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, 2006

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 Act). o Yes     þ No

     All common stock is held by affiliates of the registrant as of December 31, 2006. As of February 28, 2007, 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, 2006: $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 2007 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	49
Item 9A.	Controls and Procedures	49
Item 9A(T).	Controls and Procedures	49
Item 9B.	Other Information	49
Part III.
Item 10.	Directors and Executive Officers and Corporate Governance	49
Item 11.	Executive Compensation	49
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	49
Item 13.	Certain Relationships and Related Transactions, and Director Independence	49
Item 14.	Principal Accounting Fees and Services	50
Part IV.
Item 15.	Exhibits and Financial Statement Schedules	50
Signatures		51
Exhibits
EX-12.1
EX-21.1
EX-24.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1

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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. Four related parties own HPCI’s common stock: Huntington Capital Financing LLC (HCF); Huntington Preferred Capital II, Inc. (HPCII); Huntington Preferred Capital Holdings, Inc. (Holdings); and Huntington Bancshares Incorporated (Huntington). HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). 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. At December 31, 2006, the Bank, on a consolidated basis with its subsidiaries, accounted for 99% of Huntington’s (on a consolidated basis) total assets and, for the twelve months ended December 31, 2006, accounted for 94% of Huntington’s net income. Thus, consolidated financial statements for the Bank and for Huntington were substantially the same for these periods. 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. The following chart outlines the relationship among affiliates at December 31, 2006:

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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, 2006, $2.8 billion, or 90.0%, 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 $0.1 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 original terms that range from 6 to 360 months. Of the loans underlying the consumer loan participations, most bear interest at fixed rates. Huntington does not originate consumer loans that allow negative amortization, or have a loan-to-value ratio at origination greater than 100%.

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. Huntington does not originate residential mortgage loans that (a) allow negative amortization, (b) have loan-to-value ratio at origination greater than 100%, or (c) are “option ARMs.”

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

Geographic Distribution

     The following table shows the geographic location of loans underlying HPCI’s loan participations at December 31, 2006:

Table 1 — Total Loan Participation Interests by Geographic Location of Borrower

(in thousands)					Percentage by
			Aggregate		Aggregate
	Number		Principal		Principal
State	of Loans		Balance		Balance
Ohio		15,485	$	2,260,527		55.1	%
Michigan		8,218		1,067,830		26.1
Indiana		2,022		317,327		7.7
Kentucky		1,632		232,117		5.7
		27,357		3,877,801		94.6
All other locations		298		219,408		5.4
Total loan participation interests		27,655	$	4,097,209		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, 2006:

Table 2 — Total Loan Participation Interests by Principal Balances

(in thousands)					Percentage by
			Aggregate		Aggregate
	Number		Principal		Principal
Size	of Loans		Balance		Balance
Less than $50,000		16,267	$	349,120		8.5	%
Greater than $50,000 to $100,000		5,146		367,695		9.0
Greater than $100,000 to $250,000		3,532		539,050		13.2
Greater than $250,000 to $500,000		1,266		447,266		10.9
Greater than $500,000 to $1,000,000		745		520,838		12.7
Greater than $1,000,000 to $3,000,000		513		849,763		20.7
Greater than $3,000,000 to $5,000,000		114		437,346		10.7
Greater than $5,000,000 to $10,000,000		59		402,899		9.8
Greater than $10,000,000		13		183,232		4.5
Total loan participation interests		27,655	$	4,097,209		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 17.8% of HPCI’s capitalization; and HPCI does not anticipate incurring any indebtedness other than permitted indebtedness, which includes acting as a co-

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borrower or guarantor of certain obligations of the Bank. HPCI’s board has limited any such pledges to 25% of HPCI’s assets. In addition, HPCI expects its interest-earning assets will continue to exceed the liquidation preference of its preferred securities. For further discussion regarding co-borrower and guarantor obligations, see “Commitments and Contingencies” in the Notes to Financial Statements included in Part II, Item 8 of this report.

     Payment of dividends on the preferred securities could also be subject to regulatory limitations if the Bank fails to be “adequately capitalized” for purposes of regulations issued by The Office of the Comptroller of the Currency (OCC). The Bank currently intends to maintain its capital ratios in excess of the “well-capitalized” levels under these regulations. However, there can be no assurance that the Bank will be able to maintain its capital in excess of the “well-capitalized” levels. At December 31, 2006, Total Risk-Based Capital for the Bank totaled $3.2 billion and would have to be reduced by more than $551.0 million to fall below “adequately capitalized minimums”. Capital ratios for the Bank as of December 31, 2006 and 2005 are as follows:

Table 3 — Capital Ratios for the Bank

	“Well-			“Adequately-
	Capitalized			Capitalized			December 31,
	Minimums”			Minimums”			2006			2005
Tier 1 Risk-Based Capital		6.00	%		4.00	%		6.47	%		6.82	%
Total Risk-Based Capital		10.00			8.00			10.44			10.55
Tier 1 Leverage Ratio		5.00			4.00			5.81			6.21

Conflict of Interests and Related Policies

     As of December 31, 2006, 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, 2006, 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

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and disposition of assets, credit risk management, and certain other activities. These policies, which are discussed below, may be amended or revised from time to time at the discretion of HPCI’s board of directors, subject in certain circumstances, to the approval of a majority of HPCI’s independent directors, but without a vote of its shareholders.

Underwriting Standards

     The Bank has represented to Holdings, and Holdings has represented to HPCI, that the loans underlying HPCI’s participation interests were originated in accordance with underwriting policies customarily employed by the Bank during the period in which the loans were originated. The Bank emphasizes, “in-market” lending, which means lending to borrowers that are located where the Bank or its affiliates have branches or loan origination offices. 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, 2006, 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.

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

     HPCI’s policy is to reinvest the proceeds of its assets in other interest-earning assets such that its Funds from Operations (FFO), which represents cash flows from operations, over any period of four fiscal quarters will be anticipated to equal or exceed 150% of the amount that would be required to pay annual dividends on the Class A, Class C, and Class D preferred securities, except as may be necessary to maintain its status as a REIT. FFO is equal to net cash provided by operating activities as reflected in HPCI’s consolidated statement of cash flows. For each of the years ended December 31, 2006, 2005, and 2004, HPCI’s FFO were $325.9 million, $274.3 million, and $273.6 million, respectively. These significantly exceeded the minimum requirement of 150% of dividends on Class A, Class C, and Class D securities of $41.3 million, $32.0 million, and $22.3 million, for the same periods, respectively. HPCI’s articles of incorporation provide that it cannot amend or change this policy with respect to the reinvestment of proceeds without the consent or affirmative vote of the holders of at least two-thirds of the Class C preferred securities and two thirds of the Class D preferred securities, voting as separate classes.

Credit Risk Management Policies

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

Other Policies

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

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

• underwrite securities of other issuers;

• actively trade in loans or other investments;

• offer securities in exchange for property; or

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

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

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

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

     HPCI currently makes investments and operates its business in such a manner consistent with the requirements of the Internal Revenue Code to qualify as a REIT. However, future economic, market, legal, tax, or other considerations may

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cause its board of directors, subject to approval by a majority of its independent directors, to determine that it is in HPCI’s best interest and the best interest of its shareholders to revoke HPCI’s REIT status. The Internal Revenue Code prohibits HPCI from electing REIT status for the five taxable years following the year of such revocation.

Employees

     At December 31, 2006, 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

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

Competition

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

     On March 1, 2005, Huntington announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), 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 would remain in effect until terminated by the bank regulators. On May 10, 2006, Huntington announced that the FRBC notified Huntington’s board of directors that Huntington had satisfied the provisions of the written agreement dated February 28, 2005, and that the FRBC, under delegated authority of the Board of Governors of the Federal Reserve System, had terminated the written agreement.

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, 2006, 94.6% 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; and

• 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, 2006, 62.8% 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, 2006, 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

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and copied at the SEC’s public reference facilities. Further information on the operation of the public reference facilities can be obtained by calling the SEC at 1-800-SEC-0330. Copies of these SEC filings can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street N.E., Washington, D.C. 20549. In addition, copies of these SEC filings can also be obtained by written request to Investor Relations, Huntington Bancshares Incorporated, 41 South High Street, Columbus, Ohio 43287 or by calling 614-480-4060. Huntington’s financial statements for the fiscal year ended December 31, 2006 are also filed with this report as Exhibit 99 (a).

     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 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, 2006, 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

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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 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 $10.6 million in 2006, $11.2 million in 2005, and $9.9 million in 2004.

     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 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 $3.2 billion as December 31, 2006. As of that same date, the Bank had borrowings of $1.0 billion under the facility.

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     HPCI has entered into an amended and restated agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize the Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess of an aggregate amount or percentage of such assets established from time to time by HPCI’s board of directors, including a majority of HPCI’s independent directors. The pledge limit was established by HPCI’s board at 25% of total assets, or approximately $1.2 billion as of December 31, 2006, as reflected in HPCI’s month-end management report. 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, 2006, HPCI’s total loans pledged were limited to one-to-four family residential mortgage portfolio and consumer second mortgage loans, which aggregated to $0.1 billion as of that same date. A default by the Bank on its obligations to the FHLB could adversely affect HPCI’s business and its ability to make timely dividend payments on preferred and common securities.

     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, 2006, 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.

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

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

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

     As a REIT, HPCI generally will be required each year to distribute as dividends to its shareholders at least 90% of REIT taxable income, excluding capital gains. Failure to comply with this requirement would result in earnings being subject to tax at regular corporate rates. In addition, HPCI would be subject to a 4% nondeductible excise tax on the amount by which certain distributions considered as paid with respect to any calendar year are less than the sum of 85% of ordinary income for the calendar year, 95% of capital gains 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, 2006, 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

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will not, however, give a preferred shareholder any right to request that such Class C or Class D preferred securities be redeemed. A special event includes:

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

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

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

     In the event HPCI redeems its Class C or Class D preferred securities, holders of such securities will be entitled to receive $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, 2007, there were four common shareholders of record, all of which are affiliates of the Bank. During 2006, 2005, and 2004, dividends of $296.3 million, $279.7 million and $263.8 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, 2006. 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, 2006.

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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, 2006, 2005, 2004, 2003, and 2002.

Table 4 — Selected Financial Data

(in thousands)	2006			2005			2004			2003			2002
STATEMENTS OF INCOME:
Interest and fee income	$	331,306		$	302,743		$	262,215		$	274,401		$	347,754
Reduction in allowance for credit losses		(22,041	)		(19,796	)		(31,591	)		(41,219	)		(161	)
Non-interest income		7,525			9,391			7,249			6,901			6,759
Non-interest expense		15,322			17,065			16,260			13,886			13,282
Net income		344,237			314,318			284,542			308,539			341,437
Dividends declared on preferred securities		47,944			34,634			20,744			18,911			23,814
Net income applicable to common shares		296,293			279,684			263,798			289,628			317,623
Dividends declared on common stock		296,293			279,684			263,798			289,628			382,840
BALANCE SHEET HIGHLIGHTS:
At period end:
Net loan participation interests	$	4,048,506		$	4,454,795		$	4,828,127		$	5,218,536		$	4,893,137
All other assets		901,230			899,090			845,464			187,442			623,884
Total assets		4,949,736			5,353,885			5,673,591			5,405,978			5,517,021
Total shareholders’ equity		4,495,753			4,649,460			5,069,776			5,405,978			5,516,351
Average balances:
Net loan participation interests	$	4,349,214		$	4,664,505		$	5,075,815		$	5,027,857		$	5,098,098
Total assets		4,816,467			5,217,640			5,530,253			5,647,772			6,052,136
Total shareholders’ equity		4,774,542			5,197,654			5,497,479			5,643,692			6,044,404
KEY RATIOS AND STATISTICS:
Yield on interest earning assets		6.94	%		5.84	%		4.74	%		4.77	%		5.82	%
Return on average assets		7.15			6.02			5.15			5.46			5.64
Return on average equity		7.21			6.05			5.18			5.47			5.65
Dividend payout ratio		100.00			100.00			100.00			100.00			121.00
Average shareholders’ equity to average assets		99.13			99.62			99.41			99.93			99.87
Preferred dividend coverage ratio		7.18	x		9.08	x		13.72	x		16.32	x		14.34	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 or the Company) is an Ohio corporation operating as a real estate investment trust (REIT) for federal income tax purposes. HPCI’s principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to its shareholders.

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

Forward-looking Statements

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

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

     Management encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. HPCI does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies and Use of Significant Estimates

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

     An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. Management has identified the allowances for credit losses (ACL) as the most significant accounting estimate. At December 31, 2006, the ACL was $52.5 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 adversely affect earnings or financial performance in future periods. At December 31, 2006, the ACL as a percent of total

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loan participation commitments was 1.28%. Based on the December 31, 2006 loan participation interests, a 10 basis point increase in this ratio to 1.38% would require $4.0 million in additional provision for credit losses, and would also negatively impact 2006 net income by approximately $4.0 million. A discussion about the process used to estimate the ACL is presented in the Credit Risk section of Management’s Discussion and Analysis in this report.

Summary Discussion of Results

2006 versus 2005

     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 of $344.2 million for 2006, $314.3 million for 2005, and $284.5 million for 2004. The increase in net income for 2006 was primarily the result of higher interest income from improved yields on loan participations and interest bearing deposits. Net income available to common shares was $296.3 million, $279.7 million, and $263.8 million for the same respective periods. Return on average assets (ROA) was 7.15% for 2006, 6.02% for 2005, and 5.15% for 2004. Return on average equity (ROE) was 7.21% for 2006, 6.05% for 2005, and 5.18% for 2004.

     HPCI had total assets of $4.9 billion at December 31, 2006, a decrease compared to the December 31, 2005 balance of $5.4 billion. Assets consist principally of participation interests in loans which were an aggregate of $4.1 billion and $4.5 billion at December 31, 2006 and 2005, respectively. The decline in total loan participation interests and total assets was due to the reduced availability of new loan participation purchases that met HPCI’s policies, primarily commercial real estate loans.

     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)		2006				2005				2004				2003				2002
At December 31,
Commercial	$	31,049	0.6	%	$	46,559	0.9	%	$	106,179	1.9	%	$	147,211	2.7	%	$	344,858	6.3	%
Commercial real estate		3,108,533	62.8			3,311,275	61.8			3,738,930	65.9			4,245,092	78.5			3,922,467	71.1
Consumer		845,272	17.1			997,094	18.6			819,250	14.4			622,575	11.5			612,357	11.1
Residential real estate		112,355	2.3			157,397	2.9			224,914	4.0			288,190	5.3			153,808	2.8
Total	$	4,097,209	82.8	%	$	4,512,325	84.2	%	$	4,889,273	86.2	%	$	5,303,068	98.0	%	$	5,033,490	91.3	%

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

     HPCI’s participation interests in commercial loans represented 0.6% and 0.9% of total assets as of December 31, 2006 and 2005, respectively. The decrease was due to continued portfolio run off. Participation interests in commercial real estate loans at December 31, 2006, which represented 62.8% of total assets, decreased compared with the same date last year primarily due to run off and decreased new loan purchases. Consumer loan participation interests were 17.1% of total assets at December 31, 2006, compared with 18.6% of total assets for the same date in 2005, as loan balances were down from the prior periods because HPCI has not purchased any new consumer loan participations since the first quarter of 2006. Residential real estate loan participation interests represented 2.3% and 2.9% of total assets as of December 31, 2006 and 2005, respectively. The decline in balance was due to portfolio run off, as there were no additional residential real estate loan purchases in 2006.

     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 2007.

     Cash and interest-bearing deposits with the Bank totaled $726.2 million and $810.1 million at December 31, 2006 and 2005, respectively. Typically, cash is invested with the Bank in an interest-bearing account. These interest-bearing

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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 amounts due from the Bank of $134.8 million at December 31, 2006, and $46.3 million at December 31, 2005. The balances represent principal and interest payments on loan participations remitted by customers directly to the Bank but not yet received by HPCI, net of new loan participation purchases.

     Total liabilities were $454.0 million, and $704.4 million at December 31, 2006, and 2005, respectively. The decrease was due to lower dividends and distributions payable.

     Shareholders’ equity was $4.5 billion at December 31, 2006, compared with the December 31, 2005 balance of $4.6 billion. This decline reflected the aggregate dividends and distributions declared on common and preferred securities partially offset by $344.2 million of net income in 2006.

     The preferred dividend coverage ratio for 2006 was 7.18, compared to 9.08 in 2005. 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.

2005 versus 2004

     HPCI reported net income of $314.3 million for 2005 compared with $284.5 million for 2004. The increase in net income 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.

     HPCI had total assets of $5.4 billion at December 31, 2005, a decrease compared with the December 31, 2004 balance of $5.7 billion. Total assets consisted 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 was due to the reduced availability of new loan participation purchases that met HPCI’s policies, primarily commercial real estate loans. Total liabilities were $704.4 million, and $603.8 million at December 31, 2005, and 2004, respectively. The increase was due to larger dividends and distributions payable.

     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 with 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.

     Shareholders’ equity was $4.6 billion at December 31, 2005, compared with 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 $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. For the year ended December 31, 2006, HPCI met all of the quarterly asset tests.

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     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 2006, 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, 2006, 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, 2006 and 2005, HPCI did not have any interest-bearing liabilities or related interest expense. Interest income is impacted by changes in the levels of interest rates and earning assets. The yield on earning assets is the percentage of interest income to average earning assets.

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

Table 6 — Interest and Fee Income

	2006							2005							2004
	Average							Average							Average
(in millions)	Balance		Income (1)		Yield			Balance		Income (1)		Yield			Balance		Income (1)		Yield
Loan participation interests:
Commercial	$	39.9	$	3.2		7.93	%	$	77.1	$	4.7		6.05	%	$	157.7	$	7.8		4.97	%
Commercial real estate		3,295.2		238.0		7.22			3,566.4		211.1		5.92			4,033.5		183.5		4.55
Consumer		935.4		63.2		6.76			892.1		61.0		6.84			702.6		51.4		7.31
Residential real estate		132.0		7.9		5.97			189.2		10.3		5.45			257.8		13.5		5.23
Total loan participations		4,402.5		312.3		7.09			4,724.8		287.1		6.08			5,151.6		256.2		4.97
Interest bearing deposits with The Huntington National Bank		366.3		19.0		5.12			457.4		15.6		3.43			376.3		6.0		1.60
Total	$	4,768.8	$	331.3		6.94	%	$	5,182.2	$	302.7		5.84	%	$	5,527.9	$	262.2		4.74	%

⁽¹⁾ Income includes interest and fees.

     Interest and fee income for the years ended December 31, 2006 and 2005 were $331.3 million and $302.7 million, respectively. The increase in interest and fee income was the result of higher yields partially offset by lower earning asset balances. The yield increased from 5.84% to 6.94% in 2006 versus 2005, or an effective 1.10%, while average total earning asset balances decreased by $413.4 million, or 8.0%. The tables above include interest received on participations in loans that are on a non-accrual status in the individual portfolios.

     Interest and fee income for the years ended December 31, 2005 and 2004 were $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 asset 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%.

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Reduction in Allowances for Credit Losses

     The reduction in allowances for credit losses is the 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 allowances for credit losses was a credit of $22.0 million for 2006, versus a credit of $19.8 million and $31.6 million for 2005 and 2004, respectively. The continued reduction in the allowance was indicative of lower net charge-offs during 2006 and 2005.

Non-Interest Income and Non-Interest Expense

     Non-interest income was $7.5 million, $9.4 million, and $7.2 million in 2006, 2005, and 2004, 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 $1.0 million, $3.0 million, and $0.7 million in 2006, 2005, and 2004, respectively. The decrease in collateral fees for 2006 was the result of the Bank releasing approximately $1.0 billion of HPCI’s consumer loans pledged as collateral with the FHLB in the first quarter of 2006. The increase in collateral fees for 2005 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. 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 $15.3 million, $17.1 million, and $16.3 million in 2006, 2005, and 2004, 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 premises and equipment. The servicing costs for the years ended December 31, 2006, 2005 and 2004 totaled $10.6 million, $11.2 million, and $9.9 million, respectively. The decrease in 2006 was due to lower loan participation balances, and the increase in 2005 was due to higher service fee rates on loan participation balances. Depreciation and amortization expenses totaled $3.9 million, $4.4 million, and $5.3 million for the years ended December 31, 2006, 2005, and 2004, respectively.

     In 2006, 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, 2006			June 30, 2005			June 30, 2004
Commercial and 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. In lieu of paying higher servicing costs to the Bank with respect to commercial and commercial real estate loans, HPCI waives 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.

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

     The predominate market risk to which HPCI is exposed is the risk of loss due to a decline in interest rates. If there is a decline in market interest rates, HPCI may experience a reduction in interest income from its loan participation interests and a corresponding decrease in funds available to be distributed to shareholders. When rates rise, HPCI is exposed to declines in the economic value of equity since approximately 33% of its loan participation portfolio is fixed rate.

     Huntington conducts its monthly interest rate risk management on a centralized basis and does not manage HPCI’s interest rate risk separately. Two broad approaches to modeling interest rate risk are employed: income simulation and

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economic value analysis. An income simulation analysis was used to measure the sensitivity of forecasted interest income to changes in market rates over a one-year horizon. The economic value analysis was conducted by subjecting the period-end balance sheet to changes in interest rates and measuring the impact of the changes in the value of the assets. The models used for these measurements assume, among other things, no new loan participation volume.

     Using the income simulation model for HPCI as of December 31, 2006, interest income for the next 12-month period would be expected to increase by $17.8 million, or 7.6%, 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 $18.7 million, or 8.0%, 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, 2006, the fair value of loan participation interests over the next 12 month period would be expected to increase $67.7 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 $90.9 million, or 2.2%, in the event of a immediate 200 basis point increase in rates from the forward rates implied in the yield curve.

     The following table shows data with respect to interest rates of the loans underlying HPCI’s loan participations at December 31, 2006 and 2005, respectively.

Table 7 — Total Loan Participation Interests by Interest Rates

December 31, 2006	Fixed Rate							Variable Rate (1)
					Percentage by							Percentage by
			Aggregate		Aggregate					Aggregate		Aggregate
	Number		Principal		Principal			Number		Principal		Principal
(in thousands)	of Loans		Balance		Balance			of Loans		Balance		Balance
under 5.00%		893	$	62,183		4.6	%		94	$	35,897		1.3	%
5.00% to 5.99%		4,991		365,366		27.1			428		103,526		3.8
6.00% to 6.99%		6,217		438,679		32.7			847		420,408		15.3
7.00% to 7.99%		4,076		284,263		21.1			1,994		1,527,821		55.6
8.00% to 8.99%		3,340		128,190		9.5			1,315		601,284		21.8
9.00% to 9.99%		1,810		43,432		3.2			284		46,563		1.7
10.00% to 10.99%		828		17,529		1.3			62		12,101		0.4
11.00% to 11.99%		287		5,376		0.4			16		1,833		0.1
12.00% and over		167		1,972		0.1			6		786		0.0
Total		22,609	$	1,346,990		100.0	%		5,046	$	2,750,219		100.0	%

December 31, 2005	Fixed Rate							Variable Rate(1)
					Percentage by							Percentage by
			Aggregate		Aggregate					Aggregate		Aggregate
	Number		Principal		Principal			Number		Principal		Principal
(in thousands)	of Loans		Balance		Balance			of Loans		Balance		Balance
under 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	%

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

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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.

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

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

     The following table provides aging information for the loans underlying HPCI’s loan participations at December 31, 2006.

Table 8 — Loan Participation Interests Aging

					Percentage by
	Total		Aggregate		Aggregate
	Number		Principal		Principal
(in thousands)	of Loans		Balance		Balance
Current		25,043	$	3,750,869		91.5	%
1 to 30 days past due		1,984		293,159		7.2
31 to 60 days past due		301		25,671		0.6
61 to 90 days past due		120		6,209		0.2
over 90 days past due (1)		207		21,301		0.5
Total		27,655	$	4,097,209		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.

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     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. Analysis of actual default experience indicated that the assigned probability of default was higher than our actual experience. Accordingly, during the 2006 third quarter, Huntington updated the criteria used to assess the probability-of-default on commercial and industrial credits. The application of these updated criteria had no significant impact on the allowance for credit losses. Huntington continually reviews and adjusts such criteria based on actual experience, which may result in further changes to such criteria, in future periods.

     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 15-month cycle, and the loan review group validates the risk grades on a minimum of 50% of the portfolio exposure.

     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.

     A specialized credit workout group manages problem credits and handles commercial recoveries, workouts, and problem loan sales, as well as the day-to-day management of relationships rated substandard or lower. 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. The allowance is comprised of two components: the transaction reserve and the economic reserve.

     The transaction reserve component of the ACL includes both (a) an estimate of loss based on pools of commercial and consumer loans with similar characteristics and (b) an estimate of loss based on an impairment review of each loan greater than $500,000 that is considered to be impaired. For commercial and commercial real estate loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The reserve factors applied to these

26

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. In the case of more homogeneous portfolios, such as consumer loans, the determination of the transaction reserve is based on reserve factors that include the use of forecasting models to measure inherent loss in these portfolios. Models and analyses are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies. Adjustments to the reserve factors are made as needed based on observed results of the portfolio analytics.

     The economic reserve incorporates our determination of the impact of risks associated with the general economic environment on the portfolio. The economic reserve is designed to address economic uncertainties and is determined based on economic indices as well as a variety of other economic factors that are correlated to the historical performance of the loan portfolio. Currently, two national and two regionally focused indices are utilized. The two national indices are: (1) the Real Consumer Spending, and (2) Consumer Confidence. The two regionally focused indices are: (1) the Institute for Supply Management Manufacturing, and (2) Non-agriculture Job Creation. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period-to-period, subject to a minimum level specified by policy.

     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, 2006 resulted in a reduction of the allowance of $22.0 million. This reduction compared with reductions of $19.8 million and $31.6 million for 2005 and 2004, respectively. 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)	2006			2005			2004			2003			2002
ALL balance, beginning of year	$	57,530		$	61,146		$	84,532		$	140,353		$	175,690
Allowance of loan participations acquired		19,404			25,071			21,201			45,397			37,020
Net loan (losses) recoveries
Commercial		1,124			1,247			1,594			(20,973	)		(29,686	)
Commercial real estate		(4,494	)		(5,175	)		(5,032	)		(13,525	)		(21,599	)
Consumer		(3,086	)		(4,362	)		(5,458	)		(22,999	)		(20,911	)
Residential real estate		(65	)		(231	)		(335	)		(2,502	)		—
Total net loan losses		(6,521	)		(8,521	)		(9,231	)		(59,999	)		(72,196	)
Reduction in ALL		(21,710	)		(19,228	)		(35,356	)		(41,219	)		(161	)
Economic Reserve transfer to AULPC		—			(938	)		—			—			—
ALL balance, end of year	$	48,703		$	57,530		$	61,146		$	84,532		$	140,353
AULPC balance, beginning of year	$	4,135		$	3,765		$	—		$	—		$	—
(Reduction in) provision for AULPC		(331	)		(568	)		3,765			—			—
Economic Reserve transfer from ALL		—			938			—			—			—
AULPC balance, end of year	$	3,804		$	4,135		$	3,765		$	—		$	—
Total Allowances for Credit Losses	$	52,507		$	61,665		$	64,911		$	84,532		$	140,353
ALL as a % of total participation interests		1.19	%		1.27	%		1.25	%		1.59	%		2.79	%
ACL as a % of total participation interests		1.28			1.37			1.33			1.59			2.79

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, 2006, 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)	2006				2005				2004				2003				2002
Commercial	$	430	0.8	%	$	635	1.0	%	$	9,148	2.2	%	$	25,375	2.8	%	$	75,264	6.9	%
Commercial real estate		42,130	75.9			48,303	73.4			44,105	76.4			47,561	80.1			26,605	77.8
Consumer		5,621	20.6			7,792	22.1			6,279	16.8			8,096	11.7			9,979	12.2
Residential real estate		522	2.7			800	3.5			1,614	4.6			3,500	5.4			2,883	3.1
Unallocated		—	—			—	—			—	—			—	—			25,622	—
Total ALL		48,703	100.0	%		57,530	100.0	%		61,146	100.0	%		84,532	100.0	%		140,353	100.0	%
AULPC		3,804	—			4,135	—			3,765	—			—	—			—	—
Total	$	52,507	100.0	%	$	61,665	100.0	%	$	64,911	100.0	%	$	84,532	100.0	%	$	140,353	100.0	%

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

Net Charge-offs

     Total net charge-offs were $6.5 million, or 0.15%, of total average loan participations, for the year ended December 31, 2006, down from $8.5 million, or 0.18%, for the year ended December 31, 2005. 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)		2006					2005					2004					2003				2002
Commercial	$	(1,124	)	(2.82)	%	$	(1,247	)	(1.62	)%	$	(1,594	)	(1.01	)%	$	20,973	8.41	%	$	29,686	5.90	%
Commercial real estate		4,494		0.14			5,175		0.15			5,032		0.12			13,525	0.33			21,599	0.56
Consumer		3,086		0.33			4,362		0.49			5,458		0.78			22,999	4.00			20,911	3.00
Residential real estate		65		0.05			231		0.12			335		0.13			2,502	0.98			—	—
Total Net Charge-offs	$	6,521		0.15		$	8,521		0.18		$	9,231		0.18		$	59,999	1.17		$	72,196	1.37

⁽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. In 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)	2006			2005			2004			2003			2002
Participation interests in non-accrual loans
Commercial	$	687		$	147		$	425		$	5,176		$	57,112
Commercial Real Estate		19,966			20,746			6,990			12,987			32,979
Consumer (1)		3,490			2,799			2,692			—			—
Residential Real Estate		1,159			2,923			4,205			4,157			6,455
Total Non-Performing Assets	$	25,302		$	26,615		$	14,312		$	22,320		$	96,546
NPAs as a % of total participation interests		0.62	%		0.59	%		0.29	%		0.42	%		1.92	%
ALL as a % of NPAs		192			216			427			379			145
ACL as a % of NPAs		208			232			454			379			145
Accruing loans past due 90 days or more	$	5,392		$	3,188		$	11,686		$	13,362		$	26,060

⁽¹⁾ In 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 decreased to $25.3 million at the end of 2006 from $26.6 million at December 31, 2005, representing 0.62% and 0.59% of total participation interests, respectively. The decrease primarily related to residential real estate loans.

     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.

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, 2006 and 2005, unfunded commitments totaled $624.5 million and $827.3 million, respectively. It is expected that cash flows generated by the existing portfolio will be sufficient to meet these obligations.

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LIQUIDITY AND CAPITAL RESOURCES

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

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

     At December 31, 2006 and 2005, HPCI maintained cash and interest bearing deposits with the Bank totaling $726.2 million and $810.1 million, respectively. In 2007, HPCI will use $450 million to pay dividends and other distributions payable at December 31, 2006. 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, 2006, HPCI had no material liabilities or contractual obligations, other than unfunded loan commitments of $624.5 million, with a weighted average maturity of 1.7 years, and dividend and distributions payable of $450.0 million.

     Shareholders’ equity was $4.5 billion at December 31, 2006, compared to the December 31, 2005 balance of $4.6 billion. This decline reflected the aggregate dividends and distributions declared on common and preferred securities offset by the $344.2 million of net income in 2006.

     The preferred dividend coverage ratio for 2006 was 7.18x, compared to 9.08x in 2005. 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.

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RESULTS FOR THE FOURTH QUARTER

Table 13 — Quarterly Statements of Income

	2006												2005			4Q06 vs 4Q05
(in thousands)	Fourth			Third			Second			First			Fourth			$ Chg			% Chg
Interest and fee income
Interest on loan participation interests:
Commercial	$	742		$	772		$	792		$	846		$	982		$	(240	)		(24.4	)%
Commercial real estate		60,377			61,475			59,841			55,782			55,053			5,324			9.7
Consumer		14,604			15,338			16,067			16,700			16,268			(1,664	)		(10.2	)
Residential real estate		1,762			1,880			2,007			2,232			2,341			(579	)		(24.7	)
Total loan participation interest income		77,485			79,465			78,707			75,560			74,644			2,841			3.8
Fees from loan participation interests		265			227			279			293			320			(55	)		(17.2	)
Interest on deposits with The Huntington National Bank		8,115			6,129			3,290			1,491			7,200			915			12.7
Total interest and fee income		85,865			85,821			82,276			77,344			82,164			3,701			4.5
Reduction in allowances for credit losses		(4,400	)		(3,255	)		(5,203	)		(9,183	)		(4,409	)		9			0.2
Interest income after reduction in allowances for credit losses		90,265			89,076			87,479			86,527			86,573			3,692			4.3
Non-interest income:
Rental income		1,710			1,591			1,591			1,591			1,590			120			7.5
Collateral fees		101			108			115			718			976			(875	)		(89.7	)
Total non-interest income		1,811			1,699			1,706			2,309			2,566			(755	)		(29.4	)
Non-interest expense:
Servicing costs		2,521			2,611			2,720			2,783			2,730			(209	)		(7.7	)
Depreciation		947			984			999			1,017			1,045			(98	)		(9.4	)
(Gain) loss on disposal of fixed assets		—			—			—			(31	)		4			(4	)		N.M.
Other		198			201			202			170			288			(90	)		(31.3	)
Total non-interest expense		3,666			3,796			3,921			3,939			4,067			(401	)		(9.9	)
Income before provision for income taxes		88,410			86,979			85,264			84,897			85,072			3,338			3.9
Provision for income taxes		386			332			310			285			251			135			53.8
Net income	$	88,024		$	86,647		$	84,954		$	84,612		$	84,821		$	3,203			3.8
Dividends declared on preferred securities		(12,475	)		(12,681	)		(11,781	)		(11,007	)		(10,050	)		(2,425	)		(24.1	)
Net income applicable to common shares (1)	$	75,549		$	73,966		$	73,173		$	73,605		$	74,771		$	778			1.0	%

⁽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 2006 was $88.0 million, up 3.8% from $84.8 million for the fourth quarter 2005. Net income applicable to common shares was $75.5 million for the fourth quarter of 2006, an increase of 1% from $74.8 million, in fourth quarter of 2005. Dividend declarations on preferred stock increased by 24.1% in the most recent quarter to $12.5 million compared with $10.1 million for the fourth quarter 2005, 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 $85.9 million, which was up from $82.2 million for the prior year quarter, due to improved yields on total loan participations and interest bearing deposits. The yield on earning assets increased to 7.02% from 6.17% for the same respective quarterly periods.

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     Total assets decreased to $4.9 billion at the end of 2006, from $5.4 billion at December 31, 2005. The reduction primarily related to lower commercial real estate and consumer loan participation balances.

     The ACL decreased to 1.28% of total loan participation interests at December 31, 2006, from 1.37% at the end of the prior year quarter. The decline in the ACL reflects the overall improvement in credit quality of the loan participation portfolio.

     Net charge-offs in the fourth quarter of 2006 were $2.2 million versus $1.0 million for the fourth quarter of 2005. This represents 0.21% and 0.09% of average loan participations for the same respective quarterly periods.

     HPCI received rent from the Bank of $1.7 million, and $1.6 million for the fourth quarters of 2006 and 2005, respectively, 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 for each of the fourth quarters of 2006 and 2005. Servicing fees paid by HPCI were $2.5 million, and $2.7 million for the fourth quarters of 2006 and 2005, respectively. HPCLI is a taxable REIT subsidiary and therefore provisions of $0.4 million and $0.3 million for income taxes applied to its taxable income are reflected in the fourth quarters of 2006 and 2005, 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, 2006 and 2005 and for the years ended December 31, 2006, 2005, and 2004 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	34
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 2006, 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 of 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, 2006. 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, 2006, 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:		By:
	Donald R. Kimble		Thomas P. Reed
	President		Vice President
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)

March 22, 2007

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 of 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, 2006, 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, 2006, 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, 2006, 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, 2006 of the Company and our report dated March 22, 2007 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 22, 2007

34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders 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, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. 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.

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 financial statements present fairly, in all material respects, the financial position of Huntington Preferred Capital, Inc. and subsidiary at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, 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, 2006, 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 22, 2007 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.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 22, 2007

35

Huntington Preferred Capital, Inc.
Consolidated Balance Sheets

	December 31,			December 31,
(in thousands, except share data)	2006			2005
Assets
Cash and interest bearing deposits with The Huntington National Bank	$	726,154		$	810,102
Due from The Huntington National Bank		134,815			46,321
Loan participation interests:
Commercial		31,049			46,559
Commercial real estate		3,108,533			3,311,275
Consumer		845,272			997,094
Residential real estate		112,355			157,397
Total loan participation interests		4,097,209			4,512,325
Allowance for loan losses		(48,703	)		(57,530	)
Net loan participation interests		4,048,506			4,454,795
Premises and equipment		17,711			21,683
Accrued income and other assets		22,550			20,984
Total assets	$	4,949,736		$	5,353,885
Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments	$	3,804		$	4,135
Dividends and distributions payable		450,000			700,000
Other liabilities		179			290
Total liabilities		453,983			704,425
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		3,694,753			3,848,460
Retained earnings		—			—
Total shareholders’ equity		4,495,753			4,649,460
Total liabilities and shareholders’ equity	$	4,949,736		$	5,353,885

See notes to consolidated financial statements.

36

Huntington Preferred Capital, Inc.
Consolidated Statements of Income

	Year Ended
	December 31,
(in thousands)	2006			2005			2004
Interest and fee income
Interest on loan participation interests:
Commercial	$	3,152		$	4,632		$	7,810
Commercial real estate		237,475			209,801			182,047
Consumer		62,709			60,345			50,543
Residential real estate		7,881			10,304			13,474
Total loan participation interest income		311,217			285,082			253,874
Fees from loan participation interests		1,064			1,979			2,337
Interest on deposits with The Huntington National Bank		19,025			15,682			6,004
Total interest and fee income		331,306			302,743			262,215
Reduction in allowances for credit losses		(22,041	)		(19,796	)		(31,591	)
Interest income after reduction in allowances for credit losses		353,347			322,539			293,806
Non-interest income:
Rental income		6,483			6,362			6,503
Collateral fees		1,042			3,029			746
Total non-interest income		7,525			9,391			7,249
Non-interest expense:
Servicing costs		10,635			11,210			9,923
Depreciation and amortization		3,947			4,370			5,273
(Gain) loss on disposal of premises and equipment		(31	)		582			218
Other		771			903			846
Total non-interest expense		15,322			17,065			16,260
Income before provision for income taxes		345,550			314,865			284,795
Provision for income taxes		1,313			547			253
Net income	$	344,237		$	314,318		$	284,542
Dividends declared on preferred securities		(47,944	)		(34,634	)		(20,744	)
Net income applicable to common shares	$	296,293		$	279,684		$	263,798

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, 2004		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
Comprehensive Income:
Net income
Total comprehensive income
Balance, December 31, 2006		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, 2004		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
Comprehensive Income:
Net income															344,237			344,237
Total comprehensive income																		344,237
Dividends declared on Class A preferred securities															(80	)		(80	)
Dividends declared on Class B preferred securities															(20,394	)		(20,394	)
Dividends declared on Class C preferred securities															(3,938	)		(3,938	)
Dividends declared on Class D preferred securities															(23,532	)		(23,532	)
Dividends declared on common stock															(296,293	)		(296,293	)
Return of capital												(153,707	)					(153,707	)
Balance, December 31, 2006		14,000	$	350,000		—	$	—		14,000	$	3,694,753		$	—		$	4,495,753

See notes to consolidated financial statements.

38

Huntington Preferred Capital, Inc.
Consolidated Statements of Cash Flows

	Year Ended
	December 31,
(in thousands)	2006			2005			2004
Operating activities
Net income	$	344,237		$	314,318		$	284,542
Adjustments to reconcile net income to net cash provided by operating activities:
Reduction of allowances for credit losses		(22,041	)		(19,796	)		(31,591	)
Depreciation and amortization		3,947			4,370			5,273
Deferred income tax (benefit) expense		(682	)		178			(1,307	)
(Gain) loss on disposal of premises and equipment		(31	)		582			218
Decrease (increase) in due from The Huntington National Bank		7			(24,404	)		13,477
(Decrease) increase in other liabilities		(111	)		239			50
Other, net		538			(1,150	)		2,936
Net cash provided by operating activities		325,864			274,337			273,598
Investing activities
Participation interests acquired		(2,613,450	)		(2,885,454	)		(4,273,356	)
Sales and repayments of loans underlying participation interests		2,951,526			3,255,600			4,696,670
Proceeds from the sale of premises and equipment		56			—			—
Net cash provided by investing activities		338,132			370,146			423,314
Financing activities
Dividends paid on preferred securities		(47,944	)		(34,634	)		(20,744	)
Dividends paid on common stock		(279,684	)		(263,798	)		—
Return of capital to common shareholders		(420,316	)		(336,202	)		—
Net cash used for financing activities		(747,944	)		(634,634	)		(20,744	)
Change in cash and cash equivalents		(83,948	)		9,849			676,168
Cash and cash equivalents at beginning of year		810,102			800,253			124,085
Cash and cash equivalents at end of period	$	726,154		$	810,102		$	800,253
Supplemental information:
Income taxes paid	$	2,077		$	40		$	1,886
Dividends and distributions declared, not paid		450,000			700,000			600,000
Change in loan participation activity due from The Huntington National Bank		88,501			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. Four related parties own HPCI’s common stock: Huntington Capital Financing LLC (HCF); Huntington Preferred Capital II, Inc. (HPCII); Huntington Preferred Capital Holdings, Inc. (Holdings); and Huntington Bancshares Incorporated (Huntington). HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). HCF, HPCII, and Holdings are direct and indirect subsidiaries of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At December 31, 2006, the Bank, on a consolidated basis with its subsidiaries, accounted for 99% of Huntington’s (on a consolidated basis) total assets and, for the year ended December 31, 2006, accounted for 94% of Huntington’s net income. Thus, consolidated financial statements for the Bank and for Huntington were substantially the same for these periods. 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 directors or executive officers of HPCI or Huntington.

     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. Consumer home equity loan participations are placed on non-accrual status when they exceed 180 days past due. 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.

     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.

40

     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.

     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. This judgment is based on the size and current risk characteristics of the portfolio, a review of individual loan participations, and historical and anticipated loss experience. External influences such as general economic conditions, regulatory guidelines, and other factors are also assessed in determining the level of the allowance.

     The determination of the allowance requires significant estimates, including the timing and amounts of expected future cash flows on impaired loans, consideration of economic conditions, and historical loss experience pertaining to pools of homogeneous loans, all of which may be susceptible to change. 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. Based on Management’s quarterly evaluation of the factors previously mentioned, the allowance for loan losses may either be increased through a provision for credit losses, net of recoveries, charged to earnings or lowered through a reduction in allowance for credit losses, net of recoveries, credited to earnings. Credit losses are charged against the allowance when Management believes the loan balance, or a portion thereof, is uncollectible.

     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 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.

     The transaction reserve component of the ACL includes both (a) an estimate of loss based on pools of commercial and consumer loans or loan commitments with similar characteristics 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 loans and related loan commitments, the estimate of loss based on pools of loans with similar characteristics is made 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. In the case of more homogeneous portfolios, such as consumer loans, the determination of the transaction reserve is based on reserve factors that include the use of forecasting models to measure inherent loss in these portfolios. Models and analyses are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies. Adjustments to the reserve factors are made, as needed based on observed results of the portfolio analytics.

     The economic reserve incorporates our determination of the impact of risks associated with the general economic environment on the portfolio. The economic reserve is designed to address economic uncertainties and is determined based on economic indices as well as a variety of other economic factors that are correlated to the historical performance of the loan portfolio. Currently, two national and two regionally focused indices are utilized. The two

41

national indices are: (1) the Real Consumer Spending, and (2) Consumer Confidence. The two regionally focused indices are: (1) the Institute for Supply Management Manufacturing, and (2) Non-agriculture Job Creation. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period-to-period, subject to a minimum level specified by policy.

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: Huntington, HCF, HPCII, and Holdings own all of HPCI’s common stock 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, a provision for income taxes is included in the accompanying financial statements only 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, 2006, 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.”

Note 2 — New Accounting Pronouncements

     FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) — In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes. This Interpretation of FASB Statement No. 109, Accounting for Income Taxes, contains guidance on the recognition and measurement of uncertain tax positions. HPCI will be required to recognize the impact of a tax position if it is more likely than not that it will be sustained upon examination, based upon the technical merits of the position. The effective date for application of this interpretation is for periods beginning after December 15, 2006. The cumulative effect of applying the provisions of this Interpretation must be reported as an adjustment to the opening balance of retained earnings for that fiscal period. Management does not expect that the impact of this new pronouncement will be material to HPCI’s financial condition, results of operations, or cash flows.

     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 No. 154, which replaces APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this new pronouncement had no impact on HPCI’s financial statements.

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)	2006		2005
Commercial	$	31,049	$	46,559
Commercial real estate		3,108,533		3,311,275
Consumer		845,272		997,094
Residential real estate		112,355		157,397
Total Loan Participation Interests	$	4,097,209	$	4,512,325

42

     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 94.6% and 95.9% of the portfolio at December 31, 2006 and 2005, respectively.

Participations in Non-Performing Loans and Past Due Loans

     At December 31, 2006 and 2005, 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)	2006		2005
Commercial	$	687	$	147
Commercial real estate		19,966		20,746
Consumer		3,490		2,799
Residential real estate		1,159		2,923
Total Participations in Non-Accrual Loans	$	25,302	$	26,615
Participations in Accruing Loans Past Due 90 Days or More	$	5,393	$	3,188

     The amount of interest that would have been recorded under the original terms for participations in loans classified as non-accrual was $4.3 million for 2006, $2.7 million for 2005, and $0.9 million for 2004. Amounts actually collected and recorded as interest income for these participations totaled $1.0 million, $0.7 million, and $0.5 million in 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)	2006			2005			2004
ALL balance, beginning of year	$	57,530		$	61,146		$	84,532
Allowance of loan participations acquired		19,404			25,071			21,201
Net loan losses		(6,521	)		(8,521	)		(9,231	)
Reduction in ALL		(21,710	)		(19,228	)		(31,031	)
Transfer to AULPC		—			(938	)		(4,325	)
ALL balance, end of year	$	48,703		$	57,530		$	61,146
AULPC balance, beginning of year	$	4,135		$	3,765		$	—
Reduction in AULPC		(331	)		(568	)		(560	)
Economic reserve transfer from ALL		—			938			4,325
AULPC balance, end of year	$	3,804		$	4,135		$	3,765
Total ACL	$	52,507		$	61,665		$	64,911
Recorded Balance of Impaired Loans, at end of year (1):
With specific reserves assigned to the loan balances	$	5,976		$	15,038		$	6,047
With no specific reserves assigned to the loan balances		6,051			7,816			7,169
Total	$	12,027		$	22,854		$	13,216
Average Balance of Impaired Loans for the Year (1)	$	16,131		$	13,863		$	10,074
Allowance for Loan Losses on Impaired Loans (1)		1,065			4,802			3,617

⁽¹⁾ Includes impaired commercial and commercial real estate loans with outstanding balances greater than $500,000. A loan is impaired when it is probable that HPCI 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 2006 and 2005 and $0.2 million in 2004.

43

     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.

     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.

Note 5 — Premises and Equipment

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

(in thousands)	2006			2005
Land and land improvements	$	340		$	365
Buildings		533			533
Leasehold improvements		101,026			101,056
Total premises and equipment		101,899			101,954
Accumulated depreciation and amortization		(84,188	)		(80,271	)
Net Premises and Equipment	$	17,711		$	21,683

     Premises and equipment related depreciation and amortization, in the amounts of $3.9 million, $4.4 million, and $5.3 million, were charged to expense in the years ended December 31, 2006, 2005, and 2004, 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.

44

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

(in thousands)	2006		2005		2004
Class A preferred securities	$	80	$	80	$	80
Class B preferred securities		20,394		13,296		5,887
Class C preferred securities		3,938		3,938		3,938
Class D preferred securities		23,532		17,320		10,839
Total preferred dividends declared	$	47,944	$	34,634	$	20,744

     As of December 31, 2006 and 2005, 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, 2006, 2005, and 2004, were $296.3 million, $279.7 million, and $263.8 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 $10.6 million, $11.2 million, and $9.9 million for the respective years ended 2006, 2005, and 2004.

     In 2006, 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, 2006			June 30, 2005			June 30, 2004
Commercial and commercial real estate		0.125	%		0.125	%		0.125	%
Consumer		0.650	%		0.750	%		0.320	%
Residential real estate		0.267	%		0.267	%		0.2997	%

     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. The Bank and HPCI performed a review of loan-servicing fees in 2006, and have agreed to retain current servicing rates for all loan participation categories, including the continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed in 2007.

     Huntington’s and the Bank’s personnel handle day-to-day operations of HPCI such as financial analysis and reporting, accounting, tax reporting, and other administrative functions. On a monthly basis, HPCI reimburses the Bank and Huntington for the cost related to the time spent by employees for performing these functions. These personnel

45

costs totaled $0.5 million, $0.5 million, and $0.6 million for the years ended December 31, 2006, 2005, and 2004, 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, 2006:

	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, 2006, 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, 2006, 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 $6.5 million, $6.4 million, and $6.5 million for years ended December 31, 2006, 2005, and 2004, 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 $134.8 million at December 31, 2006, and $46.3 million at December 31, 2005.

     HPCI has assets pledged in association with the Bank’s advances from the Federal Home Loan Bank (FHLB). For further information regarding this see Note 10.

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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
2006
Interest and fee income	$	85,865		$	85,821		$	82,276		$	77,344
Reduction in allowance for credit losses		(4,400	)		(3,255	)		(5,203	)		(9,183	)
Non-interest income		1,811			1,699			1,706			2,309
Non-interest expense		3,666			3,796			3,921			3,939
Income before provision for income taxes		88,410			86,979			85,264			84,897
Provision for income taxes		386			332			310			285
Net income		88,024			86,647			84,954			84,612
Dividends declared on preferred securities		(12,475	)		(12,681	)		(11,781	)		(11,007	)
Net income applicable to common shares	$	75,549		$	73,966		$	73,173		$	73,605
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

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

47

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 $3.2 billion as of December 31, 2006. As of that same date, the Bank had borrowings of $1.0 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. The pledge limit was established by HPCI’s board at 25% of total assets, or approximately $1.2 billion as of December 31, 2006, as reflected in HPCI’s month-end management report. This pledge limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors. The amount of HPCI’s participation interests pledged was $0.1 billion at December 31, 2006, and $1.1 billion at December 31, 2005. In 2005, the loans pledged consisted of 1-4 family residential mortgage portfolio and consumer second mortgage loans. The reduction during 2006 was due to the Bank’s release of approximately $1.0 billion of HPCI’s second mortgage loans pledged as collateral with the FHLB. The agreement also provides that the Bank will pay HPCI a monthly fee based upon the total loans pledged by HPCI. The Bank paid HPCI a total of $1.0 million, $3.0 million, and $0.7 million in the respective annual periods ended December 31, 2006, 2005, and 2004 as compensation for making such assets available to the Bank. 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.

     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, 2006 and 2005, the unfunded loan commitments totaled $624.5 million and $827.3 million, respectively.

Note 11 — 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.

48

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, 2006 to which this report relates that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Item 9A(T): Controls and Procedures

     Not applicable.

Item 9B: Other Information

     Not applicable.

Part III

Item 10: Directors and Executive Officers and Corporate Governance

     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 2007 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 2007 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 2007 Information Statement and is incorporated herein by reference.

Item 13: Certain Relationships and Related Transactions, and Director Independence

     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 2007 Information Statement and is incorporated herein by reference.

49

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 2007 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 52 and 53 of this Form 10-K.

(b) The exhibits to this Form 10-K begin on page 54.

(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 23rd day of March, 2007.

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 23rd day of March, 2007.

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

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

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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 worldwide 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.

3.1.	Amended and Restated Articles of Incorporation (previously filed as Exhibit 3(a)(ii) to Amendment No. 4 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on October 12, 2001, and incorporated herein by reference.)
3.2.	Code of Regulations (previously filed as Exhibit 3(b) to the Registrant’s Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 17, 2001, and incorporated herein by reference.)
4.1.	Specimen of certificate representing Class C preferred securities, previously filed as Exhibit 4 to the Registrant’s Amendment No. 1 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 31, 2001, and incorporated herein by reference.
10.1.	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).
10.2.	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).
10.3.	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).
10.4.	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).
10.5.	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).
10.6.	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).
10.7.	Amended and Restated Agreement dated June 1, 2005 between Huntington Preferred Capital Inc. and 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).
10.8.	Limited Waiver of Contract Provision, dated August 11, 2006, with Huntington Preferred Capital Holdings, Inc., Huntington Preferred Capital, Inc., and The Huntington National Bank (previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, and incorporated herein by reference).
12.1	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.

52

14.1	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 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.
21.1	List of Subsidiaries.
24.1	Power of Attorney.
31.1.	Rule 13a-14(a) Certification — Chief Executive Officer.
31.2.	Rule 13a-14(a) Certification — Chief Financial Officer.
32.1.	Section 1350 Certification — Chief Executive Officer.
32.1.	Section 1350 Certification — Chief Financial Officer.
99.1.	Consolidated Financial Statements of Huntington Bancshares Incorporated as of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005, and 2004.

53

EX-12.1

Exhibit 12.1

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

	Year Ended December 31,
(in thousands)	2006			2005			2004			2003			2002
Earnings:
Income before taxes	$	345,550		$	314,865		$	284,795		$	308,635		$	341,392
Add: Fixed charges, excluding interest on deposits		—			—			—			—			—
Earnings available for fixed charges, excluding interest on deposits		345,550			314,865			284,795			308,635			341,392
Add: Interest on deposits		—			—			—			—			—
Earnings available for fixed charges, including interest on deposits	$	345,550		$	314,865		$	284,795		$	308,635		$	341,392
Combined Fixed Charges and Preferred Stock Dividends:
Interest expense, excluding interest on deposits	$	—		$	—		$	—		$	—		$	—
Interest factor in net rental expense		—			—			—			—			—
Total fixed charges, excluding interest on deposits		—			—			—			—			—
Add: Interest on deposits		—			—			—			—			—
Total fixed charges, including interest on deposits		—			—			—			—			—
Preferred stock dividends		47,944			34,634			20,744			18,911			23,814
Combined fixed charges and preferred stock dividends	$	47,944		$	34,634		$	20,744		$	18,911		$	23,814
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends		7.21	x		9.09	x		13.73	x		16.32	x		14.34	x

EX-21.1

Exhibit 21.1

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-24.1

Exhibit 24.1

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, 2006, 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 23, 2007.

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/ 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
/s/ Richard I. Witherow Richard I. Witherow	Director

EX-31.1

Exhibit 31.1

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 23, 2007

/s/ Donald R. Kimble  

Donald R. Kimble, President 

(chief executive officer) 

EX-31.2

Exhibit 31.2

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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 23, 2007

/s/ Thomas P. Reed  

Thomas P. Reed, Vice President 

(chief financial officer) 

EX-32.1

Exhibit 32.1

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, 2006, 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 23, 2007

EX-32.2

Exhibit 32.2

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, 2006, 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 23, 2007

EX-99.1

Exhibit 99.1

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, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. 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.

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 financial statements present fairly, in all material respects, the financial position of Huntington Bancshares Incorporated and subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 2, 5, 19, and 21 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, SFAS No. 156, Accounting for Servicing of Financial Assets, and SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, in 2006.

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, 2006, 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 21, 2007 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 21, 2007

82

CONSOLIDATED BALANCE SHEETS

HUNTINGTON BANCSHARES INCORPORATED

			December 31,
(in thousands, except number of shares)			2006			2005
Assets
Cash and due from banks			$	1,080,163		$	966,445
Federal funds sold and securities purchased under resale agreements				440,584			74,331
Interest bearing deposits in banks				74,168			22,391
Trading account securities				36,056			8,619
Loans held for sale				270,422			294,344
Investment securities				4,362,924			4,526,520
Loans and leases:
		Commercial and industrial loans and leases		7,849,912			6,809,208
		Commercial real estate loans		4,504,540			4,036,171
		Automobile loans		2,125,821			1,985,304
		Automobile leases		1,769,424			2,289,015
		Home equity loans		4,926,900			4,762,743
		Residential mortgage loans		4,548,918			4,193,139
		Other consumer loans		427,910			396,586
Loans and leases				26,153,425			24,472,166
Allowance for loan and lease losses				(272,068	)		(268,347	)
Net loans and leases				25,881,357			24,203,819
Bank owned life insurance				1,089,028			1,001,542
Premises and equipment				372,772			360,677
Automobile operating lease assets				28,331			189,003
Goodwill				570,876			212,530
Other intangible assets				59,487			4,956
Accrued income and other assets				1,062,851			899,628
Total assets			$	35,329,019		$	32,764,805
Liabilities and shareholders’ equity
Liabilities
	Deposits in domestic offices
		Demand deposits — non-interest bearing	$	3,615,745		$	3,390,044
		Interest bearing		20,640,368			18,548,943
	Deposits in foreign offices			791,657			470,688
	Deposits			25,047,770			22,409,675
	Short-term borrowings			1,676,189			1,889,260
	Federal Home Loan Bank advances			996,821			1,155,647
	Other long-term debt			2,229,140			2,418,419
	Subordinated notes			1,286,657			1,023,371
	Deferred income tax liability			443,921			743,655
	Allowance for unfunded loan commitments and letters of credit			40,161			36,957
	Accrued expenses and other liabilities			594,034			530,320
Total liabilities				32,314,693			30,207,304
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 235,474,366 and 224,106,172 shares, respectively			2,560,569			2,491,326
	Less 22,391,889 and 33,760,083 treasury shares, respectively			(506,946	)		(693,576	)
	Accumulated other comprehensive loss			(55,066	)		(22,093	)
	Retained earnings			1,015,769			781,844
Total shareholders’ equity				3,014,326			2,557,501
Total liabilities and shareholders’ equity			$	35,329,019		$	32,764,805

See Notes to Consolidated Financial Statements.

83

CONSOLIDATED STATEMENTS OF INCOME

HUNTINGTON BANCSHARES INCORPORATED

			Year Ended December 31,
(in thousands, except per share amounts)			2006			2005			2004
Interest and fee income
	Loans and leases
		Taxable	$	1,775,445		$	1,428,371		$	1,132,599
		Tax-exempt		2,154			1,466			1,474
	Investment securities
		Taxable		231,294			157,716			171,852
		Tax-exempt		23,901			19,865			17,884
	Other			37,725			34,347			23,506
Total interest income				2,070,519			1,641,765			1,347,315
Interest expense
	Deposits			717,167			446,919			257,099
	Short-term borrowings			72,222			34,334			13,053
	Federal Home Loan Bank advances			60,016			34,647			33,253
	Subordinated notes and other long-term debt			201,937			163,454			132,536
Total interest expense				1,051,342			679,354			435,941
Net interest income				1,019,177			962,411			911,374
Provision for credit losses				65,191			81,299			55,062
Net interest income after provision for credit losses				953,986			881,112			856,312
	Service charges on deposit accounts			185,713			167,834			171,115
	Trust services			89,955			77,405			67,410
	Brokerage and insurance income			58,835			53,619			54,799
	Other service charges and fees			51,354			44,348			41,574
	Bank owned life insurance income			43,775			40,736			42,297
	Automobile operating lease income			43,115			133,015			285,431
	Mortgage banking income			41,491			28,333			26,786
	Gains on sales of automobile loans			3,095			1,211			14,206
	Securities gains (losses), net			(73,191	)		(8,055	)		15,763
	Other income			116,927			93,836			99,217
Total non-interest income				561,069			632,282			818,598
	Personnel costs			541,228			481,658			485,806
	Outside data processing and other services			78,779			74,638			72,115
	Net occupancy			71,281			71,092			75,941
	Equipment			69,912			63,124			63,342
	Marketing			31,728			26,279			24,600
	Automobile operating lease expense			31,286			103,850			235,080
	Professional services			27,053			34,569			36,876
	Telecommunications			19,252			18,648			19,787
	Printing and supplies			13,864			12,573			12,463
	Amortization of intangibles			9,962			829			817
	Restructuring reserve releases			—			—			(1,151	)
	Other expense			106,649			82,560			96,568
Total non-interest expense				1,000,994			969,820			1,122,244
Income before income taxes				514,061			543,574			552,666
Provision for income taxes				52,840			131,483			153,741
Net income			$	461,221		$	412,091		$	398,925
Average common shares — basic				236,699			230,142			229,913
Average common shares — diluted				239,920			233,475			233,856
Per common share
Net income — basic			$	1.95		$	1.79		$	1.74
Net income — diluted				1.92			1.77			1.71
Cash dividends declared				1.000			0.845			0.750

See Notes to Consolidated Financial Statements.

84

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, 2004				—	$	—		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 period, net of reclassification for 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 period, net of reclassification for 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
	Comprehensive Income:
	Net income																					461,221			461,221
	Unrealized net gains on investment securities arising during the period, net of reclassification for net realized losses																		48,270						48,270
	Unrealized gains on cash flow hedging derivatives																		1,802						1,802
	Minimum pension liability adjustment																		269						269
		Total comprehensive income																							511,562
	Cumulative effect of change in accounting principle for servicing financial assets, net of tax of $6,521																					12,110			12,110
	Cumulative effect of change in accounting for funded status of pension plans, net of tax of $44,716																		(83,314	)					(83,314	)
	Cash dividends declared ($1.00 per share)																					(239,406	)		(239,406	)
	Shares issued pursuant to acquisition									53,366			25,350			522,390									575,756
	Recognition of the fair value of share-based compensation									18,574															18,574
	Treasury shares purchased												(15,981	)		(378,835	)								(378,835	)
	Stock options exercised									(3,007	)		2,013			43,836									40,829
	Other									310			(14	)		(761	)								(451	)
Balance — December 31, 2006				—	$	—		257,866	$	2,560,569			(22,392	)	$	(506,946	)	$	(55,066	)	$	1,015,769		$	3,014,326

See Notes to Consolidated Financial Statements.

85

CONSOLIDATED STATEMENTS OF CASH FLOWS

HUNTINGTON BANCSHARES INCORPORATED

			Year Ended December 31,
(in thousands of dollars)			2006			2005			2004
Operating activities
	Net income		$	461,221		$	412,091		$	398,925
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for credit losses		65,191			81,299			55,062
		Depreciation and amortization		111,649			172,977			306,113
		Decrease in accrued income taxes		(69,411	)		(66,593	)		(22,125	)
		Deferred income tax (benefit) provision		(288,047	)		(32,110	)		140,962
		Decrease (increase) in trading account securities		24,784			275,765			(302,041	)
		Pension contribution		(29,800	)		(63,600	)		(44,667	)
		Originations of loans held for sale		(2,537,999	)		(2,572,346	)		(1,858,262	)
		Principal payments on and proceeds from loans held for sale		2,532,908			2,501,471			1,861,272
		Losses (gains) on investment securities		73,191			8,055			(15,763	)
		Other, net		(119,228	)		(42,310	)		(8,740	)
Net cash provided by operating activities				224,459			674,699			528,216
Investing activities
	(Increase) decrease in interest bearing deposits in banks			(48,681	)		7			11,229
	Net cash received in acquisitions			60,772			—			—
	Proceeds from:
		Maturities and calls of investment securities		604,286			463,001			881,305
		Sales of investment securities		2,829,529			1,995,764			2,386,479
	Purchases of investment securities			(3,015,922	)		(2,832,258	)		(2,438,158	)
	Proceeds from sales of loans			245,635			—			1,534,395
	Net loan and lease originations, excluding sales			(338,022	)		(1,012,345	)		(4,216,309	)
	Proceeds from sale of operating lease assets			128,666			280,746			451,264
	Purchases of premises and equipment			(47,207	)		(57,288	)		(56,531	)
	Other, net			(7,760	)		20,415			2,910
Net cash provided by (used for) investing activities				411,296			(1,141,958	)		(1,443,416	)
Financing activities
	Increase in deposits			936,766			1,655,736			2,273,046
	(Decrease) increase in short-term borrowings			(292,211	)		682,027			(245,071	)
	Proceeds from issuance of subordinated notes			250,000			—			148,830
	Maturity/redemption of subordinated notes			(4,080	)		—			(100,000	)
	Proceeds from Federal Home Loan Bank advances			2,517,210			809,589			1,088
	Maturity of Federal Home Loan Bank advances			(2,771,417	)		(925,030	)		(3,000	)
	Proceeds from issuance of long-term debt			935,000			—			925,000
	Maturity of long-term debt			(1,158,942	)		(1,719,403	)		(1,455,000	)
	Purchase of minority interest in consolidated subsidiaries			—			(107,154	)		—
	Dividends paid on common stock			(231,117	)		(200,628	)		(168,075	)
	Repurchases of common stock			(378,835	)		(231,656	)		—
	Other, net			41,842			39,194			47,239
Net cash (used for) provided by financing activities				(155,784	)		2,675			1,424,057
Change in cash and cash equivalents				479,971			(464,584	)		508,857
Cash and cash equivalents at beginning of year				1,040,776			1,505,360			996,503
Cash and cash equivalents at end of year			$	1,520,747		$	1,040,776		$	1,505,360
Supplemental disclosures:
	Income taxes paid		$	410,298		$	230,186		$	34,904
	Interest paid			1,024,635			640,679			422,060
	Non-cash activities
		Mortgage loans exchanged for mortgage-backed securities		—			15,058			115,929
		Common stock dividends accrued, paid in subsequent quarter		37,166			28,877			35,662
		Common stock and stock options issued for purchase acquisition		575,756			—			—

See Notes to Consolidated Financial Statements.

86

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 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, Tennessee, and Vermont. Huntington also has a limited purpose foreign office in the Cayman Islands and another 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 (FIN 46R), 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.

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. See “Mortgage Banking Activities” for more information about a reclassification of certain trading activities associated with mortgage servicing rights. Certain other 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 classified as investment securities. Investment securities include securities designated as available for sale and non-marketable equity securities. 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 the consolidated statement of 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 securities losses.

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.

Investments are reviewed quarterly for indicators of other-than-temporary 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 of impairment are further evaluated to determine the likelihood of a significant adverse effect on the fair value and amount of the impairment as necessary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

–  Loans and Leases — Loans and direct financing leases for which Huntington has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified in the balance sheet as loans and leases. Loans and leases are carried 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 using the interest method 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. Management evaluates direct financing leases individually for impairment.

Loans that Huntington has the intent and ability to sell or securitize are classified as held for sale. Loans held for sale are carried at the lower of aggregate cost or fair value. Fair value is determined based on prevailing market prices for loans with similar characteristics. Subsequent declines in fair value are recognized either as a charge-off or as non-interest income, depending on the length of time the loan has been recorded as held for sale. When a decision is made to sell a loan that was not originated or initially acquired with the intent to sell, the loan is reclassified into held for sale. Such reclassifications may occur, and have occurred in the past several years, due to a change in strategy in managing the balance sheet. See Note 5 for further information on recent securitization activities.

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, is in effect until July 1, 2007, and has covered all originations since June 30, 2005. 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 quarterly 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 fair value at the end of the lease term is less than the residual value embedded in the original lease contract. For leased automobiles, 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 that occur when the automobile is sold for a value below ALG Black Book value at the time of sale, which may arise when the automobile has excess wear and tear and/or excess mileage, not reimbursed by the lessee. In any event, the insurance provides a minimum level of coverage of residual value such that the net present value of the minimum lease payments plus the portion of the residual value that is guaranteed exceeds 90 percent of the fair value of the automobile at the inception of the lease.

For leased equipment, the residual component of a direct financing lease represents the estimated fair value of the leased equipment at the end of the lease term. Huntington relies on industry data, historical experience, and independent appraisals to establish these residual value estimates. Additional information regarding product life cycle, product upgrades, as well as insight into competing products are obtained through relationships with industry contacts and are factored into residual value estimates where applicable.

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 periodically 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

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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.) A home equity charge-off occurs when it is determined that there is not sufficient equity in the loan to cover Huntington’s position. A write down in value occurs as determined by Huntington’s internal processes, with subsequent losses incurred upon final disposition. In the event the first mortgage is purchased to protect Huntington’s interests, the charge-off process is the same as residential mortgage loans described above.

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 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 automobile loan 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 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 determination of the allowance requires 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.

The transaction reserve component of the ACL includes both (a) an estimate of loss based on pools of commercial and consumer loans and leases with similar characteristics 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 loans, the estimate of loss based on pools of loans and leases with similar characteristics is made through the use of a standardized loan grading system that is applied on an

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individual loan level and updated on a continuous basis. The reserve factors applied to these portfolios were developed based on internal credit migration models that track historical movements of loans between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data. In the case of more homogeneous portfolios, such as consumer loans and leases, the determination of the transaction reserve is based on reserve factors that include the use of forecasting models to measure inherent loss in these portfolios. Models and analyses are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies. Adjustments to the reserve factors are made as needed based on observed results of the portfolio analytics.

The economic reserve incorporates our determination of the impact of risks associated with the general economic environment on the portfolio. The economic reserve is designed to address economic uncertainties and is determined based on economic indices as well as a variety of other economic factors that are correlated to the historical performance of the loan portfolio. Currently, two national and two regionally focused indices are utilized. The two national indices are: (1) the Real Consumer Spending, and (2) Consumer Confidence. The two regionally focused indices are: (1) the Institute for Supply Management Manufacturing, and (2) Non-agriculture Job Creation. Because of this more quantitative approach to recognizing risks in the general economy, the economic reserve may fluctuate from period-to-period, subject to a minimum level specified by policy.

–  Other Real Estate Owned — Other real estate owned (OREO) is comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations. In 2006, OREO also included government insured loans in foreclosure. OREO obtained in satisfaction of a loan is recorded at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the allowance for loan losses. Subsequent changes in value are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer. Changes in value subsequent to transfer are recorded in non-interest expense. Gains or losses not previously recognized resulting from the sale of OREO are recognized in non-interest expense on the date of sale.

–  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 cost of the acquisition over the fair value of net assets acquired is recorded as goodwill. Other intangible assets are amortized either on an accelerated or straight-line basis over their estimated useful lives. Goodwill and other intangible assets are evaluated for impairment on an annual basis at September 30^th of each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

–  Mortgage Banking Activities — 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. Servicing rights are initially recorded at fair value. All mortgage servicing rights are subsequently carried at fair value, and are included in other assets.

To determine the fair value of MSRs, Huntington uses a static discounted cash flow methodology incorporating current market interest rates. A static model does not attempt to forecast or predict the future direction of interest rates; rather it estimates the amount and timing of future servicing cash flows using current market interest rates. The current mortgage interest rate influences the prepayment rate; and therefore, the timing and magnitude of the cash flows associated with the servicing asset, while the discount rate determines the present value of those cash flows. Expected mortgage loan prepayment assumptions are derived from a third party model. Management believes these prepayment assumptions are consistent with assumptions used by other market participants valuing similar MSRs.

Huntington hedges the value of MSRs using derivative instruments. Huntington values its derivative instruments using observable market prices, when available. In the absence of observable market prices, Huntington uses discounted cash flow models to estimate the fair value of its derivatives. The interest rates used in these cash flow models are based on forward yield curves. Changes in fair value of these derivatives are reported as a component of mortgage banking income. In 2006,

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Huntington reclassified trading gains/losses associated with MSRs from other non-interest income to mortgage banking income. Prior periods have been reclassified to conform to this presentation.

–  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’s useful life or the term of the related leases, including any renewal periods for which renewal is reasonably assured. 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. These assets are reported at cost, including net deferred origination fees or costs, less accumulated depreciation. 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.

Rental income is accrued on a straight line basis over the lease term. 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 statements of income. On a quarterly basis, residual values of operating leases are evaluated individually for impairment under Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under that Statement, when aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset 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.

Also, on a quarterly basis, Management evaluates the amount of residual value losses that it anticipates will result from the estimated fair value of leased assets being less than the residual value inherent in the lease. When estimating fair value, 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.

Starting in 2004, Huntington also began purchasing equipment for lease to customers under 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 84 months. The equipment, net of accumulated depreciation, are reported in other assets in the consolidated balance sheet.

–  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 — 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. 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.

Huntington also uses derivatives, principally loan sale commitments, in the hedging of its mortgage loan interest rate lock commitments and its mortgage loans held for sale. Mortgage loan sale commitments and the related interest rate lock

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commitments are carried at fair value on the consolidated balance sheet with changes in fair value reflected in mortgage banking revenue.

Derivative financial instruments, primarily interest rate swaps, are accounted for in accordance with Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement No. 133), as amended. This Statement requires every derivative instrument to be recorded in the consolidated balance sheet as either an asset or a liability (in other assets or other liabilities, respectively) measured at its fair value, with changes to that fair value being recorded through earnings unless specific criteria are met to account for the derivative using hedge accounting.

For those derivatives which hedge accounting is applied, Huntington formally documents the hedging relationship and the risk management objective and strategy for undertaking the hedge. This documentation identifies the hedging instrument, the hedged item or transaction, the nature of the risk being hedged, and, unless the hedge meets all of the criteria to assume there is no ineffectiveness, the method that will be used to assess the effectiveness of the hedging instrument and how ineffectiveness will be measured. The methods utilized to assess retrospective hedge effectiveness, as well as the frequency of testing, vary based on the type of item being hedged and the designated hedge period. For specifically designated fair value hedges of certain fixed-rate debt, Huntington utilizes the short-cut method when all the criteria of paragraph 68 of Statement No. 133 are met. For other fair value hedges of fixed-rate debt including certificates of deposit, Huntington utilizes the dollar offset or the regression method to evaluate hedge effectiveness on a quarterly basis. For fair value hedges of portfolio loans and mortgage loans held for sale, the regression method is used to evaluate effectiveness on a daily basis. For cash flow hedges, the dollar offset method is applied on a quarterly basis. For hedging relationships that are designated as fair value hedges, changes in the fair value of the derivative are, to the extent that the hedging relationship is effective, recorded through earnings and offset against changes in the fair value of the hedged item. For cash flow hedges, changes in the fair value of the derivative are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. Any portion of a hedge that is ineffective is recognized immediately as other non-interest income. When a cash flow hedge is discontinued because the originally forecasted transaction is not probable of occurring, any net gain or loss in accumulated other comprehensive income is recognized immediately as other non-interest income.

Like other financial instruments, derivatives 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.

–  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. Any interest due for payment of income taxes is included in the provision for income taxes.

–  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.

–  Share-Based Compensation — On January 1, 2006, Huntington adopted the fair value recognition provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement No. 123R) relating to its share-based compensation plans. Prior to January 1, 2006, Huntington had accounted for share-based compensation plans under the intrinsic value method promulgated by Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. In accordance with APB 25, compensation expense for employee stock options was generally not recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

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Under the modified prospective method of Statement No. 123R, compensation expense is recognized during the year ended December 31, 2006, for all unvested stock options, based on the grant date fair value estimated in accordance with the original provisions of Statement No. 123, Accounting for Stock-Based Compensation (Statement No. 123) and for all share-based payments granted after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of Statement No. 123R. Share-based compensation expense is recorded in personnel costs in the consolidated statements of income. Huntington’s financial results for the prior periods have not been restated.

–  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.

–  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

Standards adopted in 2006:

–  FASB Statement No. 123 (revised 2004), Share-Based Payment (Statement No. 123R) — Statement No. 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 is measured based on the fair value of the equity or liability instruments issued. Huntington adopted Statement No. 123R, effective January 1, 2006. The impact of adoption to Huntington’s results of operations is presented in Note 19.

–  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 No. 154, which replaces APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 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 was not material to Huntington’s financial condition, results of operations, or cash flows.

–  FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (Statement No. 155) — On February 16, 2006, the FASB issued Statement No. 155, which amends Statement No. 133 to simplify the accounting for certain derivatives embedded in other financial instruments (hybrid financial instruments) by permitting these hybrid financial instruments to be carried at fair value. Statement No. 155 also establishes a requirement to evaluate interests in securitized financial assets, including collateralized mortgage obligations and mortgage-backed securities, to identify embedded derivatives that would need to be separately accounted for from the financial asset.

In January 2007, the FASB issued Derivatives Implementation Group Issue No. B40 addressing application of Statement No. 155 to collateralized mortgage obligations and mortgage-backed securities. Based on the FASB’s conclusions regarding the applicability of Statement No. 155 to collateralized mortgage obligations and mortgage-backed securities, Management does not believe that the implementation issue will have a significant impact to its financial position or its results of operations. Huntington adopted Statement No. 155 effective January 1, 2006, with no impact to reported financial results.

–  FASB Statement No. 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140 (Statement No. 156) — In March 2006, the FASB issued Statement No. 156, an amendment of Statement No. 140. This Statement requires all separately recognized servicing rights be initially measured at fair value, if practicable. For each class of separately recognized servicing assets and liabilities, this statement permits 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 are 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. Huntington elected to adopt the provisions of Statement No. 156 for mortgage servicing rights effective January 1, 2006, and has recorded mortgage servicing right assets using the fair value provision of the standard. The adoption of Statement No. 156 resulted in an $18.6 million increase in the carrying value of mortgage servicing right assets as of January 1, 2006. The

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cumulative effect of this change was $12.1 million, net of taxes, which is reflected as an increase in retained earnings in the Consolidated Statements of Changes in Shareholders’ Equity. (See Note 5)

–

FASB Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132R (Statement No. 158) — In September 2006, the FASB issued Statement No. 158, as an amendment to FASB Statements No. 87, 88, 106 and 132R. Statement No. 158 requires an employer to recognize in its statement of financial position the funded status of its defined benefit plans and to recognize as a component of other comprehensive income, net of tax, any unrecognized transition obligations and assets, the actuarial gains and losses and prior service costs and credits that arise during the period. The recognition provisions of Statement No. 158 are to be applied prospectively and are effective for fiscal years ending after December 15, 2006. In addition, Statement No. 158 requires a fiscal year end measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible. However, the new measurement date requirement will not be effective until fiscal years ended after December 15, 2008. Currently, Huntington utilizes a measurement date of September 30th. The adoption of Statement No. 158 as of December 31, 2006 resulted in a write-down of its pension asset by $125.1 million, and decreased accumulated other comprehensive income by $83.0 million, net of taxes (See Note 21).

Standards not yet adopted as of December 31, 2006:

–  FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes — In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes. This Interpretation of FASB Statement No. 109, Accounting for Income Taxes, contains guidance on the recognition and measurement of uncertain tax positions. Huntington will be required to recognize the impact of a tax position if it is more likely than not that it will be sustained upon examination, based upon the technical merits of the position. The effective date for application of this interpretation is for periods beginning after December 15, 2006. The cumulative effect of applying the provisions of this Interpretation must be reported as an adjustment to the opening balance of retained earnings for that fiscal period. Management does not expect that the impact of this new pronouncement will be material to Huntington’s financial condition, results of operations, or cash flows.

–  FASB Statement No. 157, Fair Value Measurements (Statement No. 157) — In September 2006, the FASB issued Statement No. 157. This Statement establishes a common definition for fair value to be applied to GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently assessing the impact this Statement will have on its consolidated financial position and results of operations.

–  FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (Statement No. 159) — In February 2007, the FASB issued Statement No. 159. This Statement permits entities to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact this Statement will have on its consolidated financial position and results of operations.

3. INVESTMENT SECURITIES

Investment securities at December 31 were as follows:

				Unrealized
(in thousands of dollars)		Amortized Cost		Gross Gains		Gross Losses			Fair Value
2006
U.S. Treasury		$	1,846	$	15	$	(5	)	$	1,856
Federal Agencies
	Mortgage-backed securities		1,277,184		4,830		(553	)		1,281,461
	Other agencies		149,917		102		(70	)		149,949
Total Federal agencies			1,427,101		4,932		(623	)		1,431,410
Asset-backed securities			1,574,572		11,372		(3,140	)		1,582,804
Municipal securities			586,467		7,332		(2,376	)		591,423
Private label collaterized mortgage obligations			586,088		4,046		(72	)		590,062
Other securities			164,829		607		(67	)		165,369
Total investment securities		$	4,340,903	$	28,304	$	(6,283	)	$	4,362,924

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

				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 collaterized mortgage obligations			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

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:

	2006				2005
(in thousands of dollars)	Amortized Cost		Fair Value		Amortized		Fair Value
Under 1 year	$	7,490	$	7,473	$	1,765	$	1,765
1-5 years		203,728		203,867		394,254		382,549
6-10 years		170,075		169,680		199,670		196,154
Over 10 years		3,802,375		3,824,111		3,838,730		3,800,751
Non-marketable equity securities		150,754		150,754		89,661		89,661
Marketable equity securities		6,481		7,039		55,058		55,640
Total investment securities	$	4,340,903	$	4,362,924	$	4,579,138	$	4,526,520

At December 31, 2006, 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 $1.5 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, 2006.

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, 2006.

		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		$	99	$	—		$	146	$	(5	)	$	245	$	(5	)
Federal agencies
	Mortgage-backed securities		131,122		(522	)		10,188		(31	)		141,310		(553	)
	Other agencies		99,531		(69	)		697		(1	)		100,228		(70	)
Total Federal agencies			230,653		(591	)		10,885		(32	)		241,538		(623	)
Asset-backed securities			297,916		(2,147	)		59,925		(993	)		357,841		(3,140	)
Municipal securities			141,355		(764	)		69,060		(1,612	)		210,415		(2,376	)
Private label collaterized mortgage obligations			38,309		(72	)		—		—			38,309		(72	)
Other securities			500		(2	)		4,697		(65	)		5,197		(67	)
Total temporarily impaired securities		$	708,832	$	(3,576	)	$	144,713	$	(2,707	)	$	853,545	$	(6,283	)

In October 2006, after receiving the resolution of the Internal Revenue Service’s audit of Huntington’s consolidated federal tax return for tax years 2002 and 2003, Management began to review its securities portfolio. The resolution of the federal income tax audit for tax years 2002 and 2003 resulted in the recognition of $84.5 million in tax provision benefit. The recognition of the tax benefits increased Huntington’s regulatory capital, providing the capacity to sustain significant after-tax charges. Management

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HUNTINGTON BANCSHARES INCORPORATED

reviewed the securities portfolio for restructuring, in response to the inverted structure of interest rates, concerns about the future liquidity of the market for collateralized mortgage obligations from certain interpretations of Statement No. 155, and concerns about the credit risk associated with securities collateralized by mortgage loans to borrowers with low FICO scores. Management recognized securities impairment as of September 30, 2006 of $57.5 million on the securities portfolios under review.

During the fourth quarter of 2006, Management completed its review. As a result, management sold substantially its entire portfolio of US Treasury securities, its callable debt securities issued by agencies of the US government, and certain mortgage-backed securities and collateralized mortgage obligations. Other securities subject to review were not sold and remain in the portfolio. An additional $15.8 million of securities losses were recognized on these securities in the fourth quarter of 2006, including $6.8 million of impairment losses related to securities backed by mortgage loans to borrowers with low FICO scores that were not subject to the initial review.

As of December 31, 2006, Management has evaluated all other 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, 2006.

Gross gains from sales of securities of $8.4 million, $8.5 million, and $34.7 million, were realized in 2006, 2005, and 2004, respectively. Gross losses from the sales of securities totaled $55.2 million in 2006, $16.6 million in 2005, and $19.0 million in 2004. Huntington also recognized an additional $26.4 million of losses relating to securities that were identified as other-than-temporarily impaired.

4.  LOANS AND LEASES

At December 31, 2006, $3.1 billion of commercial and industrial loans were pledged to secure potential discount window borrowings from the Federal Reserve Bank, and $4.9 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.

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)		2006			2005
Commercial and industrial
	Lease payments receivable	$	624,656		$	486,488
	Estimated residual value of leased assets		44,893			39,570
Gross investment in commercial lease financing receivables			669,549			526,058
Deferred origination fees and costs			3,983			3,125
Unearned income			(86,849	)		(58,476	)
Total net investment in commercial lease financing receivables		$	586,683		$	470,707
Consumer
	Lease payments receivable	$	857,127		$	1,209,088
	Estimated residual value of leased assets		1,068,766			1,296,303
Gross investment in consumer lease financing receivables			1,925,893			2,505,391
Deferred origination fees and costs			(810	)		(565	)
Unearned income			(155,659	)		(215,811	)
Total net investment in consumer lease financing receivables		$	1,769,424		$	2,289,015

The future lease rental payments due from customers on direct financing leases at December 31, 2006, totaled $1.5 billion and were as follows: $0.4 billion in 2007; $0.3 billion in 2008; $0.2 billion in 2009; $0.1 billion in 2010 and 2011, and $0.4 billion thereafter. Included in the estimated residual value of leased consumer assets was a valuation reserve of $7.3 million and $5.1 million at December 31, 2006 and 2005, respectively, for expected residual value impairment not covered by residual value insurance.

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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 $4.9 billion and $4.8 billion at December 31, 2006 and 2005, respectively, or 19% of total loans at the end of each period. From a credit risk perspective, 87% of the home equity loans had a loan to value ratio of less than 90% at December 31, 2006. The charge-off policy for home equity loans is described in Note 1. There were no other economic, industry, or geographic concentration of credit risk in the loan and lease portfolio at December 31, 2006.

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)		2006			2005
Balance, beginning of year		$	76,488		$	89,177
	Loans made		105,337			219,728
	Repayments		(91,639	)		(231,814	)
	Changes due to status of executive officers and directors		(33,680	)		(603	)
Balance, end of year		$	56,506		$	76,488

Non-Performing Assets and Past Due Loans

At December 31, 2006 and 2005, 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)		2006		2005
	Commercial and industrial	$	58,393	$	55,273
	Commercial real estate		37,947		18,309
	Residential mortgage		32,527		17,613
	Home equity		15,266		10,720
Total non-performing loans			144,133		101,915
Other real estate, net			49,487		15,240
Total non-performing assets		$	193,620	$	117,155
Accruing loans past due 90 days or more		$	59,114	$	56,138

The amount of interest that would have been recorded under the original terms for total loans classified as non-accrual or renegotiated was $14.2 million for 2006, $7.7 million for 2005, and $3.3 million for 2004. Amounts actually collected and recorded as interest income for these loans totaled $3.4 million, $1.9 million, and $1.9 million for 2006, 2005, and 2004, respectively.

5.  LOAN SALES AND SECURITIZATIONS

Automobile loans

Huntington sold $0.7 billion, $0.4 billion and $1.5 billion of automobile loans in 2006, 2005 and 2004, respectively. Pre-tax gains from the sales of automobile loans totaled $3.1 million, $1.2 million and $14.2 million in 2006, 2005 and 2004, respectively.

Huntington adopted Statement No. 156 as of January 1, 2006. Automobile loan servicing rights are accounted for under the amortization provision of that statement. A servicing asset is established at fair value at the time of the sale using the following assumptions: actual servicing income of 0.55% – 0.65%, adequate compensation for servicing of approximately 0.62%, other ancillary fees of approximately 0.37%, a discount rate of 10% and 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 on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.

97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

Changes in the carrying value of automobile loan servicing rights for the three years ended December 31, 2006, and the fair value at the end of each period were as follows:

	Year Ended December 31,
(in thousands of dollars)	2006			2005			2004
Carrying value, beginning of year	$	10,805		$	20,286		$	17,662
New servicing assets		4,748			2,113			16,249
Amortization		(7,637	)		(11,528	)		(13,625	)
Impairment charges		—			(66	)		—
Carrying value, end of year	$	7,916		$	10,805		$	20,286
Fair value, end of year	$	9,457		$	11,658		$	21,361

Huntington has retained servicing responsibilities and receives annual servicing fees from 0.55% to 1.00% and other ancillary fees of approximately 0.40% to 0.47% of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing assets, included in other non-interest income amounted to $14.2 million in 2006, $12.5 million in 2005, and $10.1 million in 2004. The unpaid principal balance of automobile loans serviced for third parties was $1.5 billion, $1.7 billion, and $2.3 billion at December 31, 2006, 2005, and 2004, respectively.

During the second quarter of 2006, Huntington transferred $1.2 billion automobile loans and leases to a trust in a securitization transaction. The securitization did not qualify for sale accounting under Statement No. 140 and therefore, is accounted for as a secured financing. There were no automobile loan securitizations in 2005 or 2004.

Residential Mortgage Loans

During 2006, Huntington sold $247.4 million of residential mortgage loans held for investment, resulting in a net pre-tax gain of $0.5 million. 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 and $115.9 million of residential mortgage loans in 2005 and 2004, respectively, and retained all of the resulting securities. Accordingly, these amounts were reclassified from loans to investment securities. There were no such exchanges of residential mortgage loans in 2006.

A mortgage servicing right (MSR) is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. Effective January 1, 2006, the Company adopted Statement No. 156. The same risk management practices are applied to all MSRs and, accordingly, MSRs were identified as a single asset class and were re-measured to fair value as of January 1, 2006, with an adjustment of $12.1 million, net of tax, to retained earnings.

At initial recognition, the MSR asset is established at its fair value using assumptions that are consistent with assumptions used at the time to estimate the fair value of the total MSR portfolio. Subsequent to initial capitalization, MSR assets are carried at fair value and are included in accrued income and other assets. Any increase or decrease in fair value during the period is recorded as an increase or decrease in servicing income, which is reflected in non-interest income in the consolidated statements of income.

The following table is a summary of the changes in MSR fair value for the year ended December 31, 2006:

(in thousands of dollars)		2006
Carrying value, beginning of year		$	91,259
Cumulative effect in change in accounting principle			18,631
Fair value, beginning of period			109,890
New servicing assets created			29,013
Servicing assets acquired			2,474
Change in fair value during the period due to:
	Time decay(1)		(4,086	)
	Payoffs(2)		(11,058	)
	Changes in valuation inputs or assumptions(3)		4,871
Fair value, end of year		$	131,104

(1)	Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2)	Represents decrease in value associated with loans that paid off during the period.
(3)	Represents change in value resulting primarily from market-driven changes in interest rates.

98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.

A summary of key assumptions and the sensitivity of the MSR value at December 31, 2006 to changes in these assumptions follows:

				Decline in fair
				value due to
				10%			20%
				adverse			adverse
(in thousands of dollars)	Actual			change			change
Constant pre-payment rate		12.84	%	$	(5,984	)	$	(11,529	)
Discount rate		9.41			(4,753	)		(9,182	)

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.

With the adoption of Statement No. 156, servicing rights are recorded at fair value at the end of each reporting period. Prior to 2006, servicing rights were evaluated quarterly for impairment based on the fair value of those rights, using a disaggregated approach. The fair value of the servicing rights was 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. Temporary impairment was recognized in a valuation allowance against the mortgage servicing rights.

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

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

The unpaid principal balance of residential mortgage loans serviced for third parties was $8.3 billion, $7.3 billion, and $6.9 billion at December 31, 2006, 2005, and 2004, respectively.

Below is a summary of servicing fee income, a component of mortgage banking income, earned during the three years ended December 31, 2006:

(in thousands of dollars)	2006		2005		2004
Servicing fees	$	24,659	$	22,181	$	21,696
Late fees		2,539		2,022		1,725
Ancillary fees		765		797		541
Total fee income	$	27,963	$	25,000	$	23,962

6. ALLOWANCES FOR CREDIT LOSSES (ACL)

The Company maintains two reserves, both of which are available to absorb possible credit losses: an allowance for loan and lease losses (ALLL) and an allowance for unfunded loan commitments and letters of credit (AULC). When summed together, these

99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

reserves constitute the total allowances for credit losses (ACL). 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)		2006			2005			2004
Allowance for loan and leases losses, beginning of year (ALLL)		$	268,347		$	271,211		$	299,732
Acquired allowance for loan and lease losses			23,785			—			—
Loan and lease losses			(119,692	)		(115,848	)		(126,115	)
Recoveries of loans previously charged off			37,316			35,791			47,580
Net loan and lease losses			(82,376	)		(80,057	)		(78,535	)
Provision for loan and lease losses			62,312			83,782			57,397
Economic reserve transfer(1)			—			(6,253	)		—
Allowance for assets sold and securitized(2)			—			(336	)		(7,383	)
Allowance for loan and lease losses, end of year		$	272,068		$	268,347		$	271,211
Allowance for unfunded loan commitments and letters of credit, beginning of year (AULC)		$	36,957		$	33,187		$	35,522
Acquired AULC									325
Provision for unfunded loan commitments and letters of credit losses			2,879			(2,483	)		(2,335	)
Economic reserve transfer(1)			—			6,253			—
Allowance for unfunded loan commitments and letters of credit, end of year		$	40,161		$	36,957		$	33,187
Total allowances for credit losses (ACL)		$	312,229		$	305,304		$	304,398
Recorded balance of impaired loans, at end of year(3) :
	With specific reserves assigned to the loan and lease balances	$	35,212		$	41,525		$	51,875
	With no specific reserves assigned to the loan and lease balances		25,662			14,032			29,296
Total		$	60,874		$	55,557		$	81,171
Average balance of impaired loans for the year(3)		$	65,907		$	29,441		$	54,445
Allowance for loan and lease losses on impaired loans(3)			7,612			14,526			23,447

(1)	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.
(2)	In conjunction with the automobile loan sales and securitizations in 2006, 2005, and 2004, 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.
(3)	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 2006, 2005 and 2004 on impaired loans while they were considered impaired was less than $0.1 million, less than $0.1 million, and $1.1 million, respectively. The recovery of the investment in impaired loans with no specific reserves generally is expected from the sale of collateral, net of costs to sell that collateral.

7. PENDING ACQUISITION OF SKY FINANCIAL GROUP, INC.

On December 20, 2006, Huntington announced the signing of a definitive agreement to acquire Sky Financial Group, Inc. (Sky Financial) in a stock and cash transaction expected to be valued at approximately $3.5 billion. Sky Financial is a $17.6 billion diversified financial holding company with over 330 banking offices and over 400 ATMs. Sky Financial serves communities in Ohio, Pennsylvania, Indiana, Michigan and West Virginia. Sky’s financial service affiliates include: Sky Bank, commercial and retail banking; Sky Trust, asset management services; and Sky Insurance, retail and commercial insurance agency services.

Under the terms of the agreement, Sky Financial shareholders will receive 1.098 shares of Huntington common stock, on a tax-free basis, and a taxable cash payment of $3.023 for each share of Sky Financial common stock. The merger was unanimously approved by both boards and is expected to close in the third quarter of 2007, pending customary regulatory approvals, as well as approval by both companies’ shareholders.

8. BUSINESS COMBINATIONS

On March 1, 2006, Huntington completed its merger with Canton, Ohio-based Unizan Financial Corp. (Unizan). Unizan operated 42 banking offices in five metropolitan markets in Ohio: Canton, Columbus, Dayton, Newark, and Zanesville.

Under the terms of the merger agreement announced January 27, 2004, and amended November 11, 2004, Unizan shareholders of record as of the close of trading on February 28, 2006, received 1.1424 shares of Huntington common stock for each share of Unizan. The total purchase price for Unizan has been allocated to the tangible and intangible assets and liabilities based on their respective fair values as of the acquisition date. Such allocations have not been finalized, and therefore, the allocation of the purchase price included in the Consolidated Balance Sheet is preliminary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

The following table shows the excess purchase price over carrying value of net assets acquired, preliminary purchase price allocation, and resulting goodwill:

(in thousands of dollars)		March 1, 2006
Purchase price		$	575,793
Carrying value of net assets acquired			(194,996	)
Excess of purchase price over carrying value of net assets acquired			380,797
Purchase accounting adjustments:
	Loans and leases		17,466
	Premises and equipment		(202	)
	Accrued income and other assets		257
	Deposits		748
	Subordinated notes		2,845
	Deferred federal income tax liability		6,616
	Accrued expenses and other liabilities		8,577
Goodwill and other intangible assets			417,104
Less other intangible assets:
	Core deposit intangible		(45,000	)
	Other identifiable intangible assets		(18,252	)
Other intangible assets			(63,252	)
Goodwill		$	353,852

Of the $63.3 million of acquired intangible assets, $45.0 million was assigned to core deposit intangible, and $18.3 million was assigned to customer relationship intangibles. The core deposit and customer relationship intangibles have useful lives ranging from 10 to 15 years.

Goodwill resulting from the transaction totaled $353.9 million and was assigned to Regional Banking and the Private Financial and Capital Markets Group (PFCMG) in the amount of $335.9 million and $18.0 million, respectively.

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

The following table summarizes the estimated fair value of the net assets acquired on March 1, 2006 related to the acquisition of Unizan:

(in thousands of dollars)			March 1, 2006
Assets
	Cash and due from banks		$	66,544
	Interest bearing deposits in banks			3,096
	Investment securities			300,416
		Loans and leases		1,666,604
		Allowance for loan and lease losses		(23,785	)
	Net loans and leases			1,642,819
	Bank owned life insurance			48,521
	Premises and equipment			21,603
	Goodwill			353,852
	Other intangible assets			63,252
	Accrued income and other assets			22,012
Total assets				2,522,115
Liabilities
	Deposits			1,696,124
	Short-term borrowings			79,140
	Federal Home Loan Bank advances			102,950
	Subordinated notes			23,464
	Deferred federal income tax liability			7,123
	Accrued expenses and other liabilities			37,521
Total liabilities				1,946,322
Purchase price			$	575,793

Huntington’s consolidated financial statements include the results of operations of Unizan since March 1, 2006, the date of acquisition. The following unaudited summary information presents the consolidated results of operations of Huntington on a pro forma basis, as if the Unizan acquisition had occurred at the beginning of 2006 and 2005.

(in thousands, except per share amounts)		2006			2005
	Net interest income	$	1,030,789		$	1,032,083
	Provision for credit losses		(66,301	)		(87,959	)
Net interest income after provision for credit losses			964,488			944,124
Non-interest income			565,853			660,986
Non-interest expense			(1,012,840	)		(1,041,532	)
Income before income taxes			517,501			563,578
Provision for income taxes			(54,837	)		(137,173	)
Net income		$	462,664		$	426,405
Net income per common share
	Basic	$	1.92		$	1.67
	Diluted		1.90			1.65
Average common shares outstanding
	Basic		240,924			255,417
	Diluted		244,145			258,879

The pro forma results include amortization of fair value adjustments on loans, deposits, and debt, and amortization of newly created intangibles and post-merger related charges. The pro forma number of average common shares outstanding includes adjustments for shares issued for the acquisition and the impact of additional dilutive securities but does not assume any incremental share repurchases. The pro forma results presented do not reflect cost savings, or revenue enhancements anticipated

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

from the acquisition, and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.

Effective at the end of the day on December 31, 2006, Huntington acquired Unified Fund Services, Inc. and Unified Financial Securities, Inc. (Unified), an Indianapolis, Indiana based provider of fund accounting, administration, distribution and transfer agent services to mutual funds. Unified will operate as a wholly owned subsidiary of Huntington. The total purchase price for Unified has been allocated to the tangible and intangible assets and liabilities based on their respective fair values as of the acquisition date. Such allocations have not been finalized, and therefore, the allocation of the purchase price included in the Consolidated Balance Sheet is preliminary. The purchase price of this acquisition was immaterial to Huntington’s financial statements.

9. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes to the carrying amount of goodwill by line of business for the years ended December 31, 2006 and 2005, were as follows:

		Regional		Dealer				Treasury/		Huntington
(in thousands of dollars)		Banking		Sales		PFCMG		Other		Consolidated
Balance, December 31, 2005		$	199,971	$	—	$	12,559	$	—	$	212,530
	Goodwill acquired during the period		335,884		—		22,462		—		358,346
Balance, December 31, 2006		$	535,855	$	—	$	35,021	$	—	$	570,876

As further described in Note 8, of the goodwill acquired during 2006, $353.9 million was a result of the completion of the merger with Unizan and $4.4 million was a result of the acquisition of Unified. There were no impairment losses for the three years ended December 31, 2006, 2005, and 2004.

At December 31, 2006 and 2005, Huntington’s other intangible assets consisted of the following:

		Gross
		Carrying		Accumulated			Net
(in thousands of dollars)		Amount		Amortization			Carrying Value
December 31, 2006
	Leasehold purchased	$	23,655	$	(19,631	)	$	4,024
	Core deposit intangible		45,000		(7,525	)		37,475
	Borrower relationship		6,570		(456	)		6,114
	Trust customers		11,430		(796	)		10,634
	Other		1,622		(382	)		1,240
Total other intangible assets		$	88,277	$	(28,790	)	$	59,487
December 31, 2005
	Leasehold purchased	$	23,655	$	(18,816	)	$	4,839
	Trust customers		130		(13	)		117
Total other intangible assets		$	23,785	$	(18,829	)	$	4,956

Amortization expense of other intangible assets for the three years ended December 31, 2006, 2005 and 2004 was $10.0 million, $0.8 million, and $0.8 million, respectively.

The estimated amortization expense of other intangible assets for the next five annual years are as follows:

		Amortization
(in thousands of dollars)		Expense
Fiscal year:
	2007	$	10,040
	2008		8,856
	2009		7,928
	2010		7,106
	2011		6,312

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

10. AUTOMOBILE OPERATING LEASE ASSETS

For periods before May 2002, Huntington purchased vehicles, primarily automobiles, for lease to consumers under 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. Rental income is earned by Huntington on these 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)	2006			2005
Cost of operating lease assets (including residual values of $28,572 and $148,937, respectively)	$	90,940		$	460,596
Deferred origination fees and costs		(23	)		(272	)
Accumulated depreciation		(62,586	)		(271,321	)
Total	$	28,331		$	189,003

The future lease rental payments due from customers on operating lease assets at December 31, 2006, totaled $5.2 million and are due as follows: $5.2 million in 2007 and less than $0.1 million thereafter. Depreciation expense for each of the years ended December 31, 2006, 2005, and 2004 was $28.6 million, $94.8 million, and $215.0 million, respectively.

11. PREMISES AND EQUIPMENT

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

	At December 31,
(in thousands of dollars)	2006			2005
Land and land improvements	$	79,273		$	67,787
Buildings		270,942			246,745
Leasehold improvements		154,097			149,466
Equipment		491,428			477,192
Total premises and equipment		995,740			941,190
Less accumulated depreciation and amortization		(622,968	)		(580,513	)
Net premises and equipment	$	372,772		$	360,677

Depreciation and amortization charged to expense and rental income credited to net occupancy expense for the three years ended December 31, 2006 were:

	Year Ended December 31,
(in thousands of dollars)	2006		2005		2004
Total depreciation and amortization of premises and equipment	$	52,333	$	50,355	$	50,097
Rental income credited to occupancy expense		11,602		11,010		13,081

12.  SHORT-TERM BORROWINGS

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

		At December 31,
(in thousands of dollars)		2006		2005
	Federal funds purchased	$	520,354	$	931,097
	Securities sold under agreements to repurchase		1,111,959		888,985
	Commercial paper		2,677		2,480
	Other borrowings		41,199		66,698
Total short-term borrowings		$	1,676,189	$	1,889,260

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

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

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)	2006		2005
Average balance during the year	$	1,065,649	$	1,125,159
Average interest rate during the year		3.33%		2.17	%
Maximum month-end balance during the year	$	1,213,673	$	1,356,733

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

13.  FEDERAL HOME LOAN BANK ADVANCES

Huntington’s long-term advances from the Federal Home Loan Bank had weighted average interest rates of 5.40% and 4.37% at December 31, 2006 and 2005, respectively. These advances, which predominantly had variable interest rates, were collateralized by qualifying real estate loans. As of December 31, 2006 and 2005, Huntington’s maximum borrowing capacity was $3.2 billion and $1.7 billion, respectively. The advances outstanding at December 31, 2006 of $1.0 billion mature as follows: $0.2 billion in 2007; $0.3 billion in 2008; $0.1 billion in 2009; $0.4 billion in 2010; and less than $0.1 billion in 2011 and 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, 2006, Huntington was in compliance with all such covenants.

14.  SUBORDINATED NOTES

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

		At December 31,
(in thousands of dollars)		2006		2005
Parent company:
	6.06% junior subordinated debentures due 2027(1)	$	206,186	$	206,186
	5.99% junior subordinated debentures due 2028(2)		103,093		103,093
	9.88% junior subordinated debentures due 2029		23,428		—
The Huntington National Bank:
	8.00% subordinated notes due 2010		152,303		158,620
	4.90% subordinated notes due 2014		193,122		193,361
	5.50% subordinated notes due 2016		248,908		—
	6.60% subordinated notes due 2018		212,526		214,277
	5.375% subordinated notes due 2019		147,091		147,834
Total subordinated notes		$	1,286,657	$	1,023,371

(1)	Variable effective rate at December 31, 2006, based on three month LIBOR + 0.70.
(2)	Variable effective rate at December 31, 2006, based on three month LIBOR + 0.625.

The weighted-average interest rate for subordinated notes was 6.08% and 5.84% at December 31, 2006 and 2005, respectively.

Amounts above are reported net of unamortized discounts and adjustments 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 23 for more information regarding such financial instruments. All principal is due upon maturity of the note as described in the table above.

Under FIN 46(R), certain wholly-owned trusts, which had been formed for the sole purpose of issuing trust preferred securities, are not consolidated. The proceeds from the trust preferred securities issuances were invested in junior subordinated debentures of the Parent Company. The obligations of these debentures constitute a full and unconditional guarantee by the Parent Company of the trust securities. The junior subordinated debentures held by the trust included in the Company’s long-term debt was $0.3 billion as of December 31, 2006 and 2005.

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

15.  OTHER LONG-TERM DEBT

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

		At December 31,
(in thousands of dollars)		2006		2005
	The Huntington National Bank	$	808,112	$	1,576,033
	5.68% Securitization trust note payable due 2012(1)		408,745		792,386
	6.02% Securitization trust note payable due 2018(2)		962,283		—
	7.88% Class C preferred securities of REIT subsidiary, no maturity		50,000		50,000
Total other long-term debt		$	2,229,140	$	2,418,419

(1)	Variable effective rate at December 31, 2006, based on one month LIBOR +0.33.
(2)	Variable effective rate at December 31, 2006, based on one month LIBOR +0.67.

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 23 for more information regarding such financial instruments.

The weighted-average interest rate for other long-term debt was 5.48% and 4.34% at December 31, 2006 and 2005, respectively.

The securitization trust notes payable are collaterized by $1.7 billion in automobile loans held in the automobile trusts. The terms of the other long-term debt obligations contain 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, 2006, Huntington was in compliance with all such covenants.

Other long-term debt maturities for the next five years are as follows: $0.1 billion in 2007; $0.2 billion in 2008; $0.2 billion in 2009; $0.3 billion in 2010; none in 2011 and $1.4 billion thereafter. These maturities are based upon the par values of long-term debt.

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

16. 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)		2006			2005			2004
Unrealized losses on investment securities arising during the year:
	Unrealized net losses	$	1,448		$	(41,014	)	$	(18,555	)
	Related tax benefit		(752	)		14,445			6,689
Net			696			(26,569	)		(11,866	)
Less: Reclassification of net realized losses (gains) from sales of investment securities during the year:
	Realized net losses (gains)		73,191			8,055			(15,763	)
	Related tax (benefit) expense		(25,617	)		(2,819	)		5,517
Net			47,574			5,236			(10,246	)
Total unrealized losses on investment securities arising during the year, net of reclassification of net realized losses (gains)			48,270			(21,333	)		(22,112	)
Unrealized gains on cash flow hedging derivatives arising during the year:
	Unrealized net gains		2,772			16,852			14,914
	Related tax expense		(970	)		(5,898	)		(5,220	)
Net			1,802			10,954			9,694
Defined benefit pension plans:
	Cumulative effect of change in accounting for funded status of pension plans		(128,175	)		—			—
	Minimum pension liability adjustment		414			(1,248	)		(1,789	)
	Related tax benefit		44,716			437			626
Net			(83,045	)		(811	)		(1,163	)
Total other comprehensive loss		$	(32,973	)	$	(11,190	)	$	(13,581	)

Activity in accumulated other comprehensive income for the three years ended December 31, 2006 was as follows:

				Unrealized gains
	Unrealized gains			and losses on
	and losses on			cash flow hedging			Defined benefit
(in thousands of dollars)	investment securities			derivatives			pension plans			Total
Balance, January 1, 2004	$	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	)
Current period change		48,270			1,802			(83,045	)		(32,973	)
Balance, December 31, 2006	$	14,254		$	17,008		$	(86,328	)	$	(55,066	)

17. SHAREHOLDERS’ EQUITY

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 (the 2005 Repurchase Program). A repurchase program authorized in 2004, with 3.1 million shares remaining, was cancelled and replaced by the 2005 Repurchase Program.

On April 20, 2006, the Company announced that the board of directors authorized a new program for the repurchase of up to 15.0 million shares (the 2006 Repurchase Program). The 2006 Repurchase Program does not have an expiration date. The 2005 Repurchase Program, with 5.0 million shares remaining, was canceled and replaced by the 2006 Repurchase Program. The Company announced its expectation to repurchase the shares from time to time in the open market or through privately negotiated transactions depending on market conditions.

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

On May 24, 2006, Huntington repurchased 6.0 million shares of common stock from Bear Stearns under an accelerated share repurchase program. The accelerated share repurchase program enabled Huntington to purchase the shares immediately, while Bear Stearns purchased shares in the market over a period of up to four months (the Repurchase Term). In connection with the repurchase of these shares, Huntington entered into a variable share forward sale agreement, which provided for a settlement, reflecting a price differential based on the adjusted volume-weighted average price as defined in the agreement with Bear Stearns. The variable share forward agreement concluded at the end of September 2006, resulting in a nominal settlement of cash to Huntington. This was reflected as an adjustment to treasury shares.

Listed below is the share repurchase activity for the year ended December 31, 2006:

	Total		Average
	Number		Price
	of Shares		Paid Per
Repurchase Programs	Purchased		Share
The 2005 Repurchase Program		4,831,000	$	23.46
The 2006 Repurchase Program		11,150,000		23.81
Total Shares Repurchased in 2006		15,981,000	$	23.71

18. 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)		2006		2005		2004
Net income		$	461,221	$	412,091	$	398,925
Average common shares outstanding			236,699		230,142		229,913
Dilutive potential common shares			3,221		3,333		3,943
Diluted average common shares outstanding			239,920		233,475		233,856
Earnings Per Share
	Basic	$	1.95	$	1.79	$	1.74
	Diluted		1.92		1.77		1.71

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 5.5 million, 5.7 million, and 2.6 million options to purchase shares of common stock outstanding at the end of 2006, 2005, and 2004, 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 $25.69 per share, $25.68 per share, and $26.96 per share at the end of the same respective periods.

19. SHARE-BASED COMPENSATION

Huntington sponsors nonqualified and incentive share-based compensation plans. These plans provide for the granting of stock options and other awards to officers, directors, and other employees. Stock options are granted at the market price on the date of the grant. Options vest ratably over three years or when other conditions are met. 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.

Beginning in 2006, Huntington began granting restricted stock units under the 2004 Stock and Long-Term Incentive Plan. Restricted stock units are issued at no cost to the recipient, and can be settled only in shares at the end of the vesting period, subject to certain service restrictions. The fair value of the restricted stock unit awards was based on the closing market price of the Company’s common stock on the date of award.

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

The following table presents the unfavorable impact of adoption of Statement 123R on Huntington’s income before income taxes, net income, and basic and diluted earnings per share for the year ended December 31, 2006.

		Share-based
(in millions, except per share amounts)		compensation expense
Income before income taxes		$	(18.6	)
Net income			(12.1	)
Earnings per share
	Basic	$	(0.05	)
	Diluted		(0.05	)

Prior to the adoption of Statement 123R, Huntington presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. Statement 123R requires the cash flows from tax benefits resulting from tax deductions in excess of compensation costs recognized for those options (excess tax benefits) to be classified as financing cash flows. As a result, the benefits of tax deductions in excess of recognized compensation cost included in net financing cash flows for the year ended December 31, 2006 was $1.0 million.

Consistent with the valuation method used for the disclosure only provisions of Statement No. 123, Huntington uses the Black-Scholes option-pricing model to value share-based compensation expense. This model assumes that the estimated fair value of options is amortized over the options’ vesting periods and the compensation costs would be included in personnel costs on the consolidated statements of income. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of Huntington’s stock. The expected term of options granted is derived from historical data on employee exercises. The expected dividend yield is based on the dividend rate and stock price on the date of the grant. The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in the three years ended December 31, 2006, 2005 and 2004.

		2006			2005			2004
Assumptions
	Risk-free interest rate		4.96	%		4.07	%		3.78	%
	Expected dividend yield		4.24			3.34			3.20
	Expected volatility of Huntington’s common stock		22.2			26.3			30.9
	Expected option term (years)		6.0			6.0			6.0
Weighted-average grant date fair value per share		$	4.21		$	5.28		$	5.78

The following pro forma disclosures for net income and earnings per diluted common share for the years ended December 31, 2005 and 2004, are presented as if Huntington had applied the fair value method of accounting of Statement No. 123 in measuring compensation costs for stock options.

		Year Ended
		December 31,
(in millions, except per share amounts)		2005			2004
Pro forma results
	Net income, as reported	$	412.1		$	398.9
	Pro forma expense, net of tax		(11.9	)		(14.4	)
Pro forma net income		$	400.2		$	384.5
Net income per common share:
	Basic, as reported	$	1.79		$	1.74
	Basic, pro forma		1.74			1.67
	Diluted, as reported		1.77			1.71
	Diluted, pro forma		1.71			1.64

109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

Huntington’s stock option activity and related information for the year ended December 31, 2006, was as follows:

					Weighted-
				Weighted-	Average
				Average	Remaining	Aggregate
				Exercise	Contractual	Intrinsic
(in thousands, except per share amounts)	Options			Price	Life (Years)	Value
Outstanding at January 1, 2006		21,004		$21.11
Granted		1,486		23.38
Acquired(1)		656		16.56
Exercised		(2,014	)	18.34
Forfeited/expired		(559	)	22.56
Outstanding at December 31, 2006		20,573		$21.36	4.8	$59,930
Exercisable at December 31, 2006		14,639		$20.72	4.5	$53,279

(1)  Relates to option plans acquired from the merger with Unizan.

The aggregate intrinsic value represents the amount by which the fair value of underlying stock exceeds the option exercise price. The total intrinsic value of stock options exercised during 2006, 2005, and 2004 was $11.8 million, $11.6 million, and $17.5 million, respectively.

Cash received from the exercise of options for 2006, 2005, and 2004 was $36.8 million, $31.9 million, and $41.4 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $2.8 million, $8.7 million, and $3.0 million for 2006, 2005, and 2004, respectively.

The following table summarizes the status of Huntington’s nonvested awards for the year ended December 31, 2006:

				Weighted-		Weighted-
				Average		Average
				Grant Date	Restricted	Grant Date
				Fair Value	Stock	Fair Value
(in thousands, except per share amounts)	Options			Per Share	Units	Per Share
Nonvested at January 1, 2006		7,956		$5.53	—	$	—
Granted		1,486		4.21	476		23.37
Acquired(1)		19		4.61	—		—
Vested		(3,025	)	5.60	—		—
Forfeited		(502	)	5.40	(8)		23.34
Nonvested at December 31, 2006		5,934		$5.17	468	$	23.37

(1)  Relates to option plans acquired from the merger with Unizan.

As of December 31, 2006, the total unrecognized compensation cost related to nonvested awards was $26.9 million with a weighted-average expense recognition period of 1.9 years. The total fair value of awards vested during the year ended December 31, 2006, was $17.0 million.

110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

The following table presents additional information regarding options outstanding as of December 31, 2006.

	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
$9.91 to $15.00	738	4.7	$14.21		738	$14.21
$15.01 to $20.00	7,133	4.7	18.03		5,844	17.61
$20.01 to $25.00	10,439	5.6	22.86		5,803	22.14
$25.01 to $28.35	2,263	2.1	27.22		2,254	27.23
Total	20,573	4.8	$21.36		14,639	$20.72

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, 2006, 1.4 million shares under option remain unvested.

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 25.3 million awards to grant or purchase shares of common stock authorized for issuance under the plans at December 31, 2006, 21.4 million were outstanding and 3.9 million were available for future grants.

20. INCOME TAXES

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

		At December 31,
(in thousands of dollars)		2006			2005			2004
Current tax provision
	Federal	$	340,665		$	163,383		$	12,779
	State		222			210			—
Total current tax provision			340,887			163,593			12,779
Deferred tax (benefit) provision
	Federal		(288,475	)		(32,681	)		140,962
	State		428			571			—
Total deferred tax (benefit) provision			(288,047	)		(32,110	)		140,962
Provision for income taxes		$	52,840		$	131,483		$	153,741

Tax expense (benefit) associated with securities transactions included in the above amounts were ($25.6 million) in 2006, ($2.8 million) in 2005, and $5.5 million in 2004.

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

		2006						2005						2004
(in thousands of dollars)		Amount			Rate			Amount			Rate			Amount			Rate
Income tax expense computed at the statutory rate		$	179,921			35.0	%	$	190,251			35.0	%	$	193,433			35.0	%
Increases (decreases):
	Tax-exempt interest income		(10,449	)		(2.0	)		(8,741	)		(1.6	)		(7,640	)		(1.4	)
	Tax-exempt bank owned life insurance income		(15,321	)		(3.0	)		(14,257	)		(2.6	)		(14,804	)		(2.7	)
	Asset securitization activities		(10,157	)		(2.0	)		(6,651	)		(1.2	)		(6,278	)		(1.1	)
	Federal tax loss carryback		(33,086	)		(6.4	)		(28,705	)		(5.3	)		—			—
	General business credits		(7,130	)		(1.4	)		(6,878	)		(1.3	)		(7,768	)		(1.4	)
	Repatriation of foreign earnings		—			—			5,741			1.1			—			—
	Resolution of federal income tax audit		(52,604	)		(10.2	)		—			—			—			—
	Other, net		1,666			0.3			723			0.1			(3,202	)		(0.6	)
Provision for income taxes		$	52,840			10.3	%	$	131,483			24.2	%	$	153,741			27.8	%

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

		At December 31,
(in thousands of dollars)		2006		2005
Deferred tax assets:
	Allowances for credit losses	$	132,085	$	123,934
	Loss and other carry-forwards		37,872		54,457
	Fair Value Adjustments		—		14,082
	Pension and other employee benefits		9,645		—
	Other		87,241		74,020
Net deferred tax assets			266,843		266,493
Deferred tax liabilities:
	Lease financing		547,488		830,303
	Fair value adjustments		2,807		—
	Pension and other employee benefits		—		41,409
	Mortgage servicing rights		32,123		26,375
	Other		91,031		71,106
Total deferred tax liability			673,449		969,193
Net deferred tax liability before valuation allowance			406,606		702,700
Valuation Allowance			37,315		40,955
Net deferred tax liability after valuation allowance		$	443,921	$	743,655

At December 31, 2006, Huntington’s deferred tax asset related to loss and other carry-forwards was $37.9 million. This was comprised of a net operating loss carry-forward of $0.2 million for U.S. federal tax purposes, which will begin expiring in 2023, an alternative minimum tax credit carry-forward of $0.4 million, and a capital loss carry-forward of $37.3 million, which will expire in 2010. A valuation allowance in the amount of $37.3 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. The valuation allowance on this asset decreased $3.6 million from 2005 to 2006 as a result of the 2005 tax return true-up and the estimated utilization of capital losses in 2006. In Management’s opinion the results of future operations will generate sufficient taxable income to realize the net operating loss and the alternative minimum tax credit carry-forward. Consequently, management has determined that a valuation allowance for deferred tax assets was not required as of December 31, 2006 or 2005 relating to these carry-forwards.

21. 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

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HUNTINGTON BANCSHARES INCORPORATED

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, 2006 and 2005, and the net periodic benefit cost for the years then ended. Huntington selected September 30, 2006 as the measurement date for all calculations and contracted an actuary to provide measurement services.

								Post-Retirement
		Pension Benefits						Benefits
		2006			2005			2006			2005
Weighted-average assumptions used to determine benefit obligations at December 31
	Discount rate		5.74	%		5.43	%		5.74	%		5.43	%
	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		5.43	%		5.81	%		5.43	%		5.81	%
	Expected return on plan assets		8.00			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. For the year ended December 31, 2006, the long-term rate of return assumption to determine the net periodic benefit cost was raised one percentage point to 8.00% due to favorable historical and expected future results.

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)	2006			2005			2006			2005
Projected benefit obligation at beginning of measurement year (September 30)	$	418,091		$	336,007		$	43,616		$	55,504
Changes due to:
Service cost		17,262			13,936			1,302			1,377
Interest cost		22,157			19,016			2,332			2,903
Benefits paid		(7,491	)		(6,897	)		(3,540	)		(3,738	)
Settlements		(11,523	)		(9,375	)		—			—
Plan amendments		—			—			1,700			—
Actuarial assumptions and gains and losses		(12,792	)		65,404			2,811			(12,430	)
Total changes		7,613			82,084			4,605			(11,888	)
Projected benefit obligation at end of measurement year (September 30)	$	425,704		$	418,091		$	48,221		$	43,616

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, 2006, Plan assets were invested 72% in equity investments and 28% in bonds, with an average duration of 3.7 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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Changes to certain actuarial assumptions, including a higher discount rate decreased the pension benefit obligation at September 30, 2006 by $12.8 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)	2006			2005
Fair value of plan assets at beginning of measurement year (September 30)	$	440,787		$	353,222
Changes due to:
Actual return on plan assets		30,232			40,798
Employer contributions		29,800			63,600
Settlements		(12,313	)		(9,936	)
Benefits paid		(7,491	)		(6,897	)
Total changes		40,228			87,565
Fair value of plan assets at end of measurement year (September 30)	$	481,015		$	440,787

Huntington’s accumulated benefit obligation under the Plan was $384 million and $372 million at September 30, 2006 and 2005, respectively. In both years, the fair value of Huntington’s plan assets exceeded its accumulated benefit obligation.

The following table shows the components of net periodic benefit cost recognized in the three years ended December 31, 2006:

	Pension Benefits									Post-Retirement Benefits
(in thousands of dollars)	2006			2005			2004			2006			2005			2004
Service cost	$	17,552		$	14,186		$	12,159		$	1,302		$	1,378		$	1,302
Interest cost		22,157			19,016			17,482			2,332			2,903			3,209
Expected return on plan assets		(33,577	)		(25,979	)		(21,530	)		—			—			—
Amortization of transition asset		(1	)		(4	)		1			1,104			1,104			1,104
Amortization of prior service cost		1			1			1			489			379			583
Amortization of gain		—			—			—			(722	)		(126	)		—
Settlements		3,565			3,642			3,151			—			—			—
Recognized net actuarial loss		17,509			10,689			7,936			—			—			—
Benefit cost	$	27,206		$	21,551		$	19,200		$	4,505		$	5,638		$	6,198

Included in service costs are $0.4 million, $0.3 million and $0.3 million of plan expenses that were recognized in the three years ended December 31, 2006, 2005 and 2004. It is Huntington’s policy to recognize settlement gains and losses as incurred. Management expects net periodic pension cost to approximate $17.6 million and net periodic post-retirement benefits cost to approximate $5.5 million for 2007.

The estimated transition asset and prior service cost for the Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are less than $0.1 million. The estimated transition asset, prior service cost and net gain for the post-retirement benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $1.1 million, $0.6 million and ($0.3 million), respectively.

Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, 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.

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HUNTINGTON BANCSHARES INCORPORATED

At September 30, 2006 and 2005, 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:

	Fair Value
	2006					2005
(in thousands of dollars)	Balance		%			Balance		%
Huntington funds — money market	$	820		—	%	$	164		—	%
Huntington funds — equity funds		331,022		69			300,080		68
Huntington funds — fixed income funds		133,641		28			125,971		29
Huntington common stock		15,532		3			14,572		3
Fair value of plan assets (September 30)	$	481,015		100	%	$	440,787		100	%

The number of shares of Huntington common stock held by the Plan was 642,364 at December 31, 2006 and 2005. 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 2006 and 2005 were $33.4 million and $18.9 million, respectively.

At December 31, 2006, 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
Fiscal Year:
	2007	$	22,412	$4,134
	2008		23,105	4,201
	2009		23,876	4,275
	2010		24,864	4,356
	2011		26,526	4,439
	2012 through 2016		144,273	21,926

Although not legally required, Huntington made a discretionary contribution to the Plan of $29.8 million in June 2006. There is no expected minimum contribution for 2007 to the Plan. However, Huntington may choose to make a contribution to the Plan up to the maximum deductible limit in the 2007 plan year. Expected contributions for 2007 to the post-retirement benefit plan are $3.2 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, respectively. A one-percentage point decrease would reduce service and interest costs and the post-retirement benefit obligation by less than $0.1 million, respectively. The 2007 health-care cost trend rate was projected to be 9.60% for pre-65 participants and 9.70% for post-65 participants compared with an estimate of 9.78% for pre-65 participants and 9.46% for post-65 participants in 2005. These rates are assumed to decrease gradually until they reach 5.0% for both pre-65 participants and post-65 participants in the year 2018 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, 2006, Huntington has a pension liability of $27.9 million associated with these plans. At December 31, 2005, the accrued pension liability for these plans totaled $26.6 million. Pension expense for the plans was $2.6 million, $2.3 million, and $2.1 million in 2006, 2005, and 2004, respectively. Huntington recorded a ($0.3 million) and $0.8 million, net of tax, minimum pension liability adjustment within other comprehensive income associated with these unfunded plans in 2006 and 2005, respectively. The adoption of Statement No. 158 eliminated the need to record any further minimum pension liability adjustments associated with these plans.

On December 31, 2006, Huntington adopted the recognition provisions of Statement No. 158, which required Huntington to recognize the funded status of the defined benefit plans on its Consolidated Balance Sheet. Statement No. 158 also required

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HUNTINGTON BANCSHARES INCORPORATED

recognition of actuarial gains and losses, prior service cost, and any remaining transition amounts from the initial application of Statements 87 and 106 as a component of accumulated other comprehensive income, net of tax.

The following table illustrates the effect of applying Statement No. 158 for all defined benefit plans on Huntington’s Consolidated Balance Sheet as of December 31, 2006.

		Before				After
		Adoption of				Adoption of
(in thousands of dollars)		Statement No. 158		Adjustments		Statement No. 158
Accrued income and other assets			$ 1,187,932		$(125,081)		$ 1,062,851
	Total assets		35,454,100		(125,081)		35,329,019
Accrued expenses and other liabilities			591,354		2,680		594,034
Deferred federal income tax liability			488,637		(44,716)		443,921
	Total liabilities		32,356,729		(42,036)		32,314,693
Accumulated other comprehensive income			27,979		(83,045)		(55,066)
	Total shareholders’ equity		3,097,371		(83,045)		3,014,326

The following table presents the amounts recognized in the consolidated balance sheets at December 31, 2006 after the adoption of Statement No. 158 for all of Huntington defined benefit plans.:

(in thousands of dollars)	December 31, 2006
Accrued income and other assets		$55,311
Accrued expenses and other liabilities		75,230

Amounts recognized in accumulated other comprehensive income as of December 31, 2006 consist of:

(in thousands of dollars)	December 31, 2006
Net actuarial loss		$(78,209)
Prior service cost		(3,808)
Transition liability		(4,311)
Defined benefit pension plans		$(86,328)

The following table presents the funded status of the Plan and the post-retirement benefit plan with the amounts recognized in the consolidated balance sheet as of December 31, 2005 prior to the adoption of Statement No. 158:

	Pension		Post-Retirement
(in thousands of dollars)	Benefits		Benefits
Projected benefit obligation less (greater) than plan assets	$	22,696	$	(43,616	)
Unrecognized net actuarial loss (gain)		153,308		(11,586	)
Unrecognized prior service cost		1,788		3,476
Unrecognized transition liability, net of amortization		6		7,728
Prepaid (accrued) benefit costs, at measurement date		177,798		(43,998	)
Contribution made after measurement date		—		1,018
Prepaid (accrued) benefit costs	$	177,798	$	(42,980	)

Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions dollar for dollar, up to the first 3% of base pay contributed to the plan. The match is 50 cents on the dollar on the 4th and 5th percent of base pay contributed to the plan. The cost of providing this plan was $10.3 million in 2006, $9.6 million in 2005, and $9.2 million in 2004. The number of shares of Huntington common stock held by this plan was 6,708,731 at December 31, 2006, and 7,322,653 at December 31, 2005. The market value of these shares was $159.3 million and $173.9 million at the same respective dates. Dividends received by the plan were $20.3 million during 2006 and $13.9 million during 2005.

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HUNTINGTON BANCSHARES INCORPORATED

22. 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:

		2006						2005
		Carrying						Carrying
(in thousands of dollars)		Amount			Fair Value			Amount			Fair Value
Financial Assets:
	Cash and short-term assets	$	1,594,915		$	1,594,915		$	1,063,167		$	1,063,167
	Trading account securities		36,056			36,056			8,619			8,619
	Mortgages held for sale		270,422			270,422			294,344			294,344
	Investment securities		4,362,924			4,362,924			4,526,520			4,526,520
	Net loans and direct financing leases		25,811,357			25,945,357			24,203,819			24,222,819
	Derivatives		44,793			44,793			30,274			30,274
Financial Liabilities:
	Deposits		(25,047,770	)		(23,754,770	)		(22,409,675	)		(21,338,675	)
	Short-term borrowings		(1,676,189	)		(1,676,189	)		(1,889,260	)		(1,889,260	)
	Federal Home Loan Bank advances		(996,821	)		(996,821	)		(1,155,647	)		(1,155,647	)
	Subordinated notes		(2,229,140	)		(2,229,140	)		(1,023,371	)		(1,023,371	)
	Other long term debt		(1,286,657	)		(1,351,657	)		(2,418,419	)		(2,479,419	)
	Derivatives		(27,041	)		(27,041	)		(27,427	)		(27,427	)

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-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.

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–  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.

23. DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives used in Asset and Liability Management Activities

The following table presents the gross notional values of derivatives used in Huntington’s Asset and Liability Management activities at December 31, 2006, identified by the underlying interest rate-sensitive instruments:

		Fair Value		Cash Flow
(in thousands of dollars)		Hedges		Hedges		Total
Instruments associated with:
	Deposits	$	635,000	$	315,000	$	950,000
	Federal Home Loan Bank advances		—		325,000		325,000
	Subordinated notes		750,000		—		750,000
	Other long-term debt		50,000		—		50,000
Total notional value at December 31, 2006		$	1,435,000	$	640,000	$	2,075,000

The following table presents additional information about the interest rate swaps used in Huntington’s Asset and Liability Management activities at December 31, 2006:

								Weighted-Average Rate
				Average
		Notional		Maturity	Fair
(in thousands of dollars)		Value		(years)	Value			Receive			Pay
Liability conversion swaps
	Receive fixed — generic	$	800,000	9.7	$	4,008			5.31	%		5.59	%
	Receive fixed — callable		635,000	6.4		(13,459	)		4.54			5.27
	Pay fixed — generic		640,000	2.6		(191	)		5.36			4.91
Total liability conversion swaps		$	2,075,000	6.5	$	(9,642	)		5.09	%		5.28	%

Interest rate caps used in Huntington’s Asset and Liability Management activities at December 31, 2006, are shown in the table below:

			Average
	Notional		Maturity	Fair		Weighted-Average
(in thousands of dollars)	Value		(years)	Value		Strike Rate
Interest rate caps — purchased	$	500,000	2.1	$	1,668		5.5	%

These derivative financial instruments were entered into for the purpose of altering the interest rate risk of 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 a decrease to net interest income of ($3.1 million) in 2006 and an increase of $23.6 million and $24.0 million in 2005 and 2004, respectively.

The amounts recognized in connection with the ineffective portion of Huntington’s fair value hedging in 2006 was $1.4 million, the amounts in 2005 and 2004 were insignificant. During 2006, 2005, and 2004, an insignificant net loss was recognized in connection with the ineffective portion of its cash flow hedging instruments. No amounts were excluded from the assessment of effectiveness during 2006, 2005, and 2004 for derivatives designated as either fair value or cash flow hedges.

At December 31, 2005, the fair value of the swap portfolio used for asset and liability management was a liability of $13.9 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. Collateral agreements are regularly entered into as part of the underlying derivative agreements with Huntington’s counterparties to mitigate the credit risk associated with derivatives. At December 31, 2006 and 2005, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $42.6 million and $26.2 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.

118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

During the first quarter of 2006, Huntington terminated asset and liability conversion interest rate swaps with a total notional value of $2.5 billion. The terminations generated gross gains of $34.9 million and gross losses of $34.5 million, resulting in a net deferred gain of $0.4 million. The net gain (loss) is being amortized into interest income over the remainder of the original terms of the terminated swaps. In 2006, a total of ($1.9 million) was recognized in interest income while ($0.8 million) was recognized in other non-interest income. The additional amounts will be recognized as follows: 2007: $2.9 million, 2008: ($1.4 million), 2009: $0.1 million, and 2010: $1.5 million.

A total of $0.9 million of the unrealized net gain on cash flow hedges is expected to be recognized in 2007.

Derivatives Used in Mortgage Banking Activities

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)		2006			2005
Derivative assets:
	Interest rate lock agreements	$	236		$	669
	Forward trades and options		1,176			172
Total derivative assets			1,412			841
Derivative liabilities:
	Interest rate lock agreements		(838	)		(328	)
	Forward trades and options		(699	)		(1,947	)
Total derivative liabilities			(1,537	)		(2,275	)
Net derivative liability		$	(125	)	$	(1,434	)

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 used in trading activities 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 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. The interest rate risk of these customer derivatives is mitigated by entering into similar derivatives having offsetting terms with other counterparties.

Supplying these derivatives to customers results in non-interest 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 $10.8 million in 2006, $8.3 million in 2005, and $8.8 million in 2004. The total notional value of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives was $4.6 billion at the end of 2006 and $4.2 billion at the end of the prior year. Huntington’s credit risk from interest rate swaps used for trading purposes was $40.0 million and $44.3 million at the same dates.

Huntington also uses certain derivative financial instruments to offset changes in value of its residential mortgage servicing assets. These derivatives consist primarily of forward interest rate agreements, and forward mortgage securities. The derivative instruments used are not designated as hedges under Statement No. 133. Accordingly, such derivatives are recorded at fair value with changes in fair value reflected in mortgage banking income. The total notional value of these derivative financial instruments at December 31, 2006, was $2.6 billion. The total notional amount corresponds to trading assets with a fair value of $40.0 million and trading liabilities with a fair value of $17.5 million. Total gains and losses for the three years ended December 31, 2006, 2005 and 2004 were $1.6 million, ($2.5 million), and ($0.2 million), respectively and were also included in other non-interest income.

In connection with securitization activities, Huntington purchased interest rate caps with a notional value totaling $1.6 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.6 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income.

119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

24. 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)		2006		2005
Contract amount represents credit risk
	Commitments to extend credit
	Commercial	$	4,416	$	3,316
	Consumer		3,374		3,046
	Commercial real estate		1,645		1,567
Standby letters of credit			1,156		1,079
Commercial letters of credit			54		47

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, 2006, approximately 47% 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 $4.3 million and $4.0 million at December 31, 2006, and 2005, 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, 2006 and 2005, Huntington had commitments to sell residential real estate loans of $319.9 million and $348.3 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 pricing, asset quality, and volume parameters. At December 31, 2006 and 2005, approximately $44.3 million and $51.6 million, respectively, 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, 2006, 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.

120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HUNTINGTON BANCSHARES INCORPORATED

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, 2006, were $31.6 million in 2007, $29.8 million in 2008, $28.4 million in 2009, $26.2 million in 2010, $24.9 million in 2011, and $135.7 million thereafter. At December 31, 2006, total minimum lease payments have not been reduced by minimum sublease rentals of $62.2 million due in the future under noncancelable subleases. At December 31, 2006, the future minimum sublease rental payments that Huntington expects to receive are $16.2 million in 2007; $13.7 million in 2008; $12.9 million in 2009; $10.3 million in 2010; $7.5 million in 2011; and $1.7 million thereafter. The rental expense for all operating leases was $34.8 million, $34.0 million, and $40.4 million for 2006, 2005, and 2004, respectively. Huntington had no material obligations under capital leases.

25.  OTHER REGULATORY MATTERS

On March 1, 2005, Huntington announced entering into a formal written agreement with the Federal Reserve Bank of Cleveland (FRBC), 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 agreement called for independent third-party reviews, as well as the submission of written plans and progress reports by Management.

On May 10, 2006, Huntington announced that the FRBC notified Huntington’s board of directors that Huntington had satisfied the provisions of the written agreement dated February 28, 2005, and that the FRBC, under delegated authority of the Board of Governors of the Federal Reserve System, had terminated the written agreement.

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.

As of December 31, 2006, 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)		2006			2005			2006			2005			2006			2005
Huntington Bancshares Incorporated
	Amount	$	2,784		$	2,701		$	3,986		$	3,678		$	2,784		$	2,701
	Ratio		8.93	%		9.13	%		12.79	%		12.42	%		8.00	%		8.34	%
The Huntington National Bank
	Amount	$	1,990		$	1,902		$	3,214		$	3,087		$	1,990		$	1,902
	Ratio		6.47	%		6.82	%		10.44	%		10.56	%		5.81	%		6.21	%

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 2006 and 2005, 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 2006 and 2005, the average balance of these deposits were $43.7 million and $57.6 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, 2006, the Bank could lend $321.3 million to a single affiliate, subject to the qualifying collateral requirements defined in the regulations.

121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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. At December 31, 2006, the bank could have declared and paid $0.7 million of additional dividends to the parent company without regulatory approval.

26. 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)		2006		2005
ASSETS
	Cash and cash equivalents	$	412,724	$	227,115
	Due from The Huntington National Bank		31,481		250,771
	Due from non-bank subsidiaries		277,245		205,208
	Investment in The Huntington National Bank		2,035,175		1,660,905
	Investment in non-bank subsidiaries		725,875		584,259
	Accrued interest receivable and other assets		45,592		128,303
Total assets		$	3,528,092	$	3,056,561
LIABILITIES AND SHAREHOLDERS’ EQUITY
	Short-term borrowings	$	3,252	$	3,034
	Long-term borrowings		329,898		309,279
	Dividends payable, accrued expenses, and other liabilities		180,616		186,747
Total liabilities			513,766		499,060
Shareholders’ equity			3,014,326		2,557,501
Total liabilities and shareholders’ equity		$	3,528,092	$	3,056,561

Statements of Income			Year Ended December 31,
(in thousands of dollars)			2006			2005			2004
Income
	Dividends from
		The Huntington National Bank	$	575,000		$	180,000		$	400,000
		Non-bank subsidiaries		47,476			3,800			8,202
	Interest from
		The Huntington National Bank		13,167			35,253			13,417
		Non-bank subsidiaries		10,880			8,770			7,638
	Management fees from subsidiaries			9,539			30,539			34,603
	Other			23			406			(810	)
Total income				656,085			258,768			463,050
Expense
		Personnel costs		31,427			25,060			32,227
		Interest on borrowings		17,856			22,772			4,317
		Other		20,040			24,741			36,738
Total expense				69,323			72,573			73,282
Income before income taxes and equity in undistributed net income of subsidiaries				586,762			186,195			389,768
Income taxes				(20,922	)		(2,499	)		(4,223	)
Income before equity in undistributed net income of subsidiaries				607,684			188,694			393,991
Increase (decrease) in undistributed net income of:
		The Huntington National Bank		(142,672	)		208,061			(9,073	)
		Non-bank subsidiaries		(3,791	)		15,336			14,007
Net income			$	461,221		$	412,091		$	398,925

122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Statements of Cash Flows				Year Ended December 31,
(in thousands of dollars)				2006			2005			2004
Operating activities
		Net income		$	461,221		$	412,091		$	398,925
		Adjustments to reconcile net income to net cash provided by operating activities:
			Equity in undistributed net income of subsidiaries		146,463			(223,397	)		(4,934	)
			Depreciation and amortization		2,150			2,674			2,690
			Change in other, net		170,367			(49,557	)		(13,609	)
Net cash provided by operating activities					780,201			141,811			383,072
Investing activities
		Repayments from subsidiaries			370,049			154,152			117,314
		Advances to subsidiaries			(397,216	)		(206,765	)		(80,197	)
		Proceeds from sale of securities available for sale			—			—			—
Net cash provided by (used in) investing activities					(27,167	)		(52,613	)		37,117
Financing activities
		Proceeds from issuance of long-term borrowings			250,200			—			—
		Payment of borrowings			(249,515	)		(99,437	)		(101,541	)
		Dividends paid on common stock			(231,117	)		(200,628	)		(168,075	)
		Acquisition of treasury stock			(378,835	)		(231,656	)		—
		Proceeds from issuance of common stock			41,842			39,194			47,239
Net cash used for financing activities					(567,425	)		(492,527	)		(222,377	)
Change in cash and cash equivalents					185,609			(403,329	)		197,812
Cash and cash equivalents at beginning of year					227,115			630,444			432,632
Cash and cash equivalents at end of year				$	412,724		$	227,115		$	630,444
Supplemental disclosure:
	Interest paid			$	17,856		$	22,754		$	18,495

27. 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 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 the Company’s organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions. An overview of this system is provided below, along with a description of each segment and discussion of financial results. Prior year results have been reclassified to conform to the current year business segment structure.

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 eight operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky. It provides these services through a banking network of 371 branches, over 980 ATMs, plus on-line and telephone banking channels. It also provides certain services outside of these five states, including mortgage banking and equipment leasing. 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 59% and 78% of total Regional Banking average 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 the Company’s primary banking markets, as well as in Arizona, Florida, Georgia, New Jersey, North Carolina, Pennsylvania,

123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

South Carolina, and Tennessee. Dealer Sales finances the purchase of automobiles by customers at the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles to consumers under long-term operating or direct finance leases, finances the dealerships’ new and used vehicle inventories, dealership real estate, or dealer working capital needs, and provides other banking services to the automotive dealerships and their owners. Competition from the financing divisions of automobile manufacturers and from other financial institutions is intense. Dealer Sales’ production opportunities are directly impacted by the general automotive sales business, including programs initiated by manufacturers to enhance and increase sales directly. Huntington has been in this line of business for over 50 years.

Private Financial and Capital Markets Group (PFCMG): This segment provides products and services designed to meet the needs of 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 high net worth 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.

Treasury/ Other: This segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or allocated to one of the other three business segments. Assets in this segment include investment securities and bank owned life insurance. The net interest income/(expense) of this segment includes the net impact of administering our investment securities portfolios as part of overall liquidity management. A match-funded transfer pricing system is used to attribute appropriate funding interest income and interest expense to other business segments. As such, net interest income includes the net impact of any over or under allocations arising from centralized management of interest rate risk. Furthermore, net interest income includes the net impact of derivatives used to hedge interest rate sensitivity. Non-interest income includes miscellaneous fee income not allocated to other business segments, including bank owned life insurance income. Fee income also includes asset revaluations not allocated to other business segments including the valuation adjustment of MSRs to fair value, as well as any investment securities and trading assets gains or losses. The non-interest expense includes certain corporate administrative and other miscellaneous expenses not allocated to other business segments. This segment also includes any difference between the actual effective tax rate of Huntington and the statutory tax rate used to allocate income taxes to the other segments.

Use of Operating Earnings to Measure Segment Performance

Management uses earnings on an operating basis, rather than on a GAAP (reported) basis, to measure underlying performance trends for each business segment. Operating earnings represent reported earnings adjusted to exclude the impact of the significant 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 years ending December 31, 2006 and 2005, operating earnings were the same as reported GAAP earnings.

124

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Listed below is certain operating basis financial information reconciled to Huntington’s 2006, 2005, and 2004 reported results by line of business:

	Regional			Dealer						Treasury/			Huntington
INCOME STATEMENTS (in thousands of dollars)	Banking			Sales			PFCMG			Other			Consolidated
2006
Net interest income	$	883,536		$	134,931		$	73,342		$	(72,632	)	$	1,019,177
Provision for credit losses		(45,320	)		(14,206	)		(5,665	)		—			(65,191	)
Non-interest income		351,485			83,867			156,500			(30,783	)		561,069
Non-interest expense		(651,935	)		(112,448	)		(142,396	)		(94,215	)		(1,000,994	)
Income taxes		(188,218	)		(32,250	)		(28,624	)		196,252			(52,840	)
Operating earnings and net income as reported	$	349,548		$	59,894		$	53,157		$	(1,378	)	$	461,221
2005
Net interest income	$	779,413		$	145,526		$	73,410		$	(35,938	)	$	962,411
Provision for credit losses		(51,246	)		(25,922	)		(4,131	)		—			(81,299	)
Non-interest income		310,437			169,876			135,150			16,819			632,282
Non-interest expense		(588,713	)		(187,504	)		(131,195	)		(62,408	)		(969,820	)
Income taxes		(157,462	)		(35,691	)		(25,632	)		87,302			(131,483	)
Operating earnings and net income as reported	$	292,429		$	66,285		$	47,602		$	5,775		$	412,091
2004
Net interest income	$	677,953		$	149,743		$	62,091		$	21,587		$	911,374
Provision for credit losses		(7,714	)		(44,697	)		(2,651	)		—			(55,062	)
Non-interest income		307,649			320,223			134,037			42,483			804,392
Non-interest expense		(593,328	)		(325,935	)		(124,441	)		(79,691	)		(1,123,395	)
Income taxes		(134,597	)		(34,766	)		(24,162	)		45,159			(148,366	)
Operating earnings		249,963			64,568			44,874			29,538			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	$	249,963		$	73,166		$	44,874		$	30,922		$	398,925

	Assets				Deposits
	At December 31,				At December 31,
BALANCE SHEETS (in millions of dollars)	2006		2005		2006		2005
Regional Banking	$	20,933	$	18,850	$	20,231	$	17,957
Dealer Sales		5,003		5,613		59		65
PFCMG		2,153		2,010		1,162		1,180
Treasury/Other		7,240		6,292		3,596		3,208
Total	$	35,329	$	32,765	$	25,048	$	22,410

125

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

28. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations, for the years ended December 31, 2006 and 2005:

		2006
(in thousands, of dollars except per share data)		Fourth			Third			Second			First
	Interest income	$	544,841		$	538,988		$	521,903		$	464,787
	Interest expense		(286,852	)		(283,675	)		(259,708	)		(221,107	)
Net interest income			257,989			255,313			262,195			243,680
Provision for credit losses			(15,744	)		(14,162	)		(15,745	)		(19,540	)
Non-interest income			140,606			97,910			163,019			159,534
Non-interest expense			(267,790	)		(242,430	)		(252,359	)		(238,415	)
Income before income taxes			115,061			96,631			157,110			145,259
(Provision) benefit for income taxes			(27,346	)		60,815			(45,506	)		(40,803	)
Net income		$	87,715		$	157,446		$	111,604		$	104,456
Net income per common share — Basic		$	0.37		$	0.66		$	0.46		$	0.45
Net income per common share — Diluted			0.37			0.65			0.46			0.45

		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

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