004 financial statements present fairly, in all material respects, the financial position of Huntington Bancshares Incorporated and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Deloitte & Touche LLP

Columbus, Ohio

February 14, 2006

98

CONSOLIDATED BALANCE SHEETS HUNTINGTON BANCSHARES INCORPORATED

			December 31,
(in thousands, except number of shares)			2005			2004
Assets
Cash and due from banks			$	966,445		$	877,320
Federal funds sold and securities purchased under resale agreements				74,331			628,040
Interest bearing deposits in banks				22,391			22,398
Trading account securities				8,619			309,630
Loans held for sale				294,344			223,469
Investment securities				4,526,520			4,238,945
Loans and leases:
		Commercial and industrial loans		6,809,208			5,829,685
		Commercial real estate loans		4,036,171			4,473,293
		Automobile loans		1,985,304			1,948,667
		Automobile leases		2,289,015			2,443,455
		Home equity loans		4,638,841			4,554,540
		Residential mortgage loans		4,193,139			3,829,234
		Other consumer loans		520,488			481,403
Loans and leases				24,472,166			23,560,277
Allowance for loan and lease losses				(268,347	)		(271,211	)
Net loans and leases				24,203,819			23,289,066
Bank owned life insurance				1,001,542			963,059
Premises and equipment				360,677			355,115
Operating lease assets				229,077			587,310
Goodwill and other intangible assets				217,486			215,807
Customers’ acceptance liability				4,536			11,299
Accrued income and other assets				855,018			844,039
Total assets			$	32,764,805		$	32,565,497
Liabilities and shareholders’ equity
Liabilities
	Deposits in domestic offices
		Demand deposits — non-interest bearing	$	3,390,044		$	3,392,123
		Interest bearing		18,548,943			16,935,091
	Deposits in foreign offices			470,688			440,947
	Deposits			22,409,675			20,768,161
	Short-term borrowings			1,889,260			1,207,233
	Federal Home Loan Bank advances			1,155,647			1,271,088
	Other long-term debt			2,418,419			4,016,004
	Subordinated notes			1,023,371			1,039,793
	Deferred income tax liability			743,655			783,628
	Allowance for unfunded loan commitments and letters of credit			36,957			33,187
	Bank acceptances outstanding			4,536			11,299
	Accrued expenses and other liabilities			525,784			897,466
Total liabilities				30,207,304			30,027,859
Shareholders’ equity
	Preferred stock — authorized 6,617,808 shares; none outstanding			—			—
	Common stock — without par value; authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 224,106,172 and 231,605,281 shares, respectively			2,491,326			2,484,204
	Less 33,760,083 and 26,260,974 treasury shares, respectively			(693,576	)		(499,259	)
	Accumulated other comprehensive loss			(22,093	)		(10,903	)
	Retained earnings			781,844			563,596
Total shareholders’ equity				2,557,501			2,537,638
Total liabilities and shareholders’ equity			$	32,764,805		$	32,565,497

See Notes to Consolidated Financial Statements.

99

CONSOLIDATED STATEMENTS OF INCOME HUNTINGTON BANCSHARES INCORPORATED

			Year Ended December 31,
(in thousands, except per share amounts)			2005			2004			2003
Interest and fee income
	Loans and leases
		Taxable	$	1,428,371		$	1,132,599		$	1,096,750
		Tax-exempt		1,466			1,474			1,674
	Investment securities
		Taxable		158,741			171,709			159,590
		Tax-exempt		19,865			17,884			15,067
	Other			33,322			23,649			32,675
Total interest income				1,641,765			1,347,315			1,305,756
Interest expense
	Deposits			446,919			257,099			288,271
	Short-term borrowings			34,334			13,053			15,698
	Federal Home Loan Bank advances			34,647			33,253			24,394
	Subordinated notes and other long-term debt			163,454			132,536			128,407
Total interest expense				679,354			435,941			456,770
Net interest income				962,411			911,374			848,986
Provision for credit losses				81,299			55,062			163,993
Net interest income after provision for credit losses				881,112			856,312			684,993
	Service charges on deposit accounts			167,834			171,115			167,840
	Operating lease income			138,433			287,091			489,698
	Trust services			77,405			67,410			61,649
	Brokerage and insurance income			53,619			54,799			57,844
	Other service charges and fees			44,348			41,574			41,446
	Mortgage banking income			41,710			32,296			58,180
	Bank owned life insurance income			40,736			42,297			43,028
	Gains on sales of automobile loans			1,211			14,206			40,039
	Gain on sale of branch offices			—			—			13,112
	Securities gains (losses), net			(8,055	)		15,763			5,258
	Other income			75,041			92,047			91,059
Total non-interest income				632,282			818,598			1,069,153
	Personnel costs			481,658			485,806			447,263
	Operating lease expense			108,376			236,478			393,270
	Outside data processing and other services			74,638			72,115			66,118
	Net occupancy			71,092			75,941			62,481
	Equipment			63,124			63,342			65,921
	Professional services			34,569			36,876			42,448
	Marketing			28,077			26,489			27,490
	Telecommunications			18,648			19,787			21,979
	Printing and supplies			12,573			12,463			13,009
	Amortization of intangibles			829			817			816
	Restructuring reserve releases			—			(1,151	)		(6,666	)
	Loss on early extinguishment of debt			—			—			15,250
	Other expense			76,236			93,281			80,780
Total non-interest expense				969,820			1,122,244			1,230,159
Income before income taxes				543,574			552,666			523,987
Provision for income taxes				131,483			153,741			138,294
Income before cumulative effect of change in accounting principle				412,091			398,925			385,693
Cumulative effect of change in accounting principle, net of tax				—			—			(13,330	)
Net income			$	412,091		$	398,925		$	372,363
Average common shares — basic				230,142			229,913			229,401
Average common shares — diluted				233,475			233,856			231,582
Per common share
Income before cumulative effect of change in accounting principle — basic			$	1.79		$	1.74		$	1.68
Income before cumulative effect of change in accounting principle — diluted				1.77			1.71			1.67
Net income — basic				1.79			1.74			1.62
Net income — diluted				1.77			1.71			1.61
Cash dividends declared				0.845			0.750			0.670

See Notes to Consolidated Financial Statements.

100

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY HUNTINGTON BANCSHARES INCORPORATED

							Common Stock					Treasury Stock						Accumulated
			Preferred Stock															Other
																		Comprehensive			Retained
(in thousands)			Shares		Amount		Shares		Amount			Shares			Amount			Income (Loss)			Earnings			Total
Balance — January 1, 2003				—	$	—		257,866	$	2,484,421			(24,987	)	$	(475,399	)	$	62,300		$	118,471		$	2,189,793
	Comprehensive income:
	Net income																					372,363			372,363
	Unrealized net losses on investment securities arising during the year, net of reclassification of net realized gains																		(47,427	)					(47,427	)
	Unrealized losses on cash flow hedging derivatives																		(11,081	)					(11,081	)
	Minimum pension liability adjustment																		(1,114	)					(1,114	)
		Total comprehensive income																							312,741
	Cash dividends declared ($0.67 per share)																					(153,476	)		(153,476	)
	Stock options exercised									(609	)		481			8,691									8,082
	Treasury shares purchased												(4,300	)		(81,061	)								(81,061	)
	Other									(270	)		(52	)		(807	)								(1,077	)
Balance — December 31, 2003				—		—		257,866		2,483,542			(28,858	)		(548,576	)		2,678			337,358			2,275,002
	Comprehensive income:
	Net income																					398,925			398,925
	Unrealized net losses on investment securities arising during the year, net of reclassification of net realized gains																		(22,112	)					(22,112	)
	Unrealized gains on cash flow hedging derivatives																		9,694						9,694
	Minimum pension liability adjustment																		(1,163	)					(1,163	)
		Total comprehensive income																							385,344
	Cash dividends declared ($0.75 per share)																					(172,687	)		(172,687	)
	Stock options exercised									678			2,432			46,561									47,239
	Other									(16	)		165			2,756									2,740
Balance — December 31, 2004				—		—		257,866		2,484,204			(26,261	)		(499,259	)		(10,903	)		563,596			2,537,638
	Comprehensive income:
	Net income																					412,091			412,091
	Unrealized net losses on investment securities arising during the year, net of reclassification of net realized losses																		(21,333	)					(21,333	)
	Unrealized gains on cash flow hedging derivatives																		10,954						10,954
	Minimum pension liability adjustment																		(811	)					(811	)
		Total comprehensive income																							400,901
	Cash dividends declared ($0.845 per share)																					(193,843	)		(193,843	)
	Stock options exercised									2,999			1,866			36,195									39,194
	Treasury shares purchased												(9,591	)		(231,656	)								(231,656	)
	Other									4,123			226			1,144									5,267
Balance — December 31, 2005				—	$	—		257,866	$	2,491,326			(33,760	)	$	(693,576	)	$	(22,093	)	$	781,844		$	2,557,501

See Notes to Consolidated Financial Statements.

101

CONSOLIDATED STATEMENTS OF CASH FLOWS HUNTINGTON BANCSHARES INCORPORATED

			Year Ended December 31,
(in thousands of dollars)			2005			2004			2003
Operating activities
	Net income		$	412,091		$	398,925		$	372,363
	Adjustments to reconcile net income to net cash provided by operating activities:
		Cumulative effect of change in accounting principle, net of tax		—			—			13,330
		Provision for credit losses		81,299			55,062			163,993
		Depreciation on operating lease assets		99,342			216,444			350,550
		Amortization of mortgage servicing rights		18,359			19,019			25,966
		Other depreciation and amortization		73,635			89,669			126,530
		Mortgage servicing rights impairment recoveries		(4,371	)		(1,378	)		(14,957	)
		Deferred income tax (benefit) provision		(32,110	)		140,962			258
		Decrease (increase) in trading account securities		275,765			(302,041	)		(7,348	)
		Originations of loans held for sale		(2,572,346	)		(1,858,262	)		(4,221,322	)
		Principal payments on and proceeds from loans held for sale		2,501,471			1,861,272			4,522,972
		Losses (gains) on sales of investment securities		8,055			(15,763	)		(5,258	)
		Gains on sales/securitizations of loans		(1,211	)		(14,206	)		(45,610	)
		Gain on sale of branch offices		—			—			(13,112	)
		Loss on early extinguishment of debt		—			—			15,250
		Restructuring reserve releases		—			(1,151	)		(6,666	)
		Increase of cash surrender value of bank owned life insurance		(40,736	)		(42,297	)		(43,028	)
		(Decrease) increase in payable to investors in sold loans		(119,352	)		24,541			64,986
		Other, net		(25,192	)		(42,580	)		40,373
Net cash provided by operating activities				674,699			528,216			1,339,270
Investing activities
	Decrease in interest bearing deposits in banks			7			11,229			3,673
	Proceeds from:
		Maturities and calls of investment securities		463,001			881,305			1,585,979
		Sales of investment securities		1,995,764			2,386,479			1,161,325
	Purchases of investment securities			(2,832,258	)		(2,438,158	)		(4,341,946	)
	Proceeds from sales/securitizations of loans			—			1,534,395			2,576,869
	Net loan and lease originations, excluding sales			(1,012,345	)		(4,216,309	)		(4,506,843	)
	Purchases of equipment for operating lease assets			(31,363	)		(14,666	)		—
	Proceeds from sale of operating lease assets			280,746			451,264			572,596
	Sale of branch offices			—			—			(81,367	)
	Proceeds from sale of premises and equipment			1,164			1,188			7,382
	Purchases of premises and equipment			(57,288	)		(56,531	)		(64,571	)
	Proceeds from sales of other real estate			50,614			16,388			14,083
	Consolidation of cash of securitization trust			—			—			58,500
Net cash used for investing activities				(1,141,958	)		(1,443,416	)		(3,014,320	)
Financing activities
	Increase in deposits			1,655,736			2,273,046			1,177,324
	Increase (decrease) in short-term borrowings			682,027			(245,071	)		(688,712	)
	Proceeds from issuance of subordinated notes			—			148,830			198,430
	Maturity of subordinated notes			—			(100,000	)		(250,000	)
	Proceeds from Federal Home Loan Bank advances			809,589			1,088			270,000
	Maturity of Federal Home Loan Bank advances			(925,030	)		(3,000	)		(10,000	)
	Proceeds from issuance of long-term debt			—			925,000			2,075,000
	Maturity of long-term debt			(1,719,403	)		(1,455,000	)		(895,250	)
	Purchase of minority interests in consolidated subsidiaries			(107,154	)		—			—
	Dividends paid on common stock			(200,628	)		(168,075	)		(151,023	)
	Repurchases of common stock			(231,656	)		—			(81,061	)
	Net proceeds from issuance of common stock			39,194			47,239			8,082
Net cash provided by financing activities				2,675			1,424,057			1,652,790
Change in cash and cash equivalents				(464,584	)		508,857			(22,260	)
Cash and cash equivalents at beginning of year				1,505,360			996,503			1,018,763
Cash and cash equivalents at end of year			$	1,040,776		$	1,505,360		$	996,503
Supplemental disclosures:
	Income taxes paid		$	230,186		$	34,904		$	72,128
	Interest paid			640,679			422,060			469,331
	Non-cash activities
		Mortgage loans exchanged for mortgage-backed securities		15,058			115,929			354,200
		Common stock dividends accrued, paid in subsequent year		28,877			35,662			31,113

See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

1. SIGNIFICANT ACCOUNTING POLICIES

–  NATURE OF OPERATIONS — Huntington Bancshares Incorporated (Huntington) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, and discount brokerage services, as well as reinsuring private mortgage, credit life and disability insurance, and selling other insurance and financial products and services. Huntington’s banking offices are located in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Certain activities are also conducted in other states including Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania, South Carolina, and Tennessee. Huntington has foreign offices in the Cayman Islands and in Hong Kong.

–  BASIS OF PRESENTATION — The consolidated financial statements include the accounts of Huntington and its majority-owned subsidiaries and are presented in accordance with accounting principles generally accepted in the United States (GAAP). All significant intercompany transactions and balances have been eliminated in consolidation. Companies in which Huntington holds more than a 50% voting equity interest or are a variable interest entity (VIE) in which Huntington absorbs the majority of expected losses are consolidated. VIEs in which Huntington does not absorb the majority of expected losses are not consolidated. For consolidated entities where Huntington holds less than a 100% interest, Huntington recognizes a minority interest liability (included in accrued expenses and other liabilities) for the equity held by others and minority interest expense (included in other non-interest expenses) for the portion of the entity’s earnings attributable to minority interests. Investments in companies that are not consolidated are accounted for using the equity method when Huntington has the ability to exert significant influence. Those investments in non-marketable securities for which Huntington does not have the ability to exert significant influence are generally accounted for using the cost method and are periodically evaluated for impairment. Investments in private investment partnerships are carried at fair value. Investments in private investment partnerships and investments that are accounted for under the equity method or the cost method are included in accrued income and other assets and Huntington’s proportional interest in the investments’ earnings are included in other non-interest income. Huntington evaluates VIEs in which it holds a beneficial interest for consolidation. VIEs, as defined by the Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46 (Revised 2003), Consolidation of Variable Interest Entities, are legal entities with insubstantial equity, whose equity investors lack the ability to make decisions about the entity’s activities, or whose equity investors do not have the right to receive the residual returns of the entity if they occur. Huntington adopted FIN 46 (Revised 2003) on July 1, 2003 and, therefore, consolidates these VIEs when it holds a majority of VIEs’ beneficial interests. The effect of adopting FIN 46 (Revised 2003) in 2003 resulted in a cumulative effect of change in accounting of $13.3 million.

The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform to the current year’s presentation.

–  SECURITIES — Securities purchased with the intention of recognizing short-term profits are classified as trading account securities and reported at fair value. The unrealized gains or losses on trading account securities are recorded in other non-interest income. All other securities are designated as investment securities. Investment securities include securities designated as available for sale, non-marketable equity securities, and, prior to 2005, securities held to maturity. Unrealized gains or losses on investment securities designated as available for sale are reported as a separate component of accumulated other comprehensive income/loss in shareholders’ equity. Declines in the value of debt and marketable equity securities that are considered other-than-temporary are recorded in non-interest income as a securities loss.

Securities transactions are recognized on the trade date (the date the order to buy or sell is executed). The amortized cost of specific securities sold is used to compute realized gains and losses. Interest and dividends on securities, including amortization of premiums and accretion of discounts using the effective interest method over the period to maturity, are included in interest income.

Non-marketable equity securities include stock acquired for regulatory purposes, such as Federal Home Loan Bank stock and Federal Reserve Bank stock. These securities are generally accounted for at cost and are included in investment securities.

Statement of Financial Accounting Standards (Statement) No. 115, Accounting for Certain Investments in Debt and Equity Securities, Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent Marketable Equity Securities, FASB Staff Position (FSP) FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, provide guidance on determining when an investment is other-than-temporarily impaired. Investments are reviewed quarterly for indicators of other-than-temporary

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

impairment. This determination requires significant judgment. In making this judgment, Management evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost and intent and ability to hold the investment. Investments with an indicator are further evaluated to determine the likelihood of a significant adverse effect on the fair value and amount of the impairment as necessary. If market or economic conditions change, future impairments may occur.

–  LOANS AND LEASES — Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs and net of unearned income. Direct financing leases are reported at the aggregate of lease payments receivable and estimated residual values, net of unearned and deferred income. Interest income is accrued as earned based on unpaid principal balances. Huntington defers the fees it receives from the origination of loans and leases, as well as the direct costs of those activities, and amortizes these fees and costs on a level-yield basis over the estimated lives of the related loans.

Automobile loans and leases include loans secured by automobiles and leases of automobiles that qualify for the direct financing method of accounting. Substantially all of the direct financing leases that qualify for that accounting method do so because the present value of the lease payments and the guaranteed residual value are at least 90% of the cost of the vehicle. Huntington records the residual values of its leases based on estimated future market values of the automobiles as published in the Automotive Lease Guide (ALG), an authoritative industry source. Beginning in October 2000, Huntington purchased residual value insurance for its entire automobile lease portfolio to mitigate the risk of declines in residual values. Residual value insurance provides for the recovery of the vehicle residual value specified by the ALG at the inception of the lease. As a result, the risk associated with market driven declines in used car values is mitigated. Currently, Huntington has three distinct residual value insurance policies in place to address the residual risk in the portfolio. One residual value insurance policy covers all vehicles leased between October 1, 2000 and April 30, 2002, and has an associated total payment cap of $50 million. Any losses above the cap result in additional depreciation expense. A second policy covers all originations from May 2002 through June 2005, and does not have a cap. A third policy, similar in structure to the referenced second policy, went into effect July 1, 2005, and covers all originations for a period of one year. Leases covered by the last two policies qualify for the direct financing method of accounting. Leases covered by the first policy are accounted for using the operating lease method of accounting and are recorded as operating lease assets in Huntington’s consolidated balance sheet.

Residual values on leased automobiles and equipment are evaluated periodically for impairment. Impairment of the residual values of direct financing leases is recognized by writing the leases down to fair value with a charge to other non-interest expense. Residual value losses arise if the market value at the end of the lease term is less than the residual value embedded in the original lease contract. Residual value insurance covers the difference between the recorded residual value and the fair value of the automobile at the end of the lease term as evidenced by ALG Black Book valuations. This insurance, however, does not cover residual losses below ALG Black Book value, which may arise when the automobile has excess wear and tear and/or excess mileage, not reimbursed by the lessee.

Commercial and industrial loans and commercial real estate loans are generally placed on non-accrual status and stop accruing interest when principal or interest payments are 90 days or more past due or the borrower’s creditworthiness is in doubt. A loan may remain in accruing status when it is sufficiently collateralized, which means the collateral covers the full repayment of principal and interest, and is in the process of active collection.

Commercial and industrial and commercial real estate loans are evaluated for impairment in accordance with the provisions of Statement No. 114, Accounting by Creditors for Impairment of a Loan, as amended. This Statement requires an allowance to be established as a component of the allowance for loan and lease losses when it is probable that all amounts due pursuant to the contractual terms of the loan or lease will not be collected and the recorded investment in the loan or lease exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted at the loan’s or lease’s effective interest rate, the observable market price of the loan or lease, or the fair value of the collateral if the loan or lease is collateral dependent.

Consumer loans and leases, excluding residential mortgage and home equity loans, are subject to mandatory charge-off at a specified delinquency date and are not classified as non-performing prior to being charged off. These loans and leases are generally charged off in full no later than when the loan or lease becomes 120 days past due. Residential mortgage loans are placed on non-accrual status when principal payments are 180 days past due or interest payments are 210 days past due. A charge-off on a residential mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the collateral. The fair value of the collateral is then recorded as real estate owned and is reflected in other assets in the consolidated balance sheet. (See Note 4 for further information.)

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Huntington uses the cost recovery method of accounting for cash received on non-performing loans and leases. Under this method, cash receipts are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income. When, in management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes and collectibility is no longer in doubt, the loan or lease is returned to accrual status. 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.

–  SOLD LOANS — Loans that are sold are accounted for in accordance with Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. For loan sales with servicing retained, an asset is also recorded for the right to service the loans sold, based on the relative fair value of the servicing rights.

Gains and losses on the loans sold and servicing rights associated with loan sales are determined when the related loans are sold to the trust or third party. Fair values of the servicing rights are based on the present value of expected future cash flows from servicing the underlying loans, net of adequate compensation to service the loans. The present value of expected future cash flows is determined using assumptions for market interest rates, ancillary fees, and prepayment rates. Management also uses these assumptions to assess the servicing rights for impairment periodically. The servicing rights are recorded in other assets in the consolidated balance sheets. Servicing revenues on mortgage and automobile loans, net of the amortization of servicing rights, are included in mortgage banking income and other non-interest income, respectively.

–  ALLOWANCE FOR CREDIT LOSSES — The allowance for credit losses (ACL) reflects Management’s judgment as to the level of the ACL considered appropriate to absorb probable inherent credit losses. This judgment is based on the size and current risk characteristics of the portfolio, a review of individual loans and leases, historical and anticipated loss experience, and a review of individual relationships where applicable. External influences such as general economic conditions, economic conditions in the relevant geographic areas and specific industries, regulatory guidelines, and other factors are also assessed in determining the level of the allowance.

The allowance is determined subjectively, requiring significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change. The allowance is increased through a provision that is charged to earnings, based on Management’s quarterly evaluation of the factors previously mentioned, and is reduced by charge-offs, net of recoveries, and the allowance associated with securitized or sold loans.

The ACL consists of two components, the transaction reserve, which includes a specific reserve in accordance with Statement No. 114, and the economic reserve. Loan and lease losses related to the transaction reserve are recognized and measured pursuant to Statement No. 5, Accounting for Contingencies, and Statement No. 114, while losses related to the economic reserve are recognized and measured pursuant to Statement No. 5. The two components are more fully described below.

       Transaction Reserve

The transaction reserve component of the ACL includes both (a) an estimate of loss based on characteristics of each commercial and consumer loan, lease, or loan commitment in the portfolio and (b) an estimate of loss based on an impairment review of each loan greater than $500,000 that is considered to be impaired.

For middle market commercial and industrial, middle market commercial real estate, and small business loans, the estimate of loss is based on characteristics of each loan through the use of a standardized loan grading system, which 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 the Company’s own portfolio and external industry data.

Management analyzes each middle market commercial and industrial, middle market commercial real estate, or small business loan over $500,000 for impairment when the loan is non-performing or has a grade of substandard or lower. The impairment tests are done in accordance with applicable accounting standards and regulations. For loans determined to be impaired, an estimate of loss is reserved for the amount of the impairment.

In the case of more homogeneous portfolios, such as consumer loans and leases, and residential mortgage loans, the determination of the transaction reserve is conducted at an aggregate, or pooled, level. For such portfolios, the development of the reserve factors includes the use of forecasting models to measure inherent loss in these portfolios.

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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.

       Economic Reserve

Changes in the economic environment are a significant judgmental factor Management considers in determining the appropriate level of the ACL. The economic reserve incorporates Management’s determination of the impact on the portfolio of risks associated with the general economic environment. The economic reserve is designed to address economic uncertainties and is determined based on a variety of economic factors that are correlated to the historical performance of the loan portfolio. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period to period.

In an effort to be as quantitative as possible in the ACL calculation, Management developed a revised methodology for calculating the economic reserve portion of the ACL in 2004. The revised methodology is specifically tied to economic indices that have a high correlation to the Company’s historic charge-off variability. The indices currently in the model consists of the U.S. Index of Leading Economic Indicators, U.S. Profits Index, U.S. Unemployment Index, and the University of Michigan Current Consumer Confidence Index. Beginning in 2004, the calculated economic reserve was determined based upon the variability of credit losses over a credit cycle. The indices and time frame may be adjusted as actual portfolio performance changes over time. Management has the capability to judgmentally adjust the calculated economic reserve amount by a maximum of +/- 20% to reflect, among other factors, differences in local versus national economic conditions. This adjustment capability is deemed necessary given the newness of the model and the continuing uncertainty of forecasting economic environment changes.

–  RESELL AND REPURCHASE AGREEMENTS — Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is continually monitored and additional collateral is obtained or is requested to be returned to Huntington as deemed appropriate.

–  GOODWILL AND OTHER INTANGIBLE ASSETS — Under the purchase method of accounting, the net assets of entities acquired by Huntington are recorded at their estimated fair value at the date of acquisition. The excess of cost over the fair value of net assets acquired is recorded as goodwill. Other intangible assets are amortized on a straight-line basis over their estimated useful lives through 2011. Goodwill is not amortized, but is evaluated for impairment on an annual basis at September 30th of each year.

–  MORTGAGE BANKING ACTIVITIES — Loans held for sale include performing 1-to-4 family residential mortgage loans originated for resale and are carried at the lower of cost (net of purchase discounts or premiums and effects of hedge accounting) or fair value as determined on an aggregate basis. Fair value is determined using available secondary market prices for loans with similar coupons, maturities, and credit quality.

Huntington recognizes the rights to service mortgage loans as separate assets, which are included in other assets in the consolidated balance sheets, only when purchased or when servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. The carrying value of loans sold or securitized is allocated between loans and servicing rights based on the relative fair values of each. Purchased mortgage servicing rights are initially recorded at cost. All servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and are included in other assets.

–  PREMISES AND EQUIPMENT — Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Buildings and building improvements are depreciated over an average of 30 to 40 years and 10 to 20 years, respectively. Land improvements and furniture and fixtures are depreciated over 10 years, while equipment is depreciated over a range of three to seven years. Leasehold improvements are amortized over the lesser of the asset life or term of the related leases. Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of an asset are capitalized and depreciated over the remaining useful life.

–  OPERATING LEASE ASSETS — Operating lease assets consist of automobiles leased to consumers and equipment leased to business customers. These assets are reported at cost, including net deferred origination fees or costs, less accumulated

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

depreciation. For automobile operating leases, net deferred origination fees or costs include the referral payments Huntington makes to automobile dealers, which are deferred and amortized on a straight-line basis over the life of the lease.

Lease payments are recorded as rental income, a component of operating lease income in non-interest income. Net deferred origination fees or costs are amortized over the life of the lease to operating lease income. Depreciation expense is recorded on a straight-line basis over the term of the lease. Leased assets are depreciated to the estimated residual value at the end of the lease term. Depreciation expense is included in operating lease expense in the non-interest expense section of the consolidated income statement. Impairment of residual values of operating leases is evaluated under Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under that Statement, when the future cash flows from the operating lease, including the expected realizable fair value of the automobile or equipment at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the lease and the proceeds from the disposition of the asset, including any insurance proceeds.

On a quarterly basis, Management evaluates the amount of residual value losses that it anticipates will result from the estimated fair value of a leased vehicle being less than the residual value inherent in the lease. Also as part of its quarterly analysis, Management evaluates automobile leases individually for impairment. Fair value includes estimated net proceeds from the sale of the leased vehicle plus expected residual value insurance proceeds and amounts expected to be collected from the lessee for excess mileage and other items that are billable under terms of the lease contract. When estimating the amount of expected insurance proceeds, Management takes into consideration policy caps that exist in one of its residual value insurance policies and whether it expects aggregate claims under such policies to exceed the cap. Residual value losses exceeding any insurance policy cap are reflected in higher depreciation expense over the remaining life of the affected automobile lease.

Credit losses, included in operating lease expense, occur when a lease is terminated early because the lessee cannot make the required lease payments. These credit-generated terminations result in Huntington taking possession of the automobile earlier than expected. When this occurs, the market value of the automobile may be less than Huntington’s book value, resulting in a loss upon sale. Rental income payments accrued, but not received, are written off when they reach 120 days past due and at that time, the asset is evaluated for impairment.

–  BANK OWNED LIFE INSURANCE — Huntington’s bank owned life insurance policies are carried at their cash surrender value. Huntington recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from death benefits.

–  DERIVATIVE FINANCIAL INSTRUMENTS — Derivative financial instruments, primarily interest rate swaps, are accounted for in accordance with Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This Statement requires every derivative instrument to be recorded in the consolidated balance sheet as either an asset or liability measured at its fair value and Huntington to formally document, designate, and assess the effectiveness of transactions for which hedge accounting is applied. Depending on the nature of the hedge and the extent to which it is effective, the changes in fair value of the derivative recorded through earnings will either be offset against the change in the fair value of the hedged item in earnings, or recorded in other comprehensive income and subsequently recognized in earnings in the period the hedged item affects earnings. The portion of a hedge that is ineffective and all changes in the fair value of derivatives not designated as hedges, referred to as trading instruments, are recognized immediately in earnings. Deferred gains or losses from derivatives that are terminated are amortized over the shorter of the original remaining term of the derivative or the remaining life of the underlying asset or liability. Trading instruments are carried at fair value with changes in fair value included in other non-interest income. Trading instruments are executed primarily with Huntington’s customers to fulfill their needs. Derivative instruments used for trading purposes include interest rate swaps, including callable swaps, interest rate caps and floors, and interest rate and foreign exchange futures, forwards, and options.

–  ADVERTISING COSTS — Advertising costs are expensed as incurred as a marketing expense, a component of non-interest expense.

–  INCOME TAXES — Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future book and tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment of such change in tax rates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

–  TREASURY STOCK — Acquisitions of treasury stock are recorded at cost. The reissuance of shares in treasury for acquisitions, stock option exercises, or for other corporate purposes, is recorded at weighted-average cost.

–  STOCK-BASED COMPENSATION — Huntington’s stock-based compensation plans are accounted for based on the intrinsic value method promulgated by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant.

The following pro forma disclosures for net income and earnings per diluted common share is presented as if Huntington had applied the fair value method of accounting of Statement No. 123, Accounting for Stock-Based Compensation, in measuring compensation costs for stock options. The fair values of the stock options granted are estimated using the Black-Scholes option-pricing model. This model assumes that the estimated fair value of the options is amortized over the options’ vesting periods and the compensation costs would be included in personnel costs in the consolidated income statement. The following table also includes the weighted-average assumptions that were used in the option-pricing model for options granted in each of the last three years:

		Year Ended December 31,
(in millions of dollars, except per share amounts)		2005			2004			2003
Assumptions
	Risk-free interest rate		4.07	%		3.78	%		4.45	%
	Expected dividend yield		3.34			3.20			3.11
	Expected volatility of Huntington’s common stock		26.3			30.9			33.8
	Expected option term (years)		6.0			6.0			6.0
Pro forma results
	Net income, as reported	$	412.1		$	398.9		$	372.4
	Less pro forma expense related to options granted		(11.9	)		(14.4	)		(10.9	)
Pro forma net income		$	400.2		$	384.5		$	361.5
Net income per common share:
	Basic, as reported	$	1.79		$	1.74		$	1.62
	Basic, pro forma		1.74			1.67			1.58
	Diluted, as reported		1.77			1.71			1.61
	Diluted, pro forma		1.71			1.64			1.56

–  SEGMENT RESULTS — Accounting policies for the lines of business are the same as those used in the preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses, and other financial elements to each line of business. Changes are made in these methodologies utilized for certain balance sheet and income statement allocations performed by Huntington’s management reporting system, as appropriate. In 2005, the Capital Markets Group was removed from the Treasury/Other segment and combined with the Private Financial Group to form the Private Financial and Capital Markets Group segment. Since the Capital Markets Group is now managed through the Private Financial Group, combining these two segments better reflects the management accountability and decision making structure. Prior periods reflect this change.

–  STATEMENT OF CASH FLOWS — Cash and cash equivalents are defined as “Cash and due from banks” and “Federal funds sold and securities purchased under resale agreements.”

2. NEW ACCOUNTING STANDARDS

–  FASB INTERPRETATION NO. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47) — In March 2005, the FASB issued FIN 47, which clarifies the term “conditional asset retirement obligation” as used in Statement No. 143, Accounting for Asset Retirement Obligations. FIN 47 refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The impact of adopting the provisions of FIN 47 in the fourth quarter of 2005 was not material.

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

–  FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) STATEMENT NO. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154) — In May 2005, the FASB issued Statement 154, which replaces APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.

–  STATEMENT NO. 123 (REVISED 2004), Share-Based Payment (STATEMENT NO. 123R) — Statement 123R was issued in December 2004, requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123R replaces Statement No. 123, Accounting for Stock-Based Compensation (Statement 123), and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB 25, as long as the footnotes to financial statements disclosed pro forma net income under the preferable fair-value-based method. Effective January 1, 2006, Huntington has adopted Statement 123R. The impact of adoption to Huntington’s results of operations is similar to the pro forma disclosures presented in Note 1. (See Note 1 for the current accounting policy on share-based payments and Note 17 for the share-based payment disclosures).

–  STAFF ACCOUNTING BULLETIN NO. 107, Share Based Payments (SAB 107) — On March 29, 2005, the SEC issued SAB 107 to provide public companies additional guidance in applying the provisions of Statement No. 123R. Among other things, SAB 107 describes the SEC staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of Statement 123R with certain existing SEC guidance. Huntington has adopted the provisions of SAB 107 in conjunction with the adoption of Statement 123R beginning January 1, 2006.

–  PROPOSED INTERPRETATION OF STATEMENT NO. 109, Accounting for Uncertain Tax Positions — In July 2005, the FASB issued an exposure draft of a proposed interpretation on accounting for uncertain tax positions under Statement No. 109, Accounting for Income Taxes. The exposure draft contains proposed guidance on the recognition and measurement of uncertain tax positions. If adopted as proposed, the Company would be required to recognize, in its financial statements, the best estimate of the impact of a tax position, only if that tax position is probable of being sustained on audit based solely on the technical merits of the position. The proposed effective date for the interpretation was originally scheduled for December 31, 2005, with a cumulative effect of a change in accounting principle to be recorded upon the initial adoption. In January 2006, FASB decided to make forthcoming rules on certain tax positions effective in 2007. FASB also moved to a view that such recognition should be changed from the tax position being “probable of being sustained on audit based solely on the technical merits of the position” to a less stringent benchmark of “more likely than not” that the position would be sustained on audit or final resolution through legal action or settlement. FASB expects to publish the planned rules on uncertain tax positions in March or April of 2006. Huntington is currently evaluating the impact this proposed interpretation will have on its consolidated financial statements.

–  PROPOSED FASB AMENDMENT TO STATEMENT NO. 140, Servicing Rights — In August 2005, the FASB issued an exposure draft, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. This exposure draft would amend Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and would require that all separately recognized servicing rights be initially measured at fair value, if practicable. For each class of separately recognized servicing assets and liabilities, this exposure draft would permit Huntington to choose either to report servicing assets and liabilities at fair value or at amortized cost. Under the fair value approach, servicing assets and liabilities will be recorded at fair value at each reporting date with changes in fair value recorded in earnings in the period in which the changes occur. Under the amortized cost method, servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are assessed for impairment based on fair value at each reporting date. The statement would be effective for fiscal years beginning after September 15, 2006, and allows early adoption as of the beginning of a fiscal year for which the entity has not previously issued interim financial statements.

109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

3. INVESTMENT SECURITIES

Investment securities at December 31 were as follows:

				Unrealized
(in thousands of dollars)		Amortized Cost		Gross Gains		Gross Losses			Fair Value
2005
U.S. Treasury		$	24,199	$	131	$	(655	)	$	23,675
Federal agencies
	Mortgage-backed securities		1,309,598		680		(31,256	)		1,279,022
	Other agencies		349,385		115		(13,034	)		336,466
Total Federal agencies			1,658,983		795		(44,290	)		1,615,488
Asset-backed securities			1,788,694		4,990		(4,904	)		1,788,780
Municipal securities			544,781		5,003		(4,934	)		544,850
Private label CMO			402,959		171		(9,561	)		393,569
Other securities			159,522		751		(115	)		160,158
Total investment securities		$	4,579,138	$	11,841	$	(64,459	)	$	4,526,520

				Unrealized
(in thousands of dollars)		Amortized Cost		Gross Gains		Gross Losses			Fair Value
2004
U.S. Treasury		$	24,987	$	362	$	(213	)	$	25,136
Federal agencies
	Mortgage-backed securities		985,846		177		(12,507	)		973,516
	Other agencies		986,954		1,193		(15,901	)		972,246
Total Federal agencies			1,972,800		1,370		(28,408	)		1,945,762
Asset-backed securities			1,198,296		2,690		(1,004	)		1,199,982
Municipal securities			410,614		7,404		(1,794	)		416,224
Private label CMO			462,394		866		(5,233	)		458,027
Other securities			189,513		4,962		(661	)		193,814
Total investment securities		$	4,258,604	$	17,654	$	(37,313	)	$	4,238,945

There were no securities classified as held to maturity at December 31, 2005. Included in investment securities at December 31, 2004, were $2.0 million of municipal securities classified as held to maturity. These securities were accounted for at their historical cost. In the first quarter of 2005, Huntington sold $1.5 million of the securities classified as held to maturity and transferred the remaining securities to available for sale. At the time of the transfer, a nominal unrealized gain on the transferred securities was recognized in other comprehensive income.

Other securities include Federal Home Loan Bank and Federal Reserve Bank stock, corporate debt and marketable equity securities.

Contractual maturities of investment securities as of December 31 were:

	2005				2004
(in thousands of dollars)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Under 1 year	$	1,765	$	1,765	$	8,597	$	8,653
1-5 years		394,254		382,549		610,189		606,140
6-10 years		199,670		196,154		584,619		575,399
Over 10 years		3,838,730		3,800,751		2,964,917		2,957,796
Non-marketable equity securities		89,661		89,661		84,756		84,756
Marketable equity securities		55,058		55,640		5,526		6,201
Total investment securities	$	4,579,138	$	4,526,520	$	4,258,604	$	4,238,945

110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

At December 31, 2005, the carrying value of investment securities pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and security repurchase agreements totaled $1.4 billion. There were no securities of a single issuer, which are not governmental or government-sponsored, that exceeded 10% of shareholders’ equity at December 31, 2005.

The following table provides the gross unrealized losses and fair value of temporarily impaired securities, aggregated by investment category and length of time the individual securities have been in a continuous loss position, at December 31, 2005.

		Less than 12 Months					Over 12 Months					Total
				Unrealized					Unrealized					Unrealized
(in thousands of dollars)		Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Treasury		$	—	$	—		$	19,857	$	(655	)	$	19,857	$	(655	)
Federal agencies
	Mortgage-backed securities		658,407		(13,536	)		431,877		(17,720	)		1,090,284		(31,256	)
	Other agencies		—		—			334,051		(13,034	)		334,051		(13,034	)
Total Federal agencies			658,407		(13,536	)		765,928		(30,754	)		1,424,335		(44,290	)
Asset-backed securities			725,215		(4,739	)		87,379		(165	)		812,594		(4,904	)
Municipal securities			214,634		(2,976	)		51,334		(1,958	)		265,968		(4,934	)
Private label CMO			42,501		(750	)		336,309		(8,811	)		378,810		(9,561	)
Other securities			3,219		(32	)		2,540		(83	)		5,759		(115	)
Total temporarily impaired securities		$	1,643,976	$	(22,033	)	$	1,263,347	$	(42,426	)	$	2,907,323	$	(64,459	)

As of December 31, 2005, Management has evaluated these investment securities with unrealized losses and all non-marketable securities for impairment. The unrealized losses were caused by interest rate increases. The contractual terms and/or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost. Huntington has the intent and ability to hold these investment securities until the fair value is recovered, which may be maturity, and therefore, does not consider them to be other-than-temporarily impaired at December 31, 2005.

In 2004, Management determined that $11.0 million of equity securities, with unrealized losses of $0.9 million were other-than-temporarily impaired. Consequently, Huntington recognized the unrealized losses in 2004 as non-interest income. There were no other-than-temporary impairments of any securities recognized in 2005 or 2003.

Gross gains from sales of securities of $8.5 million, $34.7 million, and $14.5 million, were realized in 2005, 2004, and 2003, respectively. Gross losses totaled $16.6 million in 2005, $19.0 million in 2004, and $9.2 million in 2003.

4. LOANS AND LEASES

At December 31, 2005, $2.4 billion of commercial and industrial loans were pledged to secure potential discount window borrowings from the Federal Reserve Bank. At this same date, $4.2 billion of real estate qualifying loans were pledged to secure advances from the Federal Home Loan Bank. Real estate qualifying loans are comprised of residential mortgage loans secured by first and second liens.

111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Huntington’s loan and lease portfolio includes lease financing receivables consisting of direct financing leases on equipment, which are included in commercial and industrial loans, and on automobiles. Net investment in lease financing receivables by category at December 31 were as follows:

		At December 31,
(in thousands of dollars)		2005			2004
Commercial and industrial
	Lease payments receivable	$	486,488		$	389,177
	Estimated residual value of leased assets		39,570			37,704
Gross investment in commercial lease financing receivables			526,058			426,881
Deferred origination fees and costs			3,125			1,980
Unearned income			(58,476	)		(39,414	)
Total net investment in commercial lease financing receivables		$	470,707		$	389,447
Consumer
	Lease payments receivable	$	1,209,088		$	1,453,909
	Estimated residual value of leased assets		1,296,303			1,258,160
Gross investment in consumer lease financing receivables			2,505,391			2,712,069
Deferred origination fees and costs			(565	)		(2,130	)
Unearned income			(215,811	)		(266,484	)
Total net investment in consumer lease financing receivables		$	2,289,015		$	2,443,455

The future lease rental payments due from customers on direct financing leases at December 31, 2005, totaled $1.2 billion and were as follows: $0.5 billion in 2006; $0.4 billion in 2007; $0.2 billion in 2008; $0.1 billion in 2009, and less than $0.1 billion thereafter. Included in the estimated residual value of leased consumer assets was a valuation reserve of $5.1 million and $4.2 million at December 31, 2005 and 2004, respectively, for expected residual value impairment not covered by residual value insurance.

RELATED PARTY TRANSACTIONS

Huntington has made loans to its officers, directors, and their associates. These loans were made in the ordinary course of business under normal credit terms, including interest rate and collateralization, and do not represent more than the normal risk of collection. These loans to related parties for the year ended December 31 are summarized as follows:

(in thousands of dollars)		2005
Balance, beginning of year		$	89,177
	Loans made		219,728
	Repayments		(231,814	)
	Changes due to status of executive officers and directors		(603	)
Balance, end of year		$	76,488

NON-PERFORMING ASSETS AND PAST DUE LOANS

At December 31, 2005 and 2004, loans in non-accrual status and loans past due 90 days or more and still accruing interest, were as follows:

	At December 31,
(in thousands of dollars)	2005		2004
Commercial and industrial	$	55,273	$	34,692
Commercial real estate		18,309		8,670
Residential mortgage		17,613		13,545
Home equity		10,720		7,055
Total non-performing loans		101,915		63,962
Other real estate, net		15,240		44,606
Total non-performing assets	$	117,155	$	108,568
Accruing loans past due 90 days or more	$	56,138	$	54,283

112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The amount of interest that would have been recorded under the original terms for total loans classified as non-accrual or renegotiated was $7.7 million for 2005, $3.3 million for 2004, and $6.3 million for 2003. Amounts actually collected and recorded as interest income for these loans totaled $1.9 million, $1.9 million, and $3.0 million for 2005, 2004, and 2003, respectively.

5. LOAN SALES AND SECURITIZATIONS

AUTOMOBILE LOANS

Huntington sold $0.4 billion, $1.5 billion and $2.1 billion of automobile loans in 2005, 2004 and 2003, respectively. Pre-tax gains from the sales of automobile loans totaled $1.2 million, $14.2 million and $40.0 million in 2005, 2004 and 2003, respectively.

During 2005, Huntington used the following assumptions to measure fair value of retained servicing rights at the time of the sale: estimated servicing income of 0.55%, requires adequate compensation for servicing of approximately 0.62%, receives other ancillary fees of approximately 0.33%, applies a discount rate of 10% and receives an estimated return on payments prior to remittance to investors. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely heavily on the predicted payoff assumption, and if actual payoff is quicker than expected, then future value would be impaired. Other impairment concerns would be changes to the other assumptions mentioned above.

Changes in the carrying value of automobile loan servicing rights for the three years ended December 31, 2005, and the fair value at the end of each period were as follows:

	Year Ended December 31,
(in thousands of dollars)	2005			2004			2003
Carrying value, beginning of year	$	20,286		$	17,662		$	12,676
New servicing assets		2,113			16,249			25,106
Amortization		(11,528	)		(13,625	)		(8,434	)
Impairment charges		(66	)		—			—
Adoption of FIN 46		—			—			(11,686	)
Carrying value, end of year	$	10,805		$	20,286		$	17,662
Fair value, end of year	$	11,658		$	21,361		$	18,501

Huntington has retained servicing responsibilities and receives annual servicing fees from 0.55% to 1.00% of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing assets, included in other non-interest income amounted to $12.5 million in 2005, $10.1 million in 2004, and $4.3 million in 2003. The unpaid principal balance of automobile loans serviced for third parties was $1.7 billion, $2.3 billion, and $1.8 billion at December 31, 2005, 2004, and 2003, respectively.

There were no automobile loan securitizations in 2005 or 2004. As a result of adopting FIN 46 (subsequently amended as FIN 46R) in the third quarter of 2003, one of the securitization trusts sponsored by Huntington was consolidated. The impact of this consolidation was to reduce the outstanding automobile loans serviced by $1.0 billion, reduce the retained interest asset by $142.3 million, and reduce the servicing asset by $11.7 million. In the second quarter of 2004, Huntington repurchased all the outstanding loans of an unconsolidated trust for $23.9 million, resulting in a $1.5 million pre-tax gain. There were no impairment charges related to Huntington’s retained interest in automobile loans during 2004 and 2003.

RESIDENTIAL MORTGAGE LOANS

There were no sales of residential mortgage loans held for investment in 2005 and 2003. During 2004, Huntington sold $199.8 million of residential mortgage loans held for investment, resulting in a net pre-tax gain of $0.5 million. Huntington also exchanged for federal agency mortgage-backed securities $15.1 million, $115.9 million and $354.2 million of residential mortgage loans in 2005, 2004 and 2003, respectively, and retained all of the resulting securities. Accordingly, these amounts were reclassified from loans to investment securities.

A mortgage servicing right (MSR) is established only when the loans are sold or when servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. The initial carrying value of the asset is established based on its relative fair value at the time of sale using assumptions that are consistent with assumptions used at the time to estimate the fair value of the total MSR portfolio. All servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value, and are included in other assets. From time to time, loans may be sold with recourse. This recourse may be for a limited period of time or for the life of the loan.

113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The unpaid principal balance of residential mortgage loans serviced for third parties was $7.3 billion, $6.9 billion, and $6.4 billion at December 31, 2005, 2004, and 2003, respectively.

A summary of loans serviced at December 31, 2005 and for the year ended, were as follows:

		Year Ended
(in millions of dollars)	At December 31, 2005	December 31, 2005
	Principal Balance	Average Balance
Loans serviced for others	$ 7,276		$ 7,013
Loans held in portfolio and held for sale	4,306		4,227
Loans serviced	$11,582		$11,240

Changes in the carrying value of mortgage servicing rights and the associated valuation allowance for the three years ended December 31, 2005, and the fair value at the end of each period were as follows:

	Year Ended December 31,
(in thousands of dollars)	2005			2004			2003
Balance, beginning of year	$	77,107		$	71,087		$	29,271
New servicing assets		28,260			23,738			52,896
Amortization		(18,359	)		(19,019	)		(25,966	)
Impairment recovery		4,371			1,378			14,957
Sales		(120	)		(77	)		(71	)
Balance, end of year	$	91,259		$	77,107		$	71,087
Fair value, end of year	$	109,560		$	84,084		$	74,684

Servicing rights are evaluated quarterly for impairment based on the fair value of those rights, using a disaggregated approach. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. Seven risk tranches are used in the evaluation of mortgage servicing rights for impairment: three tranches for servicing rights on 30-year fixed-rate mortgage loans (based on interest rate bands of below 6.00%; 6.00% up to 6.99%; and 7.00% and above), three tranches for servicing rights on 15-year fixed-rate mortgage loans (based on interest rate bands of below 5.50%; 5.50% up to 6.49%; and 6.50% and above), and one tranche encompassing balloon and adjustable rate mortgages. Huntington began using the expanded interest rate bands in the fourth quarter of 2003. Temporary impairment is recognized in a valuation allowance against the mortgage servicing rights. Huntington also analyzes its mortgage servicing rights periodically for other-than-temporary impairment. Other-than-temporary impairment is recognized as a direct reduction of the carrying value of the mortgage servicing right and cannot be recovered. No other-than-temporary impairment was recognized in the three years ended December 31, 2005. Servicing rights are amortized over the period of, and in proportion to, the estimated future net servicing revenue. Amortization is recorded as a reduction of mortgage banking income, which is reflected in non-interest income in Huntington’s consolidated income statement.

Changes in the impairment allowance for mortgage servicing rights for the three years ended December 31, 2005, were as follows:

	Year Ending December 31,
(in thousands of dollars)	2005			2004			2003
Balance, beginning of year	$	(4,775	)	$	(6,153	)	$	(21,110	)
Impairment charges		(15,814	)		(18,110	)		(10,713	)
Impairment recovery		20,185			19,488			25,670
Balance, end of year	$	(404	)	$	(4,775	)	$	(6,153	)

114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

At December 31, 2005, the fair value, assumptions and the sensitivity of the current fair value of Huntington’s mortgage servicing rights to immediate 10% and 20% adverse changes in those assumptions were:

				Decline in fair
				value due to
				10%			20%
				adverse			adverse
(in thousands of dollars)	Actual			change			change
Constant pre-payment rate		12.76	%	$	(4,900	)	$	(9,500	)
Discount rate		9.42			(3,900	)		(7,600	)

Caution should be used when reading these sensitivities as a change in an individual assumption and its impact on fair value is shown independent of changes in other assumptions. Economic factors are dynamic and may counteract or magnify sensitivities.

6. ALLOWANCES FOR CREDIT LOSSES (ACL)

The Company maintains two reserves, both of which are available to absorb possible credit losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). When summed together, these reserves constitute the total allowances for credit losses (ACL). During 2005, the economic reserve associated with unfunded loan commitments was transferred from the ALLL to the AULC. This transfer had no impact on net income. A summary of the transactions in the allowances for credit losses and details regarding impaired loans and leases follows for the three years ended December 31:

		Year Ended December 31,
(in thousands of dollars)		2005			2004			2003
Allowance for loan and leases losses, beginning of year (ALLL)		$	271,211		$	299,732		$	300,503
Loan and lease losses			(115,848	)		(126,115	)		(201,534	)
Recoveries of loans previously charged off			35,791			47,580			39,725
Net loan and lease losses			(80,057	)		(78,535	)		(161,809	)
Provision for loan and lease losses			83,782			57,397			164,616
Economic reserve transfer			(6,253	)		—			—
Allowance for assets sold and securitized(1)			(336	)		(7,383	)		(3,578	)
Allowance for loan and lease losses, end of year		$	268,347		$	271,211		$	299,732
Allowance for unfunded loan commitments and letters of credit, beginning of year (AULC)		$	33,187		$	35,522		$	36,145
Provision for unfunded loan commitments and letters of credit losses			(2,483	)		(2,335	)		(623	)
Economic reserve transfer			6,253			—			—
Allowance for unfunded loan commitments and letters of credit, end of year		$	36,957		$	33,187		$	35,522
Total allowances for credit losses (ACL)		$	305,304		$	304,398		$	335,254
Recorded balance of impaired loans, at end of year(2) :
	With specific reserves assigned to the loan and lease balances	$	41,525		$	51,875		$	54,853
	With no specific reserves assigned to the loan and lease balances		14,032			29,296			—
Total		$	55,557		$	81,171		$	54,853
Average balance of impaired loans for the year(2)		$	29,441		$	54,445		$	33,970
Allowance for loan and lease losses on impaired loans(2)			14,526			23,447			26,249

(1)

In conjunction with the automobile loan sales and securitizations in 2005, 2004, and 2003, an allowance for loan and lease losses attributable to the associated loans sold was included as a component of the loan’s carrying value upon their sale.

(2)

Includes impaired commercial and industrial loans and commercial real estate loans with outstanding balances greater than $500,000. A loan is impaired when it is probable that Huntington will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are included in non-performing assets. The amount of interest recognized in 2005 and 2004 on impaired loans while they were considered impaired was less than $0.1 million and $1.1 million, respectively. There was no interest recognized in 2003 on impaired loans while they were considered impaired.

115

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

There is a potential for loan products to contain contractual terms that give rise to a concentration of credit risk that may increase a lending institution’s exposure to risk of nonpayment or realization. Examples of these contractual terms include loans that permit negative amortization, a loan-to-value of greater than 100%, and option adjustable-rate mortgages. Huntington does not offer mortgage loan products that contain these terms. Huntington does offer a home equity loan product that is interest only with an introductory rate that is below the market interest rate for the initial period of the loan term and increases when that period ends. Home equity loans totaled $4.6 billion, or 19%, of total loans at December 31, 2005 and 2004. From a credit risk perspective, 87% of the home equity loans had a loan to value ratio of less than 90% at December 31, 2005. The charge-off policy for home equity loans is described in Note 1.

7. OPERATING LEASE ASSETS

For periods before May 2002, Huntington purchased vehicles, primarily automobiles, for lease to consumers under operating lease arrangements. Starting in 2004, Huntington also began purchasing equipment for lease to customers under similar operating lease arrangements. These operating lease arrangements required the lessee to make a fixed monthly rental payment over a specified lease term, typically from 36 to 66 months. The vehicles and equipment, net of accumulated depreciation, are recorded as operating lease assets in the consolidated balance sheet. Rental income is earned by Huntington on the operating lease assets and reported as non-interest income. The assets are depreciated over the term of the lease to the estimated fair value at the end of the lease. The depreciation of these assets is reported as a component of non-interest expense. At the end of the lease, the asset is either purchased by the lessee or returned to Huntington. The following is a summary of operating lease assets at December 31:

	At December 31,
(in thousands of dollars)	2005			2004
Cost of operating lease assets (including residual values of $159,070 and $406,965, respectively)	$	506,445		$	1,173,616
Deferred origination fees and costs		(272	)		(1,138	)
Accumulated depreciation		(277,096	)		(585,168	)
Total	$	229,077		$	587,310

The future lease rental payments due from customers on operating lease assets at December 31, 2005, totaled $101.5 million and are due as follows: $63.8 million in 2006; $17.6 million in 2007; $7.4 million in 2008; $5.6 million in 2009, $3.3 million in 2010, and $3.4 million thereafter. Depreciation expense for each of the years ended December 31, 2005, 2004, and 2003 was $99.3 million, $216.4 million, and $350.6 million, respectively.

8. PREMISES AND EQUIPMENT

At December 31, premises and equipment stated at cost were comprised of the following:

		At December 31,
(in thousands of dollars)		2005			2004
	Land and land improvements	$	67,787		$	63,406
	Buildings		246,745			237,071
	Leasehold improvements		149,466			142,764
	Equipment		477,192			467,674
Total premises and equipment			941,190			910,915
Less accumulated depreciation and amortization			(580,513	)		(555,800	)
Net premises and equipment		$	360,677		$	355,115

Depreciation and amortization charged to expense and rental income credited to occupancy expense for the three years ended December 31, 2005 were:

	Year Ended December 31,
(in thousands of dollars)	2005		2004		2003
Total depreciation and amortization of premises and equipment	$	50,355	$	50,097	$	46,746
Rental income credited to occupancy expense		11,010		13,081		14,837

116

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

9. GOODWILL AND OTHER INTANGIBLE ASSETS

At December 31, goodwill and other intangible assets, net of accumulated amortization, were comprised of:

	At December 31,
(in thousands of dollars)	2005		2004
Goodwill	$	212,530	$	210,155
Other intangibles		4,956		5,652
Balance, end of period	$	217,486	$	215,807

At December 31, 2005, none of Huntington’s goodwill is deductible for tax purposes. Goodwill and other intangible assets, net of accumulated amortization, and related activity, by segment, for the years ended December 31, 2005 and 2004, were as follows:

	Regional		Dealer					Treasury/			Huntington
(in thousands of dollars)	Banking		Sales		PFCMG			Other			Consolidated
Balance, January 1, 2004	$	197,593		—	$	12,947		$	6,469		$	217,009
Amortization		—		—		—			(817	)		(817	)
Adjustments		—		—		(385	)		—			(385	)
Balance, December 31, 2004		197,593		—		12,562			5,652			215,807
Additions		2,378		—		130			—			2,508
Amortization		—		—		(13	)		(816	)		(829	)
Balance, December 31, 2005	$	199,971	$	—	$	12,679		$	4,836		$	217,486

During 2005 Huntington purchased certain trust relationships for $0.1 million. Also included in 2005 is $2.4 million primarily relating to the finalization of the settlement of a purchase price contingency of the LeaseNet acquisition in 2002.

The $0.4 million adjustment in 2004 relates to goodwill recorded as part of the Haberer Registered Investment Advisor, Inc. acquisition in 2002. No impairment of goodwill was required in accordance with Statement No. 142 in 2005, 2004 or 2003. For the years 2006 through 2010, amortization expense associated with the other intangibles is expected to be $0.8 million each year.

10. SHORT-TERM BORROWINGS

At December 31, short-term borrowings were comprised of the following:

	At December 31,
(in thousands of dollars)	2005		2004
Federal funds purchased	$	931,097	$	30,620
Securities sold under agreements to repurchase		888,985		1,093,247
Commercial paper		2,480		1,928
Other borrowings		66,698		81,438
Total short-term borrowings	$	1,889,260	$	1,207,233

Other borrowings consist of borrowings from the U.S. Treasury, funds held as collateral from swap counterparties, and other notes payable.

Information concerning securities sold under agreements to repurchase for the years ended December 31 is summarized as follows:

	Year Ended December 31,
(in thousands of dollars)	2005			2004
Average balance during the year	$	1,125,159		$	1,410,174
Average interest rate during the year		2.17	%		0.93	%
Maximum month-end balance during the year	$	1,356,733		$	1,500,267

Commercial paper is issued by Huntington Bancshares Financial Corporation, a non-bank subsidiary, with principal and interest guaranteed by the parent company.

117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

11. FEDERAL HOME LOAN BANK ADVANCES

Huntington’s long-term advances from the Federal Home Loan Bank had weighted average interest rates of 4.37% and 2.32% at December 31, 2005 and 2004, respectively. These advances, which predominantly had variable interest rates, were collateralized by qualifying real estate loans. As of December 31, 2005 and 2004, Huntington’s maximum borrowing capacity was $1.7 billion and $1.5 billion, respectively. The advances outstanding at December 31, 2005 of $1.2 billion mature as follows: $0.2 billion in 2006; $0.6 billion in 2007; $0.4 billion in 2008; and less than $0.1 billion thereafter. The terms of advances include various restrictive covenants including limitations on the acquisition of additional debt in excess of specified levels, dividend payments, and the disposition of subsidiaries. As of December 31, 2005, Huntington was in compliance with all such covenants.

12. SUBORDINATED NOTES

At December 31, Huntington’s subordinated notes consisted of the following:

		At December 31,
(in thousands of dollars)		2005		2004
Parent company:
	4.94% junior subordinated debentures due 2027(1)	$	206,186	$	206,186
	5.12% junior subordinated debentures due 2028(2)		103,093		103,093
The Huntington National Bank:
	8.00% subordinated notes due 2010		158,620		160,692
	4.90% subordinated notes due 2014		193,361		199,136
	6.60% subordinated notes due 2018		214,277		219,505
	5.375% subordinated notes due 2019		147,834		151,181
Total subordinated notes		$	1,023,371	$	1,039,793

(1)	Variable effective rate at December 31, 2005, based on three month LIBOR + 0.70.
(2)	Variable effective rate at December 31, 2005, based on three month LIBOR + 0.625.

The weighted-average interest rate for subordinated notes was 5.84% and 5.16% at December 31, 2005 and 2004, respectively.

Amounts above are reported net of unamortized discounts and include values related to hedging with derivative financial instruments. The derivative instruments, principally interest rate swaps, are used to match the funding rates on certain assets by hedging the cash flow variability associated with certain variable-rate debt by converting the debt to fixed-rate and hedging the fair values of certain fixed-rate debt by converting the debt to a variable rate. See Note 21 for more information regarding such financial instruments. All principal is due upon maturity of the note as described in the table above.

13. OTHER LONG-TERM DEBT

At December 31, Huntington’s other long-term debt consisted of the following:

		At December 31,
(in thousands of dollars)		2005		2004
	The Huntington National Bank	$	1,576,033	$	3,006,004
	Parent company (matured in December 2005)		—		100,000
	4.69% Securitization trust note payable due 2012(1)		792,386		860,000
	7.88% Class C preferred securities of REIT subsidiary, no maturity		50,000		50,000
Total other long-term debt		$	2,418,419	$	4,016,004

(1)  Variable effective rate at December 31, 2005, based on one month LIBOR + 0.33.

Amounts above include values related to hedging with derivative financial instruments. The derivative instruments, principally interest rate swaps, are used to match the funding rates on certain assets by hedging the cash flow variability associated with certain variable-rate debt by converting the debt to fixed-rate and hedging the fair values of certain fixed-rate debt by converting the debt to a variable rate. See Note 21 for more information regarding such financial instruments.

The weighted-average interest rate for other long-term debt was 4.34% and 2.86% at December 31, 2005 and 2004, respectively. At December 31, 2005, Huntington’s other long-term debt included $50 million of secured borrowings, which had a variable rate of 4.13% based, in part, on three-month LIBOR. The secured borrowings matured in January 2006.

The securitization trust note payable is collateralized by $855 million in automobile loans held in the automobile trust. The terms of the other long-term debt obligations contain various restrictive covenants including limitations on the acquisition of additional

118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

debt in excess of specified levels, dividend payments, and the disposition of subsidiaries. As of December 31, 2005, Huntington was in compliance with all such covenants.

Other long-term debt maturities for the next five years are as follows: $0.8 billion in 2006; $0.1 billion in 2007; $0.2 billion in 2008; $0.2 billion in 2009; $0.3 billion in 2010; and $0.8 billion in 2011 and thereafter. These maturities are based upon the par values of long-term debt.

14. OTHER COMPREHENSIVE INCOME

The components of Huntington’s other comprehensive income in each of the three years ended December 31 were as follows:

		Year Ended December 31,
(in thousands of dollars)		2005			2004			2003
Unrealized losses on investment securities arising during the year:
	Unrealized net losses	$	(41,014	)	$	(18,555	)	$	(67,520	)
	Related tax benefit		14,445			6,689			23,511
Net			(26,569	)		(11,866	)		(44,009	)
Less: Reclassification of net realized losses (gains) from sales of investment securities during the year:
	Realized net losses (gains)		8,055			(15,763	)		(5,258	)
	Related tax (benefit) expense		(2,819	)		5,517			1,840
Net			5,236			(10,246	)		(3,418	)
Total unrealized losses on investment securities arising during the year, net of reclassification of net realized losses (gains)			(21,333	)		(22,112	)		(47,427	)
Unrealized gains (losses) on cash flow hedging derivatives arising during the year:
	Unrealized net gains (losses)		16,852			14,914			(17,048	)
	Related tax (expense) benefit		(5,898	)		(5,220	)		5,967
Net			10,954			9,694			(11,081	)
Minimum pension liability adjustment:
	Unrealized net loss		(1,248	)		(1,789	)		(1,714	)
	Related tax benefit		437			626			600
Net			(811	)		(1,163	)		(1,114	)
Total other comprehensive loss		$	(11,190	)	$	(13,581	)	$	(59,622	)

Activity in accumulated other comprehensive income for the three years ended December 31, 2005 was as follows:

				Unrealized gains
	Unrealized gains			and losses on			Minimum
	and losses on			cash flow hedging			pension
(in thousands of dollars)	investment securities			derivatives			liability			Total
Balance, January 1, 2003	$	56,856		$	5,639		$	(195	)	$	62,300
Current period change		(47,427	)		(11,081	)		(1,114	)		(59,622	)
Balance, December 31, 2003		9,429			(5,442	)		(1,309	)		2,678
Current period change		(22,112	)		9,694			(1,163	)		(13,581	)
Balance, December 31, 2004		(12,683	)		4,252			(2,472	)		(10,903	)
Current period change		(21,333	)		10,954			(811	)		(11,190	)
Balance, December 31, 2005	$	(34,016	)	$	15,206		$	(3,283	)	$	(22,093	)

119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

15. SHAREHOLDERS’ EQUITY

Effective April 27, 2004, the board of directors authorized a new share repurchase program (the 2004 Repurchase Program) which cancelled the prior 2003 share repurchase program and authorized Management to repurchase not more than 7.5 million shares of Huntington common stock. On June 9, 2005, Huntington reactivated its share repurchase program upon settlement of the SEC formal investigation.

On October 18, 2005, the Company announced that the board of directors authorized a new program for the repurchase of up to 15 million shares of our common stock (the 2005 Repurchase Program). The 2005 Repurchase Program does not have an expiration date. The 2004 Repurchase Program, with 3.1 million shares remaining, was cancelled and replaced by the 2005 Repurchase Program. The Company expects to repurchase the shares from time to time in the open market or through privately negotiated transactions, depending on market conditions.

Listed below is the share repurchase activity for the year ended December 31, 2005:

	Total		Average
	Number		Price
	of Shares		Paid Per
Repurchase Programs	Purchased		Share
The 2004 Repurchase Program		4,415,700		$24.58
The 2005 Repurchase Program		5,175,000		23.76
Total Shares Repurchased in 2005		9,590,700		$24.13

16. EARNINGS PER SHARE

Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for dilutive stock options. The calculation of basic and diluted earnings per share for each of the three years ended December 31 was as follows:

			Year ended December 31,
(in thousands, except per share amounts)			2005		2004		2003
Income before cumulative effect of accounting change			$	412,091	$	398,925	$	385,693
Cumulative effect of change in accounting principle, net of tax				—		—		(13,330	)
Net income			$	412,091	$	398,925	$	372,363
Average common shares outstanding				230,142		229,913		229,401
Dilutive potential common shares				3,333		3,943		2,181
Diluted average common shares outstanding				233,475		233,856		231,582
Earnings Per Share
	Basic
		Income before cumulative effect of accounting change	$	1.79	$	1.74	$	1.68
		Net income		1.79		1.74		1.62
	Diluted
		Income before cumulative effect of accounting change		1.77		1.71		1.67
		Net income		1.77		1.71		1.61

The average market price of Huntington’s common stock for the period was used in determining the dilutive effect of outstanding stock options. Dilutive potential common shares include stock options and options held in deferred compensation plans. Dilutive potential common shares are computed based on the number of shares subject to options that have an exercise price less than the average market price of Huntington’s common stock for the period.

Approximately 5.7 million, 2.6 million, and 2.8 million options to purchase shares of common stock outstanding at the end of 2005, 2004, and 2003, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive. The weighted average exercise price for these options was $25.68 per share, $26.96 per share, and $26.74 per share at the end of the same respective periods.

120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

On January 7, 2005, Huntington released from escrow 86,118 shares of Huntington common stock, which were previously issued in September 2002, to former shareholders of LeaseNet, Inc. A total of 373,896 common shares, previously held in escrow, was returned to Huntington. All shares in escrow had been accounted for as treasury stock.

17. STOCK-BASED COMPENSATION

Huntington sponsors nonqualified and incentive stock option plans. These plans provide for the granting of stock options to officers, directors and other employees at the market price on the date of the grant. Huntington’s board of directors has approved all of the plans. Shareholders have approved each of the plans, except for the broad-based Employee Stock Incentive Plan. Of the 26.5 million options to purchase shares of common stock authorized for issuance under the plans at December 31, 2005, 21.0 million are outstanding and 5.5 million were available for future grants. Options granted since 1997 vest ratably over three years or when other conditions are met while those granted in 1994 through 1997 vested ratably over four years. Options granted prior to May 2004 have a maximum term of ten years. All options granted beginning in May 2004 have a maximum term of seven years.

The fair value of the options granted was estimated at the date of grant using a Black-Scholes option-pricing model. Huntington’s stock option activity and related information for each of the recent three years ended December 31 was as follows:

	2005				2004		2003
				Weighted-		Weighted-				Weighted-
				Average		Average				Average
				Exercise		Exercise				Exercise
(in thousands, except per share amounts)	Options			Price	Options	Price	Options			Price
Outstanding at beginning of year		20,017		$20.25	19,997	$19.40		18,024		$18.93
Granted		3,645		24.32	3,200	23.05		3,659		20.38
Exercised		(1,842	)	17.89	(2,478)	17.05		(788	)	14.40
Forfeited/expired		(816	)	21.70	(702)	20.02		(898	)	19.32
Outstanding at end of year		21,004		$21.11	20,017	$20.25		19,997		$19.40
Exercisable at end of year		13,048		$20.13	11,984	$19.68		9,649		$19.60
Weighted-average fair value per share of options granted during the year				$ 5.28		$ 5.78				$ 5.64

Additional information regarding options outstanding as of December 31, 2005, was as follows:

	Options Outstanding			Exercisable Options
		Weighted-
		Average	Weighted-			Weighted-
		Remaining	Average			Average
		Contractual	Exercise			Exercise
(in thousands, except per share amounts)	Shares	Life (Years)	Price	Shares		Price
Range of Exercise Prices
$11.09 to $15.00	968	3.8	$14.84		968	$14.84
$15.01 to $20.00	8,017	5.5	18.14		6,540	17.73
$20.01 to $25.00	9,731	6.4	22.74		3,270	21.55
$25.01 to $28.35	2,288	3.1	27.22		2,270	27.24
Total	21,004	5.6	$21.11		13,048	$20.13

On August 27, 2002, common stock options were granted, with certain specified exceptions, to full- and part-time employees under the Huntington Bancshares Incorporated Employee Stock Incentive Plan (the Incentive Plan). Under the terms of the Incentive Plan, these options are to vest on the earlier of August 27, 2007, or at such time as the closing price for Huntington’s common stock for five consecutive trading days reached or exceeded $27.00. As of December 31, 2005, 1.5 million shares under option remain unvested.

121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

18. INCOME TAXES

The following is a summary of the provision for income taxes:

		At December 31,
(in thousands of dollars)		2005			2004		2003
Current tax provision
	Federal	$	163,383		$	12,779	$	138,036
	State		210			—		—
Total current tax provision			163,593			12,779		138,036
Deferred tax (benefit) provision
	Federal		(32,681	)		140,962		258
	State		571			—		—
Total deferred tax (benefit) provision			(32,110	)		140,962		258
Provision for income taxes		$	131,483		$	153,741	$	138,294

The following is a reconcilement of provision for income taxes to the amount computed at the statutory rate of 35%:

		2005						2004						2003
(in thousands of dollars)		Amount			Rate			Amount			Rate			Amount			Rate
Provision for income taxes computed at the statutory rate		$	190,251			35.0	%	$	193,433			35.0	%	$	183,396			35.0	%
Increases (decreases):
	Tax-exempt interest income		(8,741	)		(1.6	)		(7,640	)		(1.4	)		(6,381	)		(1.2	)
	Tax-exempt bank owned life insurance income		(14,257	)		(2.6	)		(14,804	)		(2.7	)		(15,060	)		(2.9	)
	Asset securitization activities		(6,651	)		(1.2	)		(6,278	)		(1.1	)		(5,211	)		(1.0	)
	Federal tax loss carryback		(28,705	)		(5.3	)		—			—			—			—
	General business credits		(6,878	)		(1.3	)		(7,768	)		(1.4	)		(11,176	)		(2.1	)
	Repatriation of foreign earnings		5,741			1.1			—			—			—			—
	Other, net		723			0.1			(3,202	)		(0.6	)		(7,274	)		(1.4	)
Provision for income taxes		$	131,483			24.2	%	$	153,741			27.8	%	$	138,294			26.4	%

The significant components of deferred assets and liabilities at December 31, were as follows:

		At December 31,
(in thousands of dollars)		2005			2004
Deferred tax assets:
	Allowance for credit losses	$	123,934		$	122,926
	Net operating loss & other carryforwards		54,457			22,936
	Fair value adjustments		14,082			6,791
	Other		74,020			95,527
Total deferred tax assets before valuation allowance			266,493			248,180
Valuation allowance			(40,955	)		—
Net deferred tax assets			225,538			248,180
Deferred tax liabilities:
	Lease financing		830,303			861,273
	Pension and other employee benefits		41,409			31,822
	Mortgage servicing rights		26,375			32,947
	Other		71,106			105,766
Total deferred tax liability			969,193			1,031,808
Net deferred tax liability		$	743,655		$	783,628

122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

At December 31, 2005, Huntington’s deferred tax asset related to net operating loss and other credit carry-forwards was $54.5 million. This was comprised of a charitable contribution carry-forward of $4.4 million (expires in 2009) and a net operating loss and other carry-forwards of $9.1 million for U.S. federal tax purposes, which will begin expiring in 2023, and a capital loss carry-forward of $41.0 million which will expire in 2010. A valuation allowance in the amount of $41.0 million has been established for the capital loss carry-forward. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In Management’s opinion the results of future operations will generate sufficient taxable income to realize the net operating loss and charitable contribution carry-forwards. Consequently, Management has determined that a valuation allowance for deferred tax assets related to these carry-forwards was not required as of December 31, 2005 or 2004.

19. BENEFIT PLANS

Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory defined benefit pension plan covering substantially all employees. The Plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code.

In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain health care and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement health-care benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage.

The following table shows the weighted-average assumptions used to determine the benefit obligation at December 31, 2005 and 2004, and the net periodic benefit cost for the years then ended. Huntington selected September 30, 2005 as the measurement date for all calculations and contracted an actuary to provide measurement services.

								Post-Retirement
		Pension Benefits						Benefits
		2005			2004			2005			2004
Weighted-average assumptions used to determine benefit obligations at December 31
	Discount rate		5.43	%		5.81	%		5.43	%		5.81	%
	Rate of compensation increase		5.00			5.00			N/A			N/A
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31
	Discount rate		5.81	%		6.00	%		5.81	%		6.00	%
	Expected return on plan assets		7.00			7.00			N/A			N/A
	Rate of compensation increase		5.00			5.00			N/A			N/A

N/ A, Not Applicable

The expected long-term rate of return on plan assets is an assumption reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return is established at the beginning of the plan year based upon historical returns and projected returns on the underlying mix of invested assets. The long-term rate of return assumption to determine the net periodic benefit cost will be 8.00% for the year ending December 31, 2006. The rate was raised one percentage point due to favorable historical and expected future results.

In 2005, Huntington lowered its assumptions for the discount rate from 5.81% to 5.43%. The 5.43% assumed discount rate was based upon the Moody’s daily long-term corporate Aa bond yield as of the Plan’s measurement date. The impact of lowering this assumption will increase Huntington’s future pension expense.

The investment objective of the Plan is to maximize the return on Plan assets over a long time horizon, while meeting the Plan obligations. At September 30, 2005, Plan assets were invested 71.5% in equity investments and 28.5% in bonds, with an average duration of 3.4 years on bond investments. The estimated life of benefit obligations was 12 years. Management believes that this mix is appropriate for the current economic environment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The following table reconciles the beginning and ending balances of the benefit obligation of the Plan and the post-retirement benefit plan with the amounts recognized in the consolidated balance sheets at December 31:

								Post-Retirement
		Pension Benefits						Benefits
(in thousands of dollars)		2005			2004			2005			2004
Projected benefit obligation at beginning of measurement year (September 30)		$	336,007		$	299,028		$	55,504		$	55,490
Changes due to:
	Service cost		13,936			11,819			1,377			1,302
	Interest cost		19,016			17,482			2,903			3,209
	Benefits paid		(6,897	)		(6,900	)		(3,738	)		(2,986	)
	Settlements		(9,375	)		(8,977	)		—			—
	Actuarial assumptions and gains and losses		65,404			23,555			(12,430	)		(1,511	)
Total changes			82,084			36,979			(11,888	)		14
Projected benefit obligation at end of measurement year (September 30)		$	418,091		$	336,007		$	43,616		$	55,504

Changes to certain actuarial assumptions, including a lower discount rate, a decrease in the expected retirement age and the use of an updated mortality table increased the pension benefit obligation at September 30, 2005 by $65.4 million.

The following table reconciles the beginning and ending balances of the fair value of Plan assets with the amounts recognized in the consolidated balance sheets at the September 30 measurement date:

		Pension Benefits
(in thousands of dollars)		2005			2004
Fair value of plan assets at beginning of measurement year (September 30)		$	353,222		$	288,569
Changes due to:
	Actual return on plan assets		40,798			35,962
	Employer contributions		63,600			44,667
	Settlements		(9,936	)		(9,076	)
	Benefits paid		(6,897	)		(6,900	)
Total changes			87,565			64,653
Fair value of plan assets at end of measurement year (September 30)		$	440,787		$	353,222

Huntington’s accumulated benefit obligation under the Plan was $372 million and $294 million at September 30, 2005 and 2004, respectively. In both years, the fair value of Huntington’s plan assets exceeded its accumulated benefit obligation.

The following table presents the funded status of the Plan and the post-retirement benefit plan with the amounts recognized in the consolidated balance sheets at December 31:

						Post-Retirement
		Pension Benefits				Benefits
(in thousands of dollars)		2005		2004		2005			2004
	Projected benefit obligation less (greater) than plan assets	$	22,696	$	17,215	$	(43,616	)	$	(55,504	)
	Unrecognized net actuarial loss (gain)		153,308		116,744		(11,586	)		718
	Unrecognized prior service cost		1,788		1,789		3,476			3,856
	Unrecognized transition liability, net of amortization		6		—		7,728			8,831
Prepaid (accrued) benefit costs, at measurement date			177,798		135,748		(43,998	)		(42,099	)
Contribution made after measurement date			—		—		1,018			766
Prepaid (accrued) benefit costs		$	177,798	$	135,748	$	(42,980	)	$	(41,333	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The following table shows the components of net periodic benefit cost recognized in the three years ended December 31, 2005:

	Pension Benefits									Post-Retirement Benefits
(in thousands of dollars)	2005			2004			2003			2005			2004		2003
Service cost	$	14,186		$	12,159		$	9,817		$	1,378		$	1,302	$	1,121
Interest cost		19,016			17,482			16,647			2,903			3,209		3,479
Expected return on plan assets		(25,979	)		(21,530	)		(25,138	)		—			—		—
Amortization of transition asset		(4	)		1			(251	)		1,104			1,104		1,104
Amortization of prior service cost		1			1			—			379			583		605
Amortization of gain		—			—			—			(126	)		—		—
Settlements		3,642			3,151			4,354			—			—		—
Recognized net actuarial loss		10,689			7,936			1,774			—			—		—
Benefit cost	$	21,551		$	19,200		$	7,203		$	5,638		$	6,198	$	6,309

Service costs presented in the above table included $0.3 million of plan expenses that were recognized in each of the three years ended December 31, 2005. It is Huntington’s policy to recognize settlement gains and losses as incurred. Management expects net periodic pension cost to approximate $23.9 million and net periodic post-retirement benefits cost to approximate $4.3 million for 2006.

In December 2003, a law was enacted that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor post-retirement benefit plans providing prescription drug coverage. Huntington has registered for the Medicare subsidy and a $15.5 million reduction in the post-retirement obligation is being recognized over a 10-year period beginning October 1, 2005.

At September 30, 2005 and 2004, The Huntington National Bank, as trustee, held all Plan assets. The Plan assets consisted of investments in a variety of Huntington mutual funds and Huntington common stock as follows:

	2005					2004
(in thousands of dollars)	Balance		%			Balance		%
Cash	$	—		—	%	$	300		—	%
Huntington funds — money market		164		—			500		—
Huntington funds — equity funds		300,080		68			240,456		68
Huntington funds — fixed income funds		125,971		29			95,837		27
Huntington common stock		14,572		3			16,129		5
Fair value of plan assets (September 30)	$	440,787		100	%	$	353,222		100	%

The number of shares of Huntington common stock held by the Plan was 642,364 at December 31, 2005 and 2004. The Plan has acquired and held Huntington common stock in compliance at all times with Section 407 of the Employee Retirement Income Security Act of 1978.

Dividends and interest received by the Plan during 2005 and 2004 were $18.9 million and $11.0 million, respectively.

At December 31, 2005, the following table shows when benefit payments, which include expected future service, as appropriate, were expected to be paid:

	Pension		Post-Retirement
(in thousands of dollars)	Benefits		Benefits
2006	$	19,204	$ 4,088
2007		21,704	4,211
2008		23,763	4,295
2009		25,374	4,387
2010		27,593	4,500
2011 through 2015		162,219	23,802

Although not legally required, Huntington made a discretionary contribution to the Plan of $63.6 million in April 2005. There is no expected minimum contribution for 2006 to the Plan. However, Huntington may choose to make a contribution to the Plan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

up to the maximum deductible limit in the 2006 plan year. Expected contributions for 2006 to the post-retirement benefit plan are $3.3 million.

The assumed health-care cost trend rate has a significant effect on the amounts reported. A one percentage point increase would increase service and interest costs and the post-retirement benefit obligation by less than $0.1 million and $2.8 million, respectively. A one-percentage point decrease would reduce service and interest costs by less than $0.1 million and the post-retirement benefit obligation by $0.9 million. The 2006 health-care cost trend rate was projected to be 9.78% for pre-65 participants and 9.46% for post-65 participants compared with an estimate of 10.99% for pre-65 participants and 10.86% for post-65 participants in 2005. These rates are assumed to decrease gradually until they reach 5.09% for pre-65 participants and 5.17% for post-65 participants in the year 2017 and remain at that level thereafter. Huntington updated the immediate health-care cost trend rate assumption based on current market data and Huntington’s claims experience. This trend rate is expected to decline over time to a trend level consistent with medical inflation and long-term economic assumptions.

Huntington also sponsors other retirement plans, the most significant being the Supplemental Executive Retirement Plan and the Supplemental Retirement Income Plan. These plans are nonqualified plans that provide certain current and former officers and directors of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. At December 31, 2005 and 2004, the accrued pension liability for these plans totaled $26.6 million and $25.1 million, respectively. Pension expense for the plans was $2.3 million, $2.1 million, and $1.7 million in 2005, 2004, and 2003, respectively. Huntington recorded a $0.8 million and $1.1 million, net of tax, minimum pension liability adjustment within other comprehensive income associated with these unfunded plans in 2005 and 2004, respectively.

Huntington has a defined contribution plan that is available to eligible employees. Matching contributions by Huntington equal 100% on the first 3%, then 50% on the next 2%, of participant elective deferrals. The cost of providing this plan was $9.6 million in 2005, $9.2 million in 2004, and $8.6 million in 2003. The number of shares of Huntington common stock held by this plan was 7,333,165 at December 31, 2005, and 7,851,365 at the end of the prior year. The market value of these shares was $174.2 million and $194.2 million at the same respective dates. Dividends received by the plan were $13.9 million during 2005 and $10.1 million during 2004.

20. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of Huntington’s financial instruments at December 31 are presented in the following table:

		2005						2004
		Carrying						Carrying
(in thousands of dollars)		Amount			Fair Value			Amount			Fair Value
Financial assets:
	Cash and short-term assets	$	1,063,167		$	1,063,167		$	1,527,758		$	1,527,758
	Trading account securities		8,619			8,619			309,630			309,630
	Loans held for sale		294,344			294,344			223,469			223,469
	Investment securities		4,526,520			4,526,520			4,238,945			4,238,945
	Net loans and direct financing leases		24,203,819			24,222,819			23,289,066			23,528,066
	Customers’ acceptance liability		4,536			4,536			11,299			11,299
	Derivatives		30,274			30,274			41,809			41,809
Financial liabilities:
	Deposits		(22,409,675	)		(21,338,675	)		(20,768,161	)		(19,915,161	)
	Short-term borrowings		(1,889,260	)		(1,889,260	)		(1,207,233	)		(1,207,233	)
	Bank acceptances outstanding		(4,536	)		(4,536	)		(11,299	)		(11,299	)
	Federal Home Loan Bank advances		(1,155,647	)		(1,155,647	)		(1,271,088	)		(1,271,088	)
	Subordinated notes		(1,023,371	)		(1,023,371	)		(1,039,793	)		(1,039,793	)
	Other long-term debt		(2,418,419	)		(2,479,419	)		(4,016,004	)		(4,094,004	)
	Derivatives		(27,427	)		(27,427	)		(4,903	)		(4,903	)

The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include trading account securities, customers’ acceptance liabilities, short-term borrowings, bank acceptances outstanding, Federal Home Loan Bank Advances and cash and short-term assets, which include cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements. Loan commitments and letters of credit generally have short-

126

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

term, variable-rate features and contain clauses that limit Huntington’s exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.

Certain assets, the most significant being operating lease assets, bank owned life insurance, and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage and non-mortgage servicing rights, deposit base, and other customer relationship intangibles are not considered financial instruments and are not discussed below. Accordingly, this fair value information is not intended to, and does not, represent Huntington’s underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.

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

–  LOANS HELD FOR SALE — valued using outstanding commitments from investors.

–  INVESTMENT SECURITIES — based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Retained interests in securitized assets are valued using a discounted cash flow analysis. The carrying amount and fair value of securities exclude the fair value of asset/liability management interest rate contracts designated as hedges of securities available for sale.

–  LOANS AND DIRECT FINANCING LEASES — variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans and leases are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans and leases with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of probable losses in the loan and lease portfolio.

–  DEPOSITS — demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities.

–  DEBT — fixed-rate, long-term debt is based upon quoted market prices or, in the absence of quoted market prices, discounted cash flows using rates for similar debt with the same maturities. The carrying amount of variable-rate obligations approximates fair value.

21. DERIVATIVE FINANCIAL INSTRUMENTS

A variety of derivative financial instruments, principally interest rate swaps, are used in asset and liability management activities to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. These instruments provide flexibility in adjusting the Company’s sensitivity to changes in interest rates without exposure to loss of principal and higher funding requirements. By using derivatives to manage interest rate risk, the effect is a smaller, more efficient balance sheet, with a lower wholesale funding requirement and a higher net interest margin. All derivatives are reflected at fair value in the consolidated balance sheet.

Market risk, which is the possibility that economic value of net assets or net interest income will be adversely affected by changes in interest rates or other economic factors, is managed through the use of derivatives. Derivatives are also sold to meet customers’ financing needs and, like other financial instruments, contain an element of credit risk, which is the possibility that Huntington will incur a loss because a counter-party fails to meet its contractual obligations. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contract provisions.

ASSET AND LIABILITY MANAGEMENT

Derivatives that are used for asset and liability management are classified as fair value hedges or cash flow hedges and are required to meet specific criteria. To qualify as a hedge, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge. This includes identifying the item and

127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

risk being hedged, the derivative being used, and how the effectiveness of the hedge is being assessed. A derivative must be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. Correlation is evaluated on a retrospective and prospective basis using quantitative measures. If a hedge relationship is found to be not effective, the derivative no longer qualifies as a hedge and any excess gains or losses attributable to ineffectiveness, as well as subsequent changes in its fair value, are recognized in other income.

For fair value hedges, deposits, short-term borrowings, and long-term debt are effectively converted to variable-rate obligations by entering into interest rate swap contracts whereby fixed-rate interest is received in exchange for variable-rate interest without the exchange of the contract’s underlying notional amount. Forward contracts, used primarily in connection with mortgage banking activities, can be settled in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. The changes in fair value of the hedged item and the hedging instrument are reflected in current earnings. The amounts recognized in connection with the ineffective portion of Huntington’s fair value hedging in 2005, 2004, and 2003 were insignificant. No amounts were excluded from the assessment of effectiveness during 2005, 2004, or 2003 for derivatives designated as fair value hedges.

For cash flow hedges, interest rate swap contracts were entered into that pay fixed-rate interest in exchange for the receipt of variable-rate interest without the exchange of the contract’s underlying notional amount, which effectively converts a portion of its floating-rate debt to fixed-rate. This reduces the potentially adverse impact of increases in interest rates on future interest expense. In like fashion, certain LIBOR-based commercial and industrial loans were effectively converted to fixed-rate by entering into contracts that swap variable-rate interest for fixed-rate interest over the life of the contracts.

To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of accumulated other comprehensive income in shareholders’ equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in earnings. During 2005, 2004, and 2003, a net loss was recognized in connection with the ineffective portion of its cash flow hedging instruments. The amounts were classified in other non-interest income and were considered insignificant. No amounts were excluded from the assessment of effectiveness during 2005, 2004, and 2003 for derivatives designated as cash flow hedges.

Derivatives used to manage Huntington’s interest rate risk at December 31, 2005, are shown in the table below:

				Average				Weighted-Average Rate
		Notional		Maturity	Fair
(in thousands of dollars)		Value		(years)	Value			Receive			Pay
Asset conversion swaps
	Receive fixed — generic	$	350,000	2.3	$	(8,782	)		3.41	%		4.27	%
Liability conversion swaps
	Receive fixed — generic		1,575,250	5.4		(15,960	)		4.21	%		4.47	%
	Receive fixed — callable		665,000	7.2		(19,348	)		4.39	%		4.22	%
	Pay fixed — generic		1,301,000	2.1		28,119			4.29	%		3.33	%
	Pay fixed — forward starting		200,000	N/A		2,100			N/A			N/A
Total liability conversion swaps			3,741,250	4.5		(5,089	)		4.27	%		4.00	%
Total swap portfolio		$	4,091,250	4.3	$	(13,871	)		4.20	%		4.03	%

N/A, not applicable

At December 31, 2004, the fair value of the swap portfolio used for asset and liability management was an asset of $17.9 million. These values must be viewed in the context of the overall financial structure of Huntington, including the aggregate net position of all on- and off-balance sheet financial instruments.

As is the case with cash securities, the fair value of interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels. Management made no assumptions regarding future changes in interest rates with respect to the variable-rate information presented in the table above.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The following table represents the gross notional value of derivatives used to manage interest rate risk at December 31, 2005, identified by the underlying interest rate-sensitive instruments. The notional amounts shown in the tables above and below should be viewed in the context of overall interest rate risk management activities to assess the impact on the net interest margin.

		Fair Value		Cash Flow
(in thousands of dollars)		Hedges		Hedges		Total
Instruments associated with:
	Investment securities	$	—	$	25,000	$	25,000
	Loans		—		325,000		325,000
	Deposits		790,250		—		790,250
	Federal Home Loan Bank advances		—		726,000		726,000
	Subordinated notes		500,000		—		500,000
	Other long-term debt		950,000		775,000		1,725,000
Total notional value at December 31, 2005		$	2,240,250	$	1,851,000	$	4,091,250

A total of $8.4 million of the unrealized net gain on cash flow hedges is expected to be recognized in 2006.

Collateral agreements are regularly entered into as part of the underlying derivative agreements with its counterparties to mitigate the credit risk associated with both the derivatives used for asset and liability management and used in trading activities. At December 31, 2005 and 2004, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $26.2 million and $12.3 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.

These derivative financial instruments were entered into for the purpose of altering the interest rate risk embedded in assets and liabilities. Consequently, net amounts receivable or payable on contracts hedging either interest earning assets or interest bearing liabilities were accrued as an adjustment to either interest income or interest expense. The net amount resulted in an increase to net interest income of $23.6 million, $24.0 million, and $51.6 million in 2005, 2004, and 2003, respectively.

DERIVATIVES USED IN MORTGAGE BANKING ACTIVITIES

Huntington also uses derivatives, principally loan sale commitments, in the hedging of its mortgage loan commitments and its mortgage loans held for sale. For derivatives that are used in hedging mortgage loans held for sale, ineffective hedge gains and losses are reflected in mortgage banking revenue in the income statement. Mortgage loan commitments and the related interest rate lock commitments are carried at fair value on the consolidated balance sheet with changes in fair value reflected in mortgage banking revenue. The following is a summary of the derivative assets and liabilities that Huntington used in its mortgage banking activities:

		At December 31,
(in thousands of dollars)		2005			2004
Derivative assets:
	Interest rate lock agreements	$	669		$	479
	Forward trades		172			853
Total derivative assets			841			1,332
Derivative liabilities:
	Interest rate lock agreements		(328	)		(993	)
	Forward trades		(1,947	)		(334	)
Total derivative liabilities			(2,275	)		(1,327	)
Net derivative (liability) asset		$	(1,434	)	$	5

DERIVATIVES USED IN TRADING ACTIVITIES

Various derivative financial instruments are offered to enable customers to meet their financing and investing objectives and for their risk management purposes. Derivative financial instruments held in Huntington’s trading portfolio during 2005 and 2004 consisted predominantly of interest rate swaps, but also included interest rate caps, floors, and futures, as well as foreign exchange options. Interest rate options grant the option holder the right to buy or sell an underlying financial instrument for a predetermined price before the contract expires. Interest rate futures are commitments to either purchase or sell a financial

129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Interest rate caps and floors are option-based contracts that entitle the buyer to receive cash payments based on the difference between a designated reference rate and a strike price, applied to a notional amount. Written options, primarily caps, expose Huntington to market risk but not credit risk. Purchased options contain both credit and market risk. They are used to manage fluctuating interest rates as exposure to loss from interest rate contracts changes.

Supplying these derivatives to customers results in fee income. These instruments are carried at fair value in other assets with gains and losses reflected in other non-interest income. Total trading revenue for customer accommodation was $8.3 million in 2005, $8.8 million in 2004, and $10.3 million in 2003. The total notional value of derivative financial instruments used by Huntington on behalf of customers (for which the related interest rate risk is offset by third parties) was $4.2 billion at the end of 2005 and $4.5 billion at the end of the prior year. Huntington’s credit risk from interest rate swaps used for trading purposes was $44.3 million and $53.8 million at the same dates.

In connection with its securitization activities, interest rate caps were purchased with a notional value totaling $0.9 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $0.9 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income in accordance with accounting principles generally accepted in the United States.

22. COMMITMENTS AND CONTINGENT LIABILITIES

COMMITMENTS TO EXTEND CREDIT

In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial statements. The contract amount of these financial agreements, representing the credit risk, at December 31 were:

		At December 31,
(in millions of dollars)		2005		2004
Commitments to extend credit
	Commercial	$	3,316	$	3,453
	Consumer		3,046		2,779
	Commercial real estate		1,567		854
Standby letters of credit			1,079		945
Commercial letters of credit			47		72

Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. At December 31, 2005, approximately 48% of standby letters of credit are collateralized and most are expected to expire without being drawn upon. The carrying amount of deferred revenue associated with these guarantees was $4.0 million and $4.1 million at December 31, 2005 and 2004, respectively.

Commercial letters of credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and have maturities of no longer than 90 days. The merchandise or cargo being traded normally secures these instruments.

COMMITMENTS TO SELL LOANS

Huntington enters into forward contracts relating to its mortgage banking business. At December 31, 2005 and 2004, Huntington had commitments to sell residential real estate loans of $348.3 million and $311.3 million, respectively. These contracts mature in less than one year.

During the 2005 second quarter, Huntington entered into a two-year agreement to sell a minimum of 50% of monthly automobile loan production at the cost of such loans, subject to certain limitations, provided the production meets certain

130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

pricing, asset quality, and volume parameters. At December 31, 2005, approximately $51.6 million of automobile loans related to this commitment were classified as held for sale.

LITIGATION

In the ordinary course of business, there are various legal proceedings pending against Huntington and its subsidiaries. In the opinion of management, the aggregate liabilities, if any, arising from such proceedings are not expected to have a material adverse effect on Huntington’s consolidated financial position, results of operations, or cash flows.

COMMITMENTS UNDER CAPITAL AND OPERATING LEASE OBLIGATIONS

At December 31, 2005, Huntington and its subsidiaries were obligated under noncancelable leases for land, buildings, and equipment. Many of these leases contain renewal options and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specified prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in the consumer or other price indices.

The future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2005, were $31.5 million in 2006, $30.4 million in 2007, $28.6 million in 2008, $27.4 million in 2009, $25.2 million in 2010, and $158.4 million thereafter. At December 31, 2005, total minimum lease payments have not been reduced by minimum sublease rentals of $77.8 million due in the future under noncancelable subleases. At December 31, 2005, the future minimum sublease rental payments that Huntington expects to receive are $16.7 million in 2006; $14.2 million in 2007; $13.1 million in 2008; $12.5 million in 2009; $9.3 million in 2010; and $12.0 million thereafter. The rental expense for all operating leases was $34.0 million, $40.4 million, and $36.1 million for 2005, 2004, and 2003, respectively. Huntington had no material obligations under capital leases.

SECURITIES AND EXCHANGE COMMISSION FORMAL INVESTIGATION

On June 2, 2005, Huntington filed a Form 8-K announcing that the Commission approved the settlement of its previously announced formal investigation into certain financial accounting matters. Huntington consented to pay a penalty of $7.5 million. This civil money penalty had no 2005 financial impact on Huntington’s results, as reserves for this amount were established and expensed in 2004.

23. FORMAL REGULATORY SUPERVISORY AGREEMENTS AND OTHER REGULATORY MATTERS

On March 1, 2005, Huntington announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), as well as the Bank entering into a formal written agreement with the Office of the Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance corporate governance, internal audit, risk management, accounting policies and procedures, and financial and regulatory reporting. The agreements called for independent third-party reviews, as well as the submission of written plans and progress reports by Management and remain in effect until terminated by the banking regulators.

On October 6, 2005, Huntington announced that the OCC had terminated its formal written agreement with the Bank dated February 28, 2005, and that the FRBC written agreement remained in effect. Huntington was verbally advised that it was in full compliance with the financial holding company and financial subsidiary requirement under the Gramm-Leach-Bliley Act (GLB Act). This notification reflected that Huntington and the Bank met both the “well-capitalized” and “well-managed” criteria under the GLB Act. Management believes that the changes it has already made, and is in the process of making, will address the FRBC issues fully and comprehensively.

Huntington and its bank subsidiary, The Huntington National Bank, are subject to various regulatory capital requirements administered by federal and state banking agencies. These requirements involve qualitative judgments and quantitative measures of assets, liabilities, capital amounts, and certain off-balance sheet items as calculated under regulatory accounting practices. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material adverse effect on Huntington’s and The Huntington National Bank’s financial statements. Applicable capital adequacy guidelines require minimum ratios of 4.00% for Tier 1 Risk-based Capital, 8.00% for Total Risk-based Capital, and 4.00% for Tier 1 Leverage Capital. To be considered “well capitalized” under the regulatory framework for prompt corrective action, the ratios must be at least 6.00%, 10.00%, and 5.00%, respectively.

131

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

As of December 31, 2005, Huntington and The Huntington National Bank (the Bank) met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for “well-capitalized” institutions. The period-end capital amounts and capital ratios of Huntington and the Bank are as follows:

		Tier 1						Total Capital						Tier 1 Leverage
(in millions of dollars)		2005			2004			2005			2004			2005			2004
Huntington Bancshares Incorporated
	Amount	$	2,701		$	2,683		$	3,678		$	3,687		$	2,701		$	2,683
	Ratio		9.13	%		9.08	%		12.42	%		12.48	%		8.34	%		8.42	%
The Huntington National Bank
	Amount	$	1,902		$	1,770		$	3,087		$	2,955		$	1,902		$	1,770
	Ratio		6.82	%		6.08	%		10.55	%		10.16	%		6.21	%		5.66	%

Tier 1 Risk-based Capital consists of total equity plus qualifying capital securities and minority interest, excluding unrealized gains and losses accumulated in other comprehensive income, and non-qualifying intangible and servicing assets. Total Risk-based Capital is Tier 1 Risk-based Capital plus qualifying subordinated notes and allowable allowances for credit losses (limited to 1.25% of total risk-weighted assets). Tier 1 Leverage Capital is equal to Tier 1 Capital. Both Tier 1 Capital and Total Capital ratios are derived by dividing the respective capital amounts by net risk-weighted assets, which are calculated as prescribed by regulatory agencies. Tier 1 Leverage Capital ratio is calculated by dividing the Tier 1 capital amount by average adjusted total assets for the fourth quarter of 2005 and 2004, less non-qualifying intangibles and other adjustments.

Huntington and its subsidiaries are also subject to various regulatory requirements that impose restrictions on cash, debt, and dividends. The Bank is required to maintain cash reserves based on the level of certain of its deposits. This reserve requirement may be met by holding cash in banking offices or on deposit at the Federal Reserve Bank. During 2005 and 2004, the average balance of these deposits were $57.6 million and $70.4 million, respectively.

Under current Federal Reserve regulations, the Bank is limited as to the amount and type of loans it may make to the parent company and non-bank subsidiaries. At December 31, 2005, the Bank could lend $308.7 million to a single affiliate, subject to the qualifying collateral requirements defined in the regulations.

Dividends from the Bank are one of the major sources of funds for Huntington. These funds aid the parent company in the payment of dividends to shareholders, expenses, and other obligations. Payment of dividends to the parent company is subject to various legal and regulatory limitations. Regulatory approval is required prior to the 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. The Bank could declare, without regulatory approval, dividends in 2006 of approximately $197.0 million plus an additional amount equal to its net income through the date of declaration in 2006.

132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

24. PARENT COMPANY FINANCIAL STATEMENTS

The parent company condensed financial statements, which include transactions with subsidiaries, are as follows.

Balance Sheets		December 31,
(in thousands of dollars)		2005		2004
ASSETS
	Cash and cash equivalents	$	227,115	$	630,444
	Due from The Huntington National Bank		250,771		250,771
	Due from non-bank subsidiaries		205,208		204,976
	Investment in The Huntington National Bank		1,660,905		1,472,357
	Investment in non-bank subsidiaries		574,382		595,233
	Goodwill		9,877		9,877
	Accrued interest receivable and other assets		128,303		141,284
Total assets		$	3,056,561	$	3,304,942
LIABILITIES AND SHAREHOLDERS’ EQUITY
	Short-term borrowings	$	3,034	$	—
	Long-term borrowings		309,279		411,750
	Dividends payable, accrued expenses, and other liabilities		186,747		355,554
Total liabilities			499,060		767,304
Shareholders’ equity			2,557,501		2,537,638
Total liabilities and shareholders’ equity		$	3,056,561	$	3,304,942

The parent company had a $25 million line of credit to one of its non-bank subsidiaries at December 31, 2005. This was reduced from $100 million at the end of the prior year. Of the total line of credit available, $0.5 million remained outstanding at December 31, 2005.

133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Statements of Income			Year Ended December 31,
(in thousands of dollars)			2005			2004			2003
Income
	Dividends from
		The Huntington National Bank	$	180,000		$	400,000		$	150,533
		Non-bank subsidiaries		3,800			8,202			3,000
	Interest from
		The Huntington National Bank		35,253			13,417			20,098
		Non-bank subsidiaries		8,770			7,638			7,356
	Management fees from subsidiaries			30,539			34,603			34,129
	Other			406			(810	)		3,214
Total income				258,768			463,050			218,330
Expense
		Personnel costs		25,060			32,227			18,608
		Interest on borrowings		22,772			4,317			12,976
		Other		24,741			36,738			27,347
Total expense				72,573			73,282			58,931
Income before income taxes and equity in undistributed net income of subsidiaries				186,195			389,768			159,399
Income taxes				(2,499	)		(4,223	)		(5,130	)
Income before equity in undistributed net income of subsidiaries and cumulative effect of change in accounting principle				188,694			393,991			164,529
Cumulative effect of change in accounting principle net of tax of $1,315				—			—			(2,442	)
Income before equity in undistributed net income of subsidiaries				188,694			393,991			162,087
Increase (decrease) in undistributed net income of:
		The Huntington National Bank		208,061			(9,073	)		196,659
		Non-bank subsidiaries		15,336			14,007			13,617
Net income			$	412,091		$	398,925		$	372,363

134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Statements of Cash Flows				Year Ended December 31,
(in thousands of dollars)				2005			2004			2003
Operating activities
		Net income		$	412,091		$	398,925		$	372,363
		Adjustments to reconcile net income to net cash provided by operating activities:
			Cumulative effect of change in accounting principle		—			—			2,442
			Equity in undistributed net income of subsidiaries		(223,397	)		(4,934	)		(210,275	)
			Depreciation and amortization		2,674			2,690			2,211
			Gain on sales of securities available for sale		—			—			(5	)
			Change in other, net		(49,557	)		(13,609	)		(67,852	)
Net cash provided by operating activities					141,811			383,072			98,884
Investing activities
		Repayments from subsidiaries			154,152			117,314			27,001
		Advances to subsidiaries			(206,765	)		(80,197	)		(74,650	)
		Proceeds from sale of securities available for sale			—			—			46
Net cash provided by (used in) investing activities					(52,613	)		37,117			(47,603	)
Financing activities
		Proceeds from issuance of long-term borrowings			—			—			100,000
		Payment of borrowings			(99,437	)		(101,541	)		(41,544	)
		Dividends paid on common stock			(200,628	)		(168,075	)		(151,023	)
		Acquisition of treasury stock			(231,656	)		—			(81,061	)
		Proceeds from issuance of common stock			39,194			47,239			8,082
Net cash used for financing activities					(492,527	)		(222,377	)		(165,546	)
Change in cash and cash equivalents					(403,329	)		197,812			(114,265	)
Cash and cash equivalents at beginning of year					630,444			432,632			546,897
Cash and cash equivalents at end of year				$	227,115		$	630,444		$	432,632
Supplemental disclosure:
	Interest paid			$	22,754		$	18,495		$	13,157

25. ACQUISITIONS AND DIVESTITURES

ACQUISITIONS

On January 27, 2004, Huntington announced the signing of a definitive agreement to acquire Unizan Financial Corp. (Unizan), a financial holding company based in Canton, Ohio. On November 12, 2004, Huntington and Unizan jointly announced entering into an amendment to their January 26, 2004 merger agreement extending the term of the agreement for one year from January 27, 2005 to January 27, 2006. On the same date, Huntington also announced that it withdrew its application with the FRBC to acquire Unizan. On October 24, 2005, Huntington announced that after consultation with the FRBC, it had re-filed its application to acquire Unizan. On January 26, 2006, Huntington announced that the Federal Reserve Board had approved its merger application. The merger is scheduled to close March 1, 2006.

DIVESTITURES

During 2003, Huntington sold four banking offices located in eastern West Virginia. This sale included approximately $50 million of loans and $130 million of deposits. Huntington’s pre-tax gain from this sale was $13.1 million in 2003 and is reflected as a separate component of non-interest income.

26. SEGMENT REPORTING

Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial and Capital Markets Group (PFCMG). A fourth segment includes the Company’s Treasury function and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon the Company’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around Huntington’s organizational and management structure and, accordingly, the results below are not necessarily comparable with similar

135

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

information published by other financial institutions. During the second quarter of 2005, the Capital Markets Group was removed from the Treasury/Other segment and combined with the Private Financial Group to form the Private Financial and Capital Markets Group segment. Since the Capital Markets Group is now managed through the Private Financial Group, combining these two segments better reflects the management accountability and decision making structure. Prior periods reflect this change. An overview of this system is provided below, along with a description of each segment and discussion of financial results.

The following provides a brief description of the four operating segments of Huntington:

Regional Banking: This segment provides traditional banking products and services to consumer, small business, and commercial customers located in its seven operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky. It provides these services through a banking network of 344 branches, over 900 ATMs, plus on-line and telephone banking channels. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, small business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail Banking accounts for 60% and 79% of total Regional Banking loans and deposits, respectively. Commercial Banking serves middle market commercial banking relationships, which use a variety of banking products and services including, but not limited to, commercial loans, international trade, cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.

Dealer Sales: This segment provides a variety of banking products and services to more than 3,500 automotive dealerships within our primary banking markets, as well as in Arizona, Florida, Georgia, North Carolina, Pennsylvania, South Carolina and Tennessee. We have been in this business for more than 50 years. Dealer Sales finances the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles to consumers under long-term leases, finances the dealerships’ floor plan inventories, real estate, or working capital needs, and provides other banking services to the automotive dealerships and their owners. Dealer Sales is directly impacted by general automotive sales, including programs initiated by manufacturers to enhance and increase sales directly. Competition from the financing divisions of automobile manufacturers and from other financial institutions is intense.

Private Financial and Capital Markets Group (PFCMG): This segment provides products and services designed to meet the needs of our higher net worth customers. Revenue is derived through the sale of trust, asset management, investment advisory, brokerage, insurance, and private banking products and services. It also focuses on financial solutions for corporate and institutional customers that include investment banking, sales and trading of securities, mezzanine capital financing, and risk management products. To serve our customers, a unique distribution model is used that employs a single, unified sales force to deliver products and services mainly through Regional Banking distribution channels. PFCMG provides investment management and custodial services to our 29 proprietary mutual funds, including ten variable annuity funds. The Huntington Investment Company offers brokerage and investment advisory services to both Regional Banking and PFCMG customers through more than 100 licensed investment sales representatives and nearly 700 licensed personal bankers. PFCMG’s insurance entities provide a complete array of insurance products including individual life insurance products ranging from basic term life insurance, to estate planning, group life and health insurance, property and casualty insurance, mortgage title insurance, and reinsurance for payment protection products. Income and related expenses from the sale of brokerage and insurance products is shared with the line of business that generated the sale or provided the customer referral, most notably Regional Banking.

Treasury/Other: This segment includes revenue and expense related to assets, liabilities, and equity not directly assigned or allocated to one of the other three business segments. Assets included in this segment include investment securities and bank owned life insurance.

USE OF OPERATING EARNINGS TO MEASURE SEGMENT PERFORMANCE

Management uses earnings on an operating basis, rather than on a GAAP basis, to measure underlying performance trends for each business segment. Operating earnings represent GAAP earnings adjusted to exclude the impact of certain items listed in the reconciliation table below. Analyzing earnings on an operating basis is very helpful in assessing underlying performance trends, a critical factor used to determine the success of strategies and future earnings capabilities. For the year ending December 31, 2005, operating earnings were the same as reported GAAP earnings.

136

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Listed below is certain operating basis financial information reconciled to Huntington’s 2005, 2004, and 2003 reported results by line of business:

	Regional			Dealer						Treasury/			Huntington
INCOME STATEMENTS (in thousands of dollars)	Banking			Sales			PFCMG			Other			Consolidated
2005
Net interest income	$	780,072		$	145,578		$	72,886		$	(36,125	)	$	962,411
Provision for credit losses		(51,061	)		(26,073	)		(4,165	)		—			(81,299	)
Non-interest income		311,244			169,792			135,102			16,144			632,282
Non-interest expense		(593,137	)		(185,936	)		(131,195	)		(59,552	)		(969,820	)
Income taxes		(156,491	)		(36,177	)		(25,420	)		86,605			(131,483	)
Operating earnings and net income as reported	$	290,627		$	67,184		$	47,208		$	7,072		$	412,091
2004
Net interest income	$	678,288		$	149,791		$	61,763		$	21,532		$	911,374
Provision for credit losses		(7,664	)		(44,733	)		(2,665	)		—			(55,062	)
Non-interest income		308,493			320,154			134,005			41,740			804,392
Non-interest expense		(593,861	)		(324,229	)		(124,441	)		(80,864	)		(1,123,395	)
Income taxes		(134,841	)		(35,344	)		(24,032	)		45,851			(148,366	)
Operating earnings		250,415			65,639			44,630			28,259			388,943
Restructuring releases, net of taxes		—			—			—			748			748
Gain on sale of automobile loans, net of taxes		—			8,598			—			636			9,234
Net income	$	250,415		$	74,237		$	44,630		$	29,643		$	398,925
2003
Net interest income	$	605,311		$	107,223		$	50,667		$	85,785		$	848,986
Provision for credit losses		(96,735	)		(56,612	)		(10,646	)		—			(163,993	)
Non-interest income		317,771			525,957			123,219			49,055			1,016,002
Non-interest expense		(562,909	)		(481,543	)		(116,872	)		(60,251	)		(1,221,575	)
Income taxes		(92,203	)		(33,259	)		(16,229	)		18,996			(122,695	)
Operating earnings		171,235			61,766			30,139			93,585			356,725
Restructuring releases, net of tax		—			—			—			4,333			4,333
Gain on sale of automobile loans, net of tax		—			13,493			—			12,532			26,025
Cumulative effect of change in accounting principle, net of tax		—			(10,888	)		—			(2,442	)		(13,330	)
Gain on sale of branch offices, net of tax		—			—			—			8,523			8,523
Long-term debt extinguishment, net of tax		—			—			—			(9,913	)		(9,913	)
Net income	$	171,235		$	64,371		$	30,139		$	106,618		$	372,363

	Assets						Deposits
	At December 31,						At December 31,
BALANCE SHEETS (in millions of dollars)	2005		2004		2003		2005		2004		2003
Regional Banking	$	18,863	$	17,864	$	15,042	$	17,968	$	17,411	$	15,473
Dealer Sales		5,612		6,100		7,336		65		75		77
PFCMG		2,005		1,959		1,722		1,169		1,176		1,165
Treasury/Other		6,285		6,642		6,419		3,208		2,106		1,772
Total	$	32,765	$	32,565	$	30,519	$	22,410	$	20,768	$	18,487

137

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

27. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations, for the years ended December 31, 2005 and 2004:

2005
(in thousands of dollars, except per share data)		Fourth			Third			Second			First
	Interest income	$	442,476		$	420,858		$	402,326		$	376,105
	Interest expense		(198,800	)		(179,221	)		(160,426	)		(140,907	)
Net interest income			243,676			241,637			241,900			235,198
Provision for credit losses			(30,831	)		(17,699	)		(12,895	)		(19,874	)
Non-interest income			147,322			160,740			156,170			168,050
Non-interest expense			(230,355	)		(233,052	)		(248,136	)		(258,277	)
Income before income taxes			129,812			151,626			137,039			125,097
Provision for income taxes			(29,239	)		(43,052	)		(30,614	)		(28,578	)
Net income		$	100,573		$	108,574		$	106,425		$	96,519
Net income per common share — Basic			$0.44			$0.47			$0.46			$0.42
Net income per common share — Diluted			0.44			0.47			0.45			0.41

2004
(in thousands of dollars, except per share data)		Fourth			Third			Second			First
	Interest income	$	359,215		$	338,002		$	324,167		$	325,931
	Interest expense		(120,147	)		(110,944	)		(101,604	)		(103,246	)
Net interest income			239,068			227,058			222,563			222,685
Provision for credit losses			(12,654	)		(11,785	)		(5,027	)		(25,596	)
Non-interest income			182,940			189,891			218,128			227,639
Non-interest expense			(281,014	)		(273,423	)		(282,153	)		(285,654	)
Income before income taxes			128,340			131,741			153,511			139,074
Provision for income taxes			(37,201	)		(38,255	)		(43,384	)		(34,901	)
Net income		$	91,139		$	93,486		$	110,127		$	104,173
Net income per common share — Basic			$0.39			$0.41			$0.48			$0.45
Net income per common share — Diluted			0.39			0.40			0.47			0.45

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