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, 2007

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. o

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

Large accelerated filer o                      Accelerated filer o                       Non-accelerated filer þ                      Smaller reporting company o

                                             (Do not check if a smaller reporting company)

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

     All common stock is held by affiliates of the registrant as of December 31, 2007. As of February 29, 2008, 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, 2007: $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 2008 Annual Shareholders’ Meeting.

HUNTINGTON PREFERRED CAPITAL, INC.

INDEX

Part I.
Item 1. Business	3
Item 1A. Risk Factors	11
Item 1B. Unresolved Staff Comments	16
Item 2. Properties	16
Item 3. Legal Proceedings	16
Item 4. Submission of Matters to a Vote of Security Holders	16
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	16
Item 6. Selected Financial Data	17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	30
Item 8. Financial Statements and Supplementary Data	30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	47
Item 9A. Controls and Procedures	47
Item 9A(T). Controls and Procedures	47
Item 9B. Other Information	47
Part III.
Item 10. Directors and Executive Officers and Corporate Governance	47
Item 11. Executive Compensation	47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	48
Item 13. Certain Relationships and Related Transactions, and Director Independence	48
Item 14. Principal Accounting Fees and Services	48
Part IV.
Item 15. Exhibits and Financial Statement Schedules	48
Signatures	49
Exhibits
EX-12.1
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). During 2007, HPCI had one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). On December 31, 2007, HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. As a result, HPCLI became a wholly owned subsidiary of Holdings. 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, 2007, 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, 2007, accounted for 84% 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 January 1, 2008:

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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, 1-4 family residences, industrial, warehouse, and self-storage properties, office and industrial condominiums, retail space, strip shopping centers, mixed use commercial properties, mobile home parks, nursing homes, hotels and motels, churches, and farms. Commercial 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, 2007, $2.8 billion, or 89.4%, of the commercial and commercial real estate loans underlying HPCI’s participation interests in such loans were secured by a first mortgage or first lien and most bear variable or floating interest rates. The remaining balance is comprised of $0.1 billion of second, third, and fourth mortgages, and $0.2 billion of loans secured by non-real property.

Consumer Loans and Residential Real Estate Loans

     HPCI owns participation interests in consumer loans primarily secured by a first or junior mortgage on the borrower’s primary residence. Many of these mortgage loans were made for reasons such as home improvements, acquisition of furniture and fixtures, or debt consolidation. These loans are predominately repaid on an installment basis and income is accrued based on the outstanding balance of the loan over original terms that range from 6 to 360 months. Of the loans underlying the consumer loan participations, most bear interest at fixed rates. Huntington does not originate consumer loans that allow negative amortization, or have a loan-to-value ratio at origination greater than 100%.

     HPCI also owns participation interests in adjustable rate, fixed rate, conforming, and nonconforming residential real estate loans. Conforming residential real estate loans comply with the requirements for inclusion in a loan guarantee or purchase program sponsored by either the Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage Association (FNMA). A majority of the nonconforming residential real estate loans underlying the participation interests acquired by HPCI to date are nonconforming because they have original principal balances which exceeded the requirements for FHLMC or FNMA programs, the original terms are shorter than the minimum requirements for FHLMC or FNMA programs at the time of origination, or generally because they vary in certain other respects from the requirements of such programs other than the requirements relating to creditworthiness of the mortgagors. Huntington does not originate residential 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 borrowers underlying HPCI’s loan participations at December 31, 2007:

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		17,202	$	2,347,295		54.0	%
Michigan		9,121		1,048,214		24.2
Indiana		2,205		366,667		8.5
Kentucky		1,726		215,028		5.0
		30,254		3,977,204		91.7
All other locations		325		361,835		8.3
Total loan participation interests		30,579	$	4,339,039		100.0	%

Dividend Policy and Restrictions

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

     Payment of dividends on the preferred securities could also be subject to regulatory limitations if the Bank fails to be “adequately capitalized” for purposes of regulations issued by The Office of the Comptroller of the Currency (OCC). The Bank currently intends to maintain its capital ratios in excess of the “well-capitalized” levels under these regulations. However, there can be no assurance that the Bank will be able to maintain its capital in excess of the “well-capitalized” levels. At December 31, 2007, Total Risk-Based Capital for the Bank totaled $4.7 billion and would have to be reduced by more than $991.7 million to fall below “adequately capitalized minimums”. Capital ratios for the Bank as of December 31, 2007 and 2006 are as follows:

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Table 2 — Capital Ratios for the Bank

	“Well-			“Adequately-
	Capitalized			Capitalized			December 31,
	Minimums”			Minimums”			2007			2006
Tier 1 Risk-Based Capital		6.00	%		4.00	%		6.64	%		6.47	%
Total Risk-Based Capital		10.00			8.00			10.17			10.44
Tier 1 Leverage Ratio		5.00			4.00			5.99			5.81

     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. Due to a significant loss that the Bank incurred in the fourth quarter of 2007, at December 31, 2007, the Bank could not declare or pay dividends without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends without regulatory approval. The OCC has approved the payment of HPCI’s first quarter 2008 dividends on its preferred securities. While management intends to request approval for any future dividend if such approval is required, there can be no assurance that the OCC will approve future dividends.

Conflict of Interests and Related Policies

     As of December 31, 2007, 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, 2007, there were no direct or indirect financial interests in any asset of HPCI by any of its officers or directors.

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Other Management Policies and Programs

General

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

Underwriting Standards

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

     Some of the loans, however, were acquired by the Bank in connection with the acquisition of other financial institutions. Most recently, Huntington completed its acquisition of Sky Financial Group, Inc (Sky Financial) on July, 1, 2007. At the time of the acquisition, no Sky Financial loans were participated to HPCI. Upon renewal, the loans originally underwritten by Sky Financial are subject to participation to HPCI without always being subject to the Bank’s underwriting policies. Even though the Bank did not and does not warrant the underwriting standards of any acquired institution, the Bank found Sky Financial’s underwriting standards to be acceptable at the time of acquisition. As a result of the Sky Financial acquisition, Huntington has a significant loan relationship with Franklin Credit Management Corporation (Franklin). No Franklin loans have been participated to HPCI.

Asset Acquisition and Disposition Policies

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

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

• are in accruing status;

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

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

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

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

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

     HPCI may continue to acquire from time to time limited amounts of participation interests in loans that are not commercial or residential loans, such as automobile loans and equipment loans, or other authorized investments. Although currently there is no intention to acquire any mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans that will be secured by single-family residential, multi-family, or commercial real estate properties located throughout the United States, HPCI is not restricted from doing so. HPCI does not intend to acquire any interest-only or principal-only mortgage-backed securities. HPCI also will not be precluded from investing in mortgage-backed securities when the Bank is the sponsor or issuer. At December 31, 2007, 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

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arrangement that it enters into in the future with the Bank will contain fees and other terms that would be substantially equivalent to or more favorable to HPCI than those that would be contained in servicing arrangements entered into with third parties unaffiliated with HPCI.

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

     HPCI’s policy is to reinvest the proceeds of its assets in other interest-earning assets such that its Funds from Operations (FFO), which represents cash flows from operations, over any period of four fiscal quarters will be anticipated to equal or exceed 150% of the amount that would be required to pay annual dividends on the Class A, Class C, and Class D preferred securities, except as may be necessary to maintain its status as a REIT. FFO is equal to net cash provided by operating activities as reflected in HPCI’s consolidated statement of cash flows. For each of the years ended December 31, 2007, 2006, and 2005, HPCI’s FFO were $321.2 million, $325.9 million, and $274.3 million, respectively. These significantly exceeded the minimum requirement of 150% of dividends on Class A, Class C, and Class D securities of $42.5 million, $41.3 million, and $32.0 million, for the same periods, respectively. HPCI’s articles of incorporation provide that it cannot amend or change this policy with respect to the reinvestment of proceeds without the consent or affirmative vote of the holders of at least two-thirds of the Class C preferred securities and two thirds of the Class D preferred securities, voting as separate classes.

Credit Risk Management Policies

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

Other Policies

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

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

• underwrite securities of other issuers;

• actively trade in loans or other investments;

• offer securities in exchange for property; or

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

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

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

     HPCI distributes to its shareholders, in accordance with the Securities and Exchange Act of 1934, as amended, annual reports containing financial statements prepared in accordance with 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

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will maintain its status as a reporting company under the Exchange Act for so long as any of the Class C preferred securities are outstanding and held by unaffiliated shareholders.

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

Employees

     At December 31, 2007, 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 collectability or present other unfavorable features.

Servicing

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

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

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

     The Bank has the right to accept payment or prepayment of the whole principal sum and accrued interest in accordance with the terms of the loans, waive prepayment charges in accordance with the Bank’s policy for loans in which no participation interest has been granted, and accept additional security for the loans. No specific term is specified in the participation and subparticipation agreements; the agreements may be terminated by mutual agreement of the parties at any

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time, without penalty. Due to the relationship among HPCI, Holdings, and the Bank, it is not anticipated that these agreements will be terminated by any party in the foreseeable future.

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

Competition

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

Segment Reporting

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

Regulatory Matters

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

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.

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

     At December 31, 2007, we had $3.1 billion of commercial and commercial real estate loan participation interests, including $0.5 billion of loan participation interests to builders of single family homes. There has been a general slowdown in the housing market across Ohio, Indiana, Kentucky and Michigan, reflecting declining prices and excess inventories of houses to be sold, particularly impacting loan participation interest borrowers in our eastern Michigan and northern Ohio markets. As a result, home builders have shown signs of financial deterioration. We expect the home builder market to continue to be volatile and anticipate continued pressure on the home builder segment in the coming months. If the slow down in the housing market continues, we could experience higher charge-offs and delinquencies in this portfolio.

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

     We are subject to the effects of any economic downturn. There has been a slowdown in the housing market across Ohio, Indiana, Kentucky and Michigan, reflecting declining prices and excess inventories of houses to be sold, particularly in the eastern Michigan and northern Ohio markets. These developments have had, and further declines may continue to have, a negative effect on our financial condition and results of operations. At December 31, 2007, we had participation interests in $1.2 billion of consumer and residential real estate loans, representing 28% of total loans. Continuing declines in home values are likely to lead to higher charge-offs and delinquencies in each of these portfolios.

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

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

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

     Our income consists primarily of interest and fees on loans underlying its participation interests. At December 31, 2007, 39% of the loans underlying our participation interests, as measured by the aggregate outstanding principal amount, bore interest at fixed rates and the remainder bore interest at adjustable rates. Adjustable-rate loans decrease the risks associated with increases in interest rates but involve other risks. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, and the increased payment increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on the loans underlying our participation interests as the borrowers refinance their mortgages at lower interest rates. Under these circumstances, we may find it more difficult to

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acquire additional participation interests with rates sufficient to support the payment of the dividends on the preferred securities. Because the rate at which dividends are required to be paid on the Class A and C preferred securities is fixed, there can be no assurance that a declining interest rate environment would not adversely affect our ability to pay full, or even partial, dividends on our preferred securities.

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

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

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

     Legal and regulatory limitations on the payment of dividends by the Bank could also affect HPCI’s ability to pay dividends to unaffiliated third parties, including the preferred shareholders. Since HPCI, HPCII, HCF, and Holdings are members of the Bank’s consolidated group, payment of common and preferred dividends by the Bank and/or any member of its consolidated group to unaffiliated third parties, including payment of dividends to the shareholders of preferred securities, would require regulatory approval if aggregate dividends on a consolidated basis exceed certain limitations. Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings. The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock.

     Due to a significant loss that the Bank incurred in the fourth quarter of 2007, at December 31, 2007, the Bank could not declare or pay dividends without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends without regulatory approval. The OCC has approved the payment of HPCI’s first quarter 2008 dividends on its preferred securities. While management intends to request approval for any future dividend if such approval is required, there can be no assurance that the OCC will approve future dividends.

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

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

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

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     As a REIT, HPCI generally will be required each year to distribute as dividends to its shareholders at least 90% of REIT taxable income, excluding capital gains. Failure to comply with this requirement would result in earnings being subject to tax at regular corporate rates. In addition, HPCI would be subject to a 4% nondeductible excise tax on the amount by which certain distributions considered as paid with respect to any calendar year are less than the sum of 85% of ordinary income for the calendar year, 95% of capital gains for the calendar year, and 100% of undistributed taxable income from prior periods. Qualification as a REIT also involves application of other specific provisions of the Internal Revenue Code. Two specific provisions are an income test and an asset test. At least 75% of HPCI’s gross income, excluding gross income from prohibited transactions, for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property. Additionally, at least 75% of HPCI’s total assets must be represented by real estate assets. At December 31, 2007, HPCI had qualifying income and qualifying assets that exceeded 75%.

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

HPCI is dependent, in virtually every phase of its operations, on the diligence and skill of the officers and employees of the Bank, 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, 2007, all of its officers and six of its nine directors are also officers or directors of the Bank and/or its affiliates. Officers that are common with the Bank devote less than a majority of their time to managing HPCI’s business. The Bank has the right to elect all of HPCI’s directors, including independent directors, except under limited circumstances if it fails to pay dividends. The Bank and its affiliates have interests that are not identical to HPCI’s and, therefore, conflicts of interest could arise in the future with respect to transactions between or among the Bank, Holdings, HPCII, HCF, and HPCI.

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

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

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status. HPCI has no control over the actions of the Bank in pursuing collection of any non-performing assets. HPCI’s ability to make timely payments of dividends on the preferred and common securities will depend in part upon the Bank’s prompt collection efforts on its behalf. HPCI pays substantial servicing fees to the Bank. HPCI incurred servicing fees of $11.1 million in 2007, $10.6 million in 2006, and $11.2 million in 2005.

     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 collateralize only one such facility. The Bank has a line of credit from the FHLB, limited to $4.8 billion as of December 31, 2007, based on the Bank’s holdings of FHLB stock. As of that same date, the Bank had borrowings of $3.1 billion under the facility.

     HPCI has entered into an amended and restated agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize the Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess of an aggregate amount or percentage of such assets established from time to time by HPCI’s board of directors, including a majority of HPCI’s independent directors. The pledge limit was established by HPCI’s board at 25% of total assets, or approximately $1.1 billion as of December 31, 2007, as reflected in HPCI’s month-end management report. This pledge limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors. As of December 31, 2007, HPCI’s total loans pledged consisted of one-to-four family residential mortgage portfolio, which aggregated to $0.9 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.

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.

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     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, 2007, are discussed in table 2 of Item I, Part 1 of this report.

     The Bank is a wholly owned subsidiary of Huntington. Huntington is a one-bank holding company which files annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (the SEC), under the Securities Exchange Act of 1934, as amended (the Exchange Act). The financial statements of the Bank and Huntington are substantially the same and thus current or future holders of HPCI’s preferred securities can obtain important information on an ongoing basis about the Bank and Huntington by reviewing Huntington’s SEC filings. These filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov and on the investor relations page of Huntington’s website at http://www.huntington.com. Any document filed by Huntington with the SEC can be read and copied at the SEC’s public reference facilities. Further information on the operation of the public reference facilities 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, 2007 are also filed with this report as Exhibit 99.1.

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

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

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

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

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

     In the event HPCI redeems its Class C or Class D preferred securities, holders of such securities will be entitled to receive the redemption price of $25.00 per share plus accrued and unpaid dividends on such shares. The redemption price 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 29, 2008, there were four common shareholders of record, all of which are affiliates of the Bank. During 2007, 2006 and 2005, dividends of $266.6 million, $296.3 million and $279.7 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, 2007. 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, 2007.

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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, 2007, 2006, 2005, 2004, and 2003.

Table 3 — Selected Financial Data

(in thousands)	2007			2006			2005			2004			2003
STATEMENTS OF INCOME:
Interest and fee income	$	324,811		$	331,306		$	302,743		$	262,215		$	274,401
Provision for (reduction in) allowance for credit losses		3,390			(22,041	)		(19,796	)		(31,591	)		(41,219	)
Non-interest income		12,042			7,525			9,391			7,249			6,901
Non-interest expense		15,587			15,322			17,065			16,260			13,886
Net income		316,259			344,237			314,318			284,542			308,539
Dividends declared on preferred securities		49,643			47,944			34,634			20,744			18,911
Net income applicable to common shares		266,616			296,293			279,684			263,798			289,628
Dividends declared on common stock		266,616			296,293			279,684			263,798			289,628
BALANCE SHEET HIGHLIGHTS:
At period end:
Net loan participation interests	$	4,276,764		$	4,048,506		$	4,454,795		$	4,828,127		$	5,218,536
All other assets		189,110			901,230			899,090			845,464			187,442
Total assets		4,465,874			4,949,736			5,353,885			5,673,591			5,405,978
Total shareholders’ equity		4,461,959			4,495,753			4,649,460			5,069,776			5,405,978
Average balances:
Net loan participation interests	$	4,289,099		$	4,349,214		$	4,664,505		$	5,075,815		$	5,027,857
Total assets		4,653,184			4,816,467			5,217,640			5,530,253			5,647,772
Total shareholders’ equity		4,617,576			4,774,542			5,197,654			5,497,479			5,643,692
KEY RATIOS AND STATISTICS:
Yield on interest earning assets		6.98	%		6.94	%		5.84	%		4.74	%		4.77	%
Return on average assets		6.80			7.15			6.02			5.15			5.46
Return on average equity		6.85			7.21			6.05			5.18			5.47
Dividend payout ratio		100.00			100.00			100.00			100.00			100.00
Average shareholders’ equity to average assets		99.23			99.13			99.62			99.41			99.93
Preferred dividend coverage ratio		6.37	x		7.18	x		9.08	x		13.72	x		16.32	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, 2007, the ACL was $66.1 million and represented the sum of the allowance for loan participation losses (ALPL) and allowance for unfunded loan participation commitments (AULPC). The ACL represents Management’s estimate as to the level of allowances considered appropriate to absorb probable inherent credit losses in the loan participation portfolio, as well as unfunded loan participation commitments. 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,

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2007, the ACL as a percent of total loan participation commitments was 1.52%. Based on the December 31, 2007 loan participation interests, a 10 basis point increase in this ratio to 1.62% would require $4.3 million in additional provision for credit losses, and would also negatively impact 2007 net income by approximately $4.3 million. A discussion about the process used to estimate the ACL is presented in the Credit Risk section of Management’s Discussion and Analysis in this report.

Qualification Tests

     Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT’s total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT’s total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. For the year ended December 31, 2007, HPCI met all of the quarterly asset tests.

     Also, a REIT must annually satisfy two gross income tests: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test plus dividends, interest, and gains from the sale of securities. In addition, a REIT must distribute 90% of the REIT’s taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. At December 31, 2007, 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, 2007, HPCI was exempt from registration as an investment company under the Investment Company Act and intends to operate its business in a manner that will maintain this exemption.

RESULTS OF OPERATIONS

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

     HPCI reported net income of $316.3 million for 2007, $344.2 million for 2006, and $314.3 million for 2005. The decrease in net income for 2007 was primarily the result of a higher provision for credit losses compared with a reduction in the allowances for credit losses in the prior year. Net income available to common shares was $266.6 million, $296.3 million, and $279.7 million for the same respective periods. Return on average assets (ROA) was 6.80% for 2007, 7.15% for 2006, and 6.02% for 2005. Return on average equity (ROE) was 6.85% for 2007, 7.21% for 2006, and 6.05% for 2005.

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, 2007 and 2006, HPCI did not have any interest-bearing liabilities or related interest expense. Interest income is impacted by changes in the levels of interest rates and earning assets. The yield on earning assets is the percentage of interest income to average earning assets.

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

Table 4 — Interest and Fee Income

	2007							2006							2005
	Average							Average							Average
(in millions)	Balance		Income (1)		Yield			Balance		Income (1)		Yield			Balance		Income (1)		Yield
Loan participation interests:
Commercial	$	26.7	$	1.9		7.32	%	$	39.9	$	3.2		7.93	%	$	77.1	$	4.7		6.05	%
Commercial real estate		3,152.1		229.4		7.28			3,295.2		238.0		7.22			3,566.4		211.1		5.92
Consumer and residential real estate		1,162.8		77.6		6.67			1,067.4		71.1		6.66			1,081.3		71.3		6.60
Total loan participations		4,341.6		308.9		7.12			4,402.5		312.3		7.09			4,724.8		287.1		6.08
Interest bearing deposits with
The Huntington National Bank		307.2		15.9		5.10			366.3		19.0		5.12			457.4		15.6		3.43
Total	$	4,648.8	$	324.8		6.98	%	$	4,768.8	$	331.3		6.94	%	$	5,182.2	$	302.7		5.84	%

⁽¹⁾      Income includes interest and fees.

     Interest and fee income for the years ended December 31, 2007 and 2006 were $324.8 million and $331.3 million, respectively. The decrease in interest and fee income was the result of lower earning asset balances. The yield increased from 6.94% to 6.98% in 2007 versus 2006, or an effective 0.04%, while average total earning asset balances decreased by $120.0 million, or 2.5%. The table above includes interest received on participations in loans that are on a non-accrual status in the individual portfolios.

     Interest and fee income for the years ended December 31, 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. For the years ended December 31, 2006 and 2005, the yield increased from 5.84% to 6.94%, or an effective 1.10%, while average total earning asset balances decreased by $413.4 million, or 8.0%.

Provision for (reduction in) Allowances for Credit Losses

     The provision for (reduction in) allowances for credit losses is the change (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 provision for credit losses was $3.4 million for 2007, versus a reduction in allowances for credit losses of $22.0 million and $19.8 million for 2006 and 2005, respectively. The increase in the allowance during 2007 was indicative of increasing monitored credits, primarily resulting from softness in the commercial real estate markets in the Midwest.

Non-Interest Income and Non-Interest Expense

     Non-interest income was $12.0 million, $7.5 million, and $9.4 million in 2007, 2006, and 2005, respectively. This income includes rental income received from the Bank related to leasehold improvements owned by HPCLI. On December 31, 2007, HPCI became a wholly owned subsidiary of Holdings. As a result, HPCI will no longer receive rental income. Non-interest income also 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 $5.2 million, $1.0 million, and $3.0 million in 2007, 2006, and 2005, respectively. The fluctuation in collateral fees in 2007 and 2006 is related to $2.1 million of fees from 2006 being recorded in 2007. 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 $15.6 million, $15.3 million, and $17.1 million in 2007, 2006, and 2005, 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, 2007, 2006, and 2005 totaled $11.1 million, $10.6 million, and $11.2 million, respectively. The increase in 2007 was due to higher consumer and residential real estate loan participation balances, and the decrease in 2006 was due to lower loan participation balances. Depreciation and amortization expenses totaled $3.6 million, $3.9 million, and $4.4 million for the years ended December 31, 2007, 2006, and 2005, respectively.

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     In 2007, 2006, and 2005, the annual servicing rates the Bank charged with respect to outstanding principal balances were:

	July 1, 2005			January 1, 2005
	through			through
	December 31, 2007			June 30, 2005
Commercial and commercial real estate		0.125	%		0.125	%
Consumer		0.650			0.750
Residential real estate		0.267			0.267

     Pursuant to the existing participation and subparticipation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time-to-time during the terms of the agreements. In lieu of paying higher servicing costs to the Bank with respect to commercial 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. The Bank and HPCI performed a review of loan servicing fees in 2007, and agreed to retain current servicing rates for all loan participation categories, including the continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed in 2008.

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. During 2007, HPCI had a subsidiary, HPCLI, which elected to be treated as a taxable REIT subsidiary and, therefore, a separate provision related to its income taxes is included in the accompanying consolidated financial statements. On December 31, 2007, HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. HPCLI became a wholly owned subsidiary of Holdings.

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 39.1% of its loan participation portfolio is fixed rate.

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

     Using the income simulation model for HPCI as of December 31, 2007, interest income for the next 12-month period would be expected to increase by $18.6 million, or 8.4%, based on a gradual 200 basis point increase in rates above the forward rates implied in the yield curve. Interest income would be expected to decline $20.1 million, or 9.1%, 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, 2007, the fair value of loan participation interests over the next 12 month period would be expected to increase $76.5 million, or 1.8%, 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 $107.3 million, or 2.5%, 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, 2007 and 2006, respectively.

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Table 5 — Total Loan Participation Interests by Interest Rates

December 31, 2007	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%		843	$	54,787		3.2	%		61	$	26,475		1.0	%
5.00% to 5.99%		4,852		364,892		21.5			258		105,599		4.0
6.00% to 6.99%		8,372		647,456		38.2			1,130		1,067,346		40.4
7.00% to 7.99%		5,615		405,151		23.8			2,129		1,307,722		49.5
8.00% to 8.99%		3,516		149,413		8.8			647		114,429		4.3
9.00% to 9.99%		1,888		50,129		3.0			79		11,101		0.4
10.00% to 10.99%		807		16,992		1.0			25		5,177		0.2
11.00% to 11.99%		236		4,375		0.3			9		3,485		0.1
12.00% and over		110		2,872		0.2			2		1,638		0.1
Total		26,239	$	1,696,067		100.0	%		4,340	$	2,642,972		100.0	%

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		—
Total		22,609	$	1,346,990		100.0	%		5,046	$	2,750,219		100.0	%

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

CREDIT QUALITY

Credit Risk

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

     HPCI’s exposure to credit risk is managed by personnel of the Bank through this credit risk management process. Based upon an assessment of the credit risk inherent in HPCI’s portfolio of loan participation interests, an ALPL 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

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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, 2007.

Table 6 — Loan Participation Interests Aging

					Percentage by
	Total		Aggregate		Aggregate
	Number		Principal		Principal
(in thousands)	of Loans		Balance		Balance
Current		28,248	$	4,087,456		94.2	%
1 to 30 days past due		1,761		196,946		4.6
31 to 60 days past due		273		10,488		0.2
61 to 90 days past due		111		5,993		0.1
over 90 days past due (1)		186		38,156		0.9
Total		30,579	$	4,339,039		100.0	%

⁽¹⁾       Includes non-accrual loans.

Commercial Credit

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

     All commercial (C&I) and commercial real estate (CRE) credit extensions are assigned internal risk ratings reflecting the borrower’s probability-of-default and loss-in-event-of-default. This two dimensional rating methodology, which has 192 individual loan grades, provides improved granularity in the portfolio management process. The probability-of-default is rated on a scale of 1-12 and is applied at the borrower level. The loss-in-event-of-default is rated on a 1-16 scale and is associated with each individual credit exposure based on the type of credit extension and the underlying collateral.

     In commercial lending, ongoing credit management is dependent on the type and nature of the loan. In general, quarterly monitoring is normal for all significant exposures. The internal risk ratings are revised and updated with each periodic monitoring event. There is also extensive macro portfolio management analysis on an ongoing basis. Analysis of actual default experience indicated that the assigned probability of default was higher than our actual experience. 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 collectability of the credits managed.

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     At December 31, 2007, HPCI had $3.1 billion of commercial and commercial real estate loan participation interests, including $0.5 billion of loan participation interests to builders of single family homes. There has been a general slowdown in the housing market across Ohio, Indiana, Kentucky and Michigan, reflecting declining prices and excess inventories of houses to be sold, particularly impacting loan participation interest borrowers in the eastern Michigan and northern Ohio markets. As a result, home builders have shown signs of financial deterioration. HPCI expects the home builder market to continue to be volatile and anticipate continued pressure on the home builder segment in the coming months. As HPCI continues its on-going portfolio monitoring, the Bank may make credit and reserve decisions based on the current conditions of the borrower or project combined with its expectations for the future.

     Commercial and commercial real estate loan participation interests outstanding by property type at December 31, 2007, were as follows:

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

	At December 31, 2007
	Geographic Region										Total		Percent of
(in thousands of dollars)	Indiana		Kentucky		Michigan		Ohio		Other		Amount		Total
Industrial and warehouse	$	25,210	$	19,123	$	207,249	$	354,834	$	100,236	$	706,652		22.6	%
Retail properties		64,714		37,806		87,067		321,453		76,976		588,016		18.8
Single family home builders		23,112		17,527		101,281		239,246		109,316		490,482		15.7
Office		21,562		19,359		115,742		286,427		35,800		478,890		15.3
Raw land and other land uses		27,012		11,985		102,674		192,414		7,131		341,216		10.9
Multi family		76,693		2,536		20,718		104,131		1,187		205,265		6.6
Health care		1,059		193		7,872		44,066		14,886		68,076		2.2
Hotel		12,899		—		20,789		14,410		337		48,435		1.6
Other		20,481		21,271		41,554		110,343		402		194,051		6.3
Total	$	272,742	$	129,800	$	704,946	$	1,667,324	$	346,271	$	3,121,083	$	100.0	%

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 participation losses (ALPL) and the allowance for unfunded loan participation commitments (AULPC). When summed together, these reserves constitute the total allowances for credit losses (ACL).

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

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

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     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 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 ALPL 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, 2007 resulted in a provision for credit losses of $3.4 million. This is compared to reductions of $22.0 million and $19.8 million for 2006 and 2005, respectively. The provision for credit losses and resultant increase from prior year-end ALPL reflected the impact of increasing monitored credits, primarily resulting from softness in the commercial real estate markets in the Midwest.

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

Table 8 — Allowances for Credit Loss Activity

(in thousands)	2007			2006			2005			2004			2003
ALPL balance, beginning of year	$	48,703		$	57,530		$	61,146		$	84,532		$	140,353
Allowance of loan participations acquired		26,530			19,404			25,071			21,201			45,397
Net loan (losses) recoveries
Commercial		168			1,124			1,247			1,594			(20,973	)
Commercial real estate		(12,169	)		(4,494	)		(5,175	)		(5,032	)		(13,525	)
Consumer and residential real estate		(4,295	)		(3,151	)		(4,593	)		(5,793	)		(25,501	)
Total net loan losses		(16,296	)		(6,521	)		(8,521	)		(9,231	)		(59,999	)
Provision for (reduction in) ALPL		3,338			(21,710	)		(19,228	)		(35,356	)		(41,219	)
Economic Reserve transfer to AULPC		—			—			(938	)		—			—
ALPL balance, end of year	$	62,275		$	48,703		$	57,530		$	61,146		$	84,532
AULPC balance, beginning of year	$	3,804		$	4,135		$	3,765		$	—		$	—
Provision for (reduction in) AULPC		52			(331	)		(568	)		3,765			—
Economic Reserve transfer from ALL		—			—			938			—			—
AULPC balance, end of year	$	3,856		$	3,804		$	4,135		$	3,765		$	—
Total Allowances for Credit Losses	$	66,131		$	52,507		$	61,665		$	64,911		$	84,532
ALPL as a % of total participation interests		1.44	%		1.19	%		1.27	%		1.25	%		1.59	%
ACL as a % of total participation interests		1.52			1.28			1.37			1.33			1.59

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

     Effective March 31, 2004, HPCI reclassified a portion of its ALPL 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 ALPL and the AULPC are adequate at December 31, 2007, to cover probable credit losses inherent in the loan participation portfolio and loan commitments.

     HPCI, through reliance on methods utilized by the Bank, allocates the ALPL to each loan participation category based on an expected loss ratio determined by continuous assessment of credit quality based on portfolio risk characteristics and other relevant factors such as historical performance, internal controls, and impacts from mergers and acquisitions. For the commercial 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 ALPL and AULPC:

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

	At December 31,
(in thousands)	2007				2006				2005				2004				2003
Commercial	$	1,086	0.5	%	$	430	0.8	%	$	635	1.0	%	$	9,148	2.2	%	$	25,375	2.8	%
Commercial real estate		55,582	71.4			42,130	75.9			48,303	73.4			44,105	76.4			47,561	80.1
Consumer and residential real estate		5,607	28.1			6,143	23.3			8,592	25.6			7,893	21.4			11,596	17.1
Total ALPL		62,275	100.0	%		48,703	100.0	%		57,530	100.0	%		61,146	100.0	%		84,532	100.0	%
AULPC		3,856	—			3,804	—			4,135	—			3,765	—			—	—
Total	$	66,131	100.0	%	$	52,507	100.0	%	$	61,665	100.0	%	$	64,911	100.0	%	$	84,532	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 $16.3 million, or 0.38%, of total average loan participations, for the year ended December 31, 2007, an increase from $6.5 million, or 0.15%, for the year ended December 31, 2006. The increase reflected continued economic weakness in our Midwest markets, most notably among our borrowers in eastern Michigan and northern Ohio.

Table 10 — Net Charge-offs ⁽¹⁾

(In thousands)	2007					2006					2005					2004					2003
Commercial	$	(168	)	(0.63)	%	$	(1,124	)	(2.82)	%	$	(1,247	)	(1.62)	%	$	(1,594	)	(1.01)	%	$	20,973	8.41	%
Commercial real estate		12,169		0.39			4,494		0.14			5,175		0.15			5,032		0.12			13,525	0.33
Consumer and residential real estate		4,295		0.37			3,151		0.30			4,593		0.42			5,793		0.60			25,501	3.07
Total Net Charge-offs	$	16,296		0.38	%	$	6,521		0.15	%	$	8,521		0.18	%	$	9,231		0.18	%	$	59,999	1.17	%

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

26

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 consumer and 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.

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

Table 11 — Non-Performing Assets

	At December 31,
(in thousands)	2007			2006			2005			2004			2003
Participation interests in non-accrual loans
Commercial	$	137		$	687		$	147		$	425		$	5,176
Commercial real estate		41,923			19,966			20,746			6,990			12,987
Consumer and residential real estate		4,136			4,649			5,722			6,897			4,157
Total Non-Performing Assets	$	46,196		$	25,302		$	26,615		$	14,312		$	22,320
NPAs as a % of total participation interests		1.06	%		0.62	%		0.59	%		0.29	%		0.42	%
ALPL as a % of NPAs		135			192			216			427			379
ACL as a % of NPAs		143			208			232			454			379
Accruing loans past due 90 days or more	$	4,440		$	5,392		$	3,188		$	11,686		$	13,362

     Total NPAs increased to $46.2 million at the end of 2007 from $25.3 million at December 31, 2006, representing 1.06% and 0.62% of total participation interests, respectively. The increase in 2007 was primarily associated with commercial real estate relationships in Michigan.

     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.

27

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, 2007 and 2006, unfunded commitments totaled $539.4 million and $624.5 million, respectively. It is expected that cash flows generated by the existing portfolio will be sufficient to meet these obligations.

LIQUIDITY AND CAPITAL RESOURCES

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

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

     At December 31, 2007 and 2006, HPCI maintained cash and interest bearing deposits with the Bank totaling $47.5 million and $726.2 million, respectively. The reduction in cash balances from the beginning of the year was related to the common stock dividend and capital distribution for 2006 paid on January 3, 2007, and purchases of new loan participations. HPCI maintains and transacts all of its cash activity with the Bank and invests available funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

     At December 31, 2007, HPCI had no material liabilities or contractual obligations, other than unfunded loan commitments of $539.4 million, with a weighted average maturity of 1.5 years. In addition to anticipated cash flows, as noted above, HPCI has interest bearing and non-interest bearing cash balances with the bank totaling $47.5 million to fund these liabilities and contractual commitments.

     Shareholders’ equity was $4.5 billion at December 31, 2007, and December 31, 2006. Earnings for 2007 were distributed to shareholders though the common dividend paid at December 31, 2007.

     The preferred dividend coverage ratio for 2007 was 6.37x, compared to 7.18x in 2006. The decrease from the prior year primarily relates to lower net income as a result of higher provision for credit losses in 2007.

28

RESULTS FOR THE FOURTH QUARTER

Table 12 — Quarterly Statements of Income

	2007												2006			4Q07 vs 4Q06
(in thousands)	Fourth			Third			Second			First			Fourth			$ Chg			% Chg
Interest and fee income
Interest on loan participation interests:
Commercial	$	414		$	487		$	514		$	541		$	742		$	(328	)		(44.2)	%
Commercial real estate		55,824			60,350			56,419			56,445			60,377			(4,553	)		(7.5	)
Consumer and residential real estate		20,927			21,129			19,015			16,082			16,366			4,561			27.9
Total loan participation interest income		77,165			81,966			75,948			73,068			77,485			(320	)		(0.4	)
Fees from loan participation interests		162			216			203			198			265			(103	)		(38.9	)
Interest on deposits with The Huntington National Bank		3,203			1,961			5,113			5,608			8,115			(4,912	)		(60.5	)
Total interest and fee income		80,530			84,143			81,264			78,874			85,865			(5,335	)		(6.2	)
Provision for (reduction in) allowances for credit losses		10,167			(5,175	)		1,091			(2,693	)		(4,400	)		14,567			N.M.
Interest income after provision for (reduction in) allowances for credit losses		70,363			89,318			80,173			81,567			90,265			(19,902	)		(22.0	)
Non-interest income:
Rental income		1,710			1,710			1,710			1,710			1,710			—			—
Collateral fees		4,943			81			86			92			101			4,842			N.M.
Total non-interest income		6,653			1,791			1,796			1,802			1,811			4,842			N.M.
Non-interest expense:
Servicing costs		2,955			2,971			2,704			2,450			2,521			434			17.2
Depreciation		874			892			903			919			947			(73	)		(7.7	)
(Gain) loss on disposal of fixed assets		105			—			—			17			—			105			—
Other		194			196			213			194			198			(4	)		(2.0	)
Total non-interest expense		4,128			4,059			3,820			3,580			3,666			462			12.6
Income before provision for income taxes		72,888			87,050			78,149			79,789			88,410			(15,522	)		(17.6	)
Provision for income taxes		378			428			418			393			386			(8	)		(2.1	)
Net income	$	72,510		$	86,622		$	77,731		$	79,396		$	88,024		$	(15,514	)		(17.6	)
Dividends declared on preferred securities		(12,213	)		(12,456	)		(12,438	)		(12,536	)		(12,475	)		262			2.1
Net income applicable to common shares (1)	$	60,297		$	74,166		$	65,293		$	66,860		$	75,549		$	(15,252	)		(20.2)	%

(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 2007 was $72.5 million, down 17.6% from $88.0 million for the fourth quarter 2006. Net income applicable to common shares was $60.3 million for the fourth quarter of 2007, a decrease of 20.2% from $75.5 million, in fourth quarter of 2006. Dividend declarations on preferred stock decreased by 2.1% in the most recent quarter to $12.2 million compared with $12.5 million for the fourth quarter 2006, due to lower 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 $80.5 million, which was down from $85.9 million for the prior year quarter, due to lower yields on total loan participations and interest bearing deposits. The yield on earning assets decreased to 6.78% from 7.02% for the same respective quarterly periods.

     Total assets decreased to $4.5 billion at the end of 2007, from $4.9 billion at December 31, 2006. The reduction primarily related to lower cash and interest bearing balances.

29

     The ACL increased to 1.52% of total loan participation interests at December 31, 2007, from 1.28% at the end of the prior year quarter. The increase in the ACL reflected the impact of increasing monitored credits, primarily resulting from softness in the commercial real estate markets in the Midwest

     Net charge-offs in the fourth quarter of 2007 were $9.1 million versus $2.2 million for the fourth quarter of 2006. This represents 0.81% and 0.21% of average loan participations for the same respective quarterly periods.

     Non-interest income increased to $6.7 million in the fourth quarter of 2007, compared to $1.8 million in the fourth quarter of 2006. The increase is primarily related to an increase in collateral fees, which totaled $4.9 million, and $0.1 million in the fourth quarter of 2007, and 2006, respectively. The increase in collateral fees is related to $2.1 million of fees from 2006 being recorded in 2007. Non-interest expense included depreciation and amortization expense for all premises and equipment, which amounted to $0.9 million for each of the fourth quarters of 2007 and 2006. Servicing fees incurred by HPCI were $3.0 million, and $2.5 million for the fourth quarters of 2007 and 2006, respectively. HPCLI was a taxable REIT subsidiary and therefore provisions of $0.4 million for income taxes applied to its taxable income are reflected in each of the fourth quarters of 2007 and 2006. On December 31, 2007, HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. HPCLI became a wholly owned subsidiary of Holdings.

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, 2007 and 2006 and for the years ended December 31, 2007, 2006, and 2005 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		31
Report of Independent Registered Public Accounting Firm		33
Consolidated Balance Sheets		34
Consolidated Statements of Income		35
Consolidated Statement of Changes in Shareholders’ Equity		36
Consolidated Statements of Cash Flows		37
Notes to Consolidated Financial Statements		38

30

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 2007, 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, 2007. 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, 2007, 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 effectiveness 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 25, 2008

31

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 internal control over financial reporting of Huntington Preferred Capital, Inc. (the “Company”) as of December 31, 2007, 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 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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, 2007 of the Company and our report dated March 25, 2008 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Columbus, Ohio
March 25, 2008

32

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. (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. 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. at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, 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 Company’s internal control over financial reporting as of December 31, 2007, 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 25, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Columbus, Ohio
March 25, 2008

33

Huntington Preferred Capital, Inc.

Consolidated Balance Sheets

	December 31,			December 31,
(in thousands, except share data)	2007			2006
Assets
Cash and interest bearing deposits with The Huntington National Bank	$	47,464		$	726,154
Due from The Huntington National Bank		121,981			134,815
Loan participation interests:
Commercial		22,526			31,049
Commercial real estate		3,098,557			3,108,533
Consumer and residential real estate		1,217,956			957,627
Total loan participation interests		4,339,039			4,097,209
Allowance for loan participation losses		(62,275	)		(48,703	)
Net loan participation interests		4,276,764			4,048,506
Premises and equipment		661			17,711
Accrued income and other assets		19,004			22,550
Total assets	$	4,465,874		$	4,949,736
Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments	$	3,856		$	3,804
Dividends and distributions payable		—			450,000
Other liabilities		59			179
Total liabilities		3,915			453,983
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		3,660,959			3,694,753
Retained earnings		—			—
Total shareholders’ equity		4,461,959			4,495,753
Total liabilities and shareholders’ equity	$	4,465,874		$	4,949,736

See notes to consolidated financial statements.

34

Huntington Preferred Capital, Inc.

Consolidated Statements of Income

	Year Ended
	December 31,
(in thousands)	2007			2006			2005
Interest and fee income
Interest on loan participation interests:
Commercial	$	1,956		$	3,152		$	4,632
Commercial real estate		229,038			237,475			209,801
Consumer and residential real estate		77,153			70,590			70,649
Total loan participation interest income		308,147			311,217			285,082
Fees from loan participation interests		779			1,064			1,979
Interest on deposits with The Huntington National Bank		15,885			19,025			15,682
Total interest and fee income		324,811			331,306			302,743
Provision for (reduction in) allowances for credit losses		3,390			(22,041	)		(19,796	)
Interest income after allowances for credit losses		321,421			353,347			322,539
Non-interest income:
Rental income		6,840			6,483			6,362
Collateral fees		5,202			1,042			3,029
Total non-interest income		12,042			7,525			9,391
Non-interest expense:
Servicing costs		11,080			10,635			11,210
Depreciation and amortization		3,588			3,947			4,370
(Gain) loss on disposal of premises and equipment		122			(31	)		582
Other		797			771			903
Total non-interest expense		15,587			15,322			17,065
Income before provision for income taxes		317,876			345,550			314,865
Provision for income taxes		1,617			1,313			547
Net income	$	316,259		$	344,237		$	314,318
Dividends declared on preferred securities		(49,643	)		(47,944	)		(34,634	)
Net income applicable to common shares	$	266,616		$	296,293		$	279,684

See notes to consolidated financial statements.

35

Huntington Preferred Capital, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

	Preferred, Class A				Preferred, Class B				Preferred, Class C
(in thousands)	Shares		Amount		Shares		Amount		Shares		Amount
Balance, January 1, 2005		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
Comprehensive Income:
Net income
Total comprehensive income
Balance, December 31, 2007		1	$	1,000		400	$	400,000		2,000	$	50,000

	Preferred, Class D				Preferred				Common					Retained
(in thousands)	Shares		Amount		Shares		Amount		Shares		Amount			Earnings			Total
Balance, January 1, 2005		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
Comprehensive Income:
Net income															316,259			316,259
Total comprehensive income																		316,259
Dividends declared on Class A preferred securities															(80	)		(80	)
Dividends declared on Class B preferred securities															(21,300	)		(21,300	)
Dividends declared on Class C preferred securities															(3,938	)		(3,938	)
Dividends declared on Class D preferred securities															(24,325	)		(24,325	)
Dividends declared on common stock															(266,616	)		(266,616	)
Return of capital												(33,794	)					(33,794	)
Balance, December 31, 2007		14,000	$	350,000		—	$	—		14,000	$	3,660,959		$	—		$	4,461,959

See notes to consolidated financial statements.

36

Huntington Preferred Capital, Inc.

Consolidated Statements of Cash Flows

	Year Ended
	December 31,
(in thousands)	2007			2006			2005
Operating activities
Net income	$	316,259		$	344,237		$	314,318
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (reduction in) allowances for credit losses		3,390			(22,041	)		(19,796	)
Depreciation and amortization		3,588			3,947			4,370
Deferred income tax (benefit) expense		(401	)		(682	)		178
Decrease (increase) in due from The Huntington National Bank		(4,937	)		7			(24,404	)
(Decrease) increase in other liabilities		(63	)		(111	)		239
Other, net		3,358			507			(568	)
Net cash provided by operating activities		321,194			325,864			274,337
Investing activities
Participation interests acquired		(2,964,050	)		(2,613,450	)		(2,885,454	)
Sales and repayments of loans underlying participation interests		2,747,799			2,951,526			3,255,600
Proceeds from the sale of premises and equipment		—			56			—
Net cash (used for) provided by investing activities		(216,251	)		338,132			370,146
Financing activities
Dividends paid on preferred securities		(49,643	)		(47,944	)		(34,634	)
Dividends paid on common stock		(546,489	)		(279,684	)		(263,798	)
Return of capital to common shareholders		(187,501	)		(420,316	)		(336,202	)
Net cash used for financing activities		(783,633	)		(747,944	)		(634,634	)
Change in cash and cash equivalents		(678,690	)		(83,948	)		9,849
Cash and cash equivalents at beginning of year		726,154			810,102			800,253
Cash and cash equivalents at end of year	$	47,464		$	726,154		$	810,102
Supplemental information:
Income taxes paid	$	2,098		$	2,077		$	40
Dividends and distributions declared, not paid		—			450,000			700,000
Non-cash change in loan participation activity with The Huntington National Bank		(17,617	)		88,501			21,742
Dividend of subsidiary stock		16,420			—			—

See notes to consolidated financial statements.

37

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.

Certain prior period amounts have been reclassified to conform to current year’s presentation.

Business: 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). During 2007, HPCI had one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). On December 31, 2007 HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. HPCLI became a wholly owned subsidiary of Holdings. HCF, HPCII, and Holdings are direct and indirect subsidiaries of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At December 31, 2007, 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, 2007, accounted for 84% of Huntington’s net income. Thus, for the purpose of presenting consolidated financial statements for the Bank, Management considers information 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.

38

     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. Interest income is recognized on impaired loans using a cost recovery method.

Allowances for Credit Losses (ACL): The ACL is comprised of the allowance for loan participation losses (ALPL) 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 ALPL 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. ALPL 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 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.

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Premises and Equipment: Premises and equipment 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.

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. During 2007, HPCI had a subsidiary, HPCLI, which elected to be treated as a taxable REIT subsidiary and, therefore, a separate provision related to its income taxes is included in the accompanying consolidated financial statements. On December 31 2007, HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. HPCLI became a wholly owned subsidiary of Holdings.

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 adopted FIN 48 on January 1, 2007. HPCI recognizes 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 adoption of this new pronouncement did not impact HPCI’s consolidated financial statements (See Note 12).

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. HPCI adopted Statement No. 157, effective January 1, 2008. The impact of this new pronouncement was not material to HPCI’s consolidated financial statements.

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. HPCI adopted Statement No. 159, effective January 1, 2008. The impact of this new pronouncement was not material to HPCI’s consolidated 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)	2007		2006
Commercial	$	22,526	$	31,049
Commercial real estate		3,098,557		3,108,533
Consumer and residential real estate		1,217,956		957,627
Total Loan Participation Interests	$	4,339,039	$	4,097,209

     Underlying loans were generally collateralized by real estate and were made primarily to borrowers in the four states of Ohio, Michigan, Indiana, and Kentucky, which comprise 91.7% and 94.6% of the portfolio at December 31, 2007 and 2006, respectively.

40

     At December 31, 2007, HPCI had $3.1 billion of commercial and commercial real estate loan participation interests, including $0.5 billion of loan participation interests to builders of single family homes. There has been a general slowdown in the housing market across Ohio, Indiana, Kentucky and Michigan, reflecting declining prices and excess inventories of houses to be sold, particularly impacting loan participation interest borrowers in our eastern Michigan and northern Ohio markets. As a result, home builders have shown signs of financial deterioration. HPCI expects the home builder market to continue to be volatile and anticipates continued pressure on the home builder segment in the coming months. As HPCI continues to monitor the portfolio, the Bank may make credit and reserve decisions based on the current conditions of the borrower or project combined with its expectations for the future.

     Other than the credit risk concentration described above, there were no other underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries, or business activity.

Participations in Non-Performing Loans and Past Due Loans

     At December 31, 2007 and 2006, 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)	2007		2006
Commercial	$	137	$	687
Commercial real estate		41,923		19,966
Consumer and residential real estate		4,136		4,649
Total Participations in Non-Accrual Loans	$	46,196	$	25,302
Participations in Accruing Loans Past Due 90 Days or More	$	4,440	$	5,393

     The amount of interest that would have been recorded under the original terms for participations in loans classified as non-accrual was $6.0 million for 2007, $4.3 million for 2006, and $2.7 million for 2005. Amounts actually collected and recorded as interest income for these participations totaled $0.4 million, $1.0 million, and $0.7 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 participation losses (ALPL) 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)	2007			2006			2005
ALPL balance, beginning of year	$	48,703		$	57,530		$	61,146
Allowance of loan participations acquired		26,530			19,404			25,071
Net loan losses		(16,296	)		(6,521	)		(8,521	)
Provision for (reduction in) ALPL		3,338			(21,710	)		(19,228	)
Transfer to AULPC		—			—			(938	)
ALPL balance, end of year	$	62,275		$	48,703		$	57,530
AULPC balance, beginning of year	$	3,804		$	4,135		$	3,765
Provision for (reduction in) AULPC		52			(331	)		(568	)
Economic reserve transfer from ALL		—			—			938
AULPC balance, end of year	$	3,856		$	3,804		$	4,135
Total ACL	$	66,131		$	52,507		$	61,665
Balance of Impaired Loans, at end of year (1):
With specific reserves assigned to the loan balances	$	30,604		$	5,976		$	15,038
With no specific reserves assigned to the loan balances		2,297			6,051			7,816
Total	$	32,901		$	12,027		$	22,854
Average Balance of Impaired Loans for the Year (1)	$	25,157		$	16,131		$	13,863
Allowance for Loan Losses on Impaired Loans (1)		6,366			1,065			4,802

41

⁽¹⁾ Includes total loan participation interests of 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 2007, 2006 and 2005.

     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 ALPL to AULPC. Previously, the entire economic reserve component was included in ALPL.

Note 5 — Premises and Equipment

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

(in thousands)	2007			2006
Land and land improvements	$	340		$	340
Buildings		533			533
Leasehold improvements		—			101,026
Total premises and equipment		873			101,899
Accumulated depreciation and amortization		(212	)		(84,188	)
Net Premises and Equipment	$	661		$	17,711

     Premises and equipment related depreciation and amortization, in the amounts of $3.6 million, $3.9 million, and $4.4 million, were charged to expense in the years ended December 31, 2007, 2006, and 2005, respectively. On December 31, 2007, HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. HPCLI became a wholly owned subsidiary of Holdings. At December 31, 2007, HPCLI owned leasehold improvements, net of depreciation and amortization, of $13.3 million.

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.

42

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

(in thousands)	2007		2006		2005
Class A preferred securities	$	80	$	80	$	80
Class B preferred securities		21,300		20,394		13,296
Class C preferred securities		3,938		3,938		3,938
Class D preferred securities		24,325		23,532		17,320
Total preferred dividends declared	$	49,643	$	47,944	$	34,634

     As of December 31, 2007 and 2006, all declared dividends on preferred securities were paid to shareholders.

     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. Due to a significant loss that the Bank incurred in the fourth quarter of 2007, at December 31, 2007, the Bank could not declare or pay dividends without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends without regulatory approval. The OCC has approved the payment of HPCI’s first quarter 2008 dividends on its preferred securities. While management intends to request approval for any future dividend, if such approval is required, there can be no assurance that the OCC will approve future dividends.

     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, 2007, 2006, and 2005, were $266.6 million, $296.3 million, and $279.7 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 incurred by the Bank totaled $11.1 million, $10.6 million, and $11.2 million for the respective years ended 2007, 2006, and 2005.

     In 2007, 2006 and 2005, the annual servicing rates the Bank charged with respect to outstanding principal balances were:

	July 1, 2005			January 1, 2005
	through			through
	December 31, 2007			June 30, 2005
Commercial and commercial real estate		0.125	%		0.125	%
Consumer		0.650			0.750
Residential real estate		0.267			0.267

     Pursuant to the existing participation and subparticipation agreements, the amount and terms of the loan-servicing fee between the Bank and HPCI are determined by mutual agreement from time-to-time during the terms of the

43

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 2007, 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 2008.

     Huntington’s and the Bank’s personnel handle day-to-day operations of HPCI such as financial analysis and reporting, accounting, tax reporting, and other administrative functions. On a monthly basis, HPCI reimburses the Bank and Huntington for the cost related to the time spent by employees for performing these functions. These personnel costs totaled $0.5 million for each of the years ended December 31, 2007, 2006, and 2005, 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, 2007:

	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, 2007, 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, 2007, HPCI board members and executive officers beneficially owned, in the aggregate, a total of 5,221 shares, or 0.261%. 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 $6.8 million, $6.5 million, and $6.4 million for years ended December 31, 2007, 2006, and 2005, respectively. Rental income is

44

reflected as a component of non-interest income in the consolidated statements of income. On December 31, 2007 HPCI paid common stock dividends consisting of cash and the stock of HPCLI to the HPCI common stock shareholders. HPCLI became a wholly owned subsidiary of Holdings. Therefore, HPCI will no longer reflect rental income from the Bank in its future consolidated statements of income.

     HPCI had a non-interest bearing receivable from the Bank of $122.0 million at December 31, 2007, and $134.8 million at December 31, 2006. The balances represent the net settlement amounts due to, or from, the Bank for the last month of the period’s activity. Principal and interest payments on loan participations remitted by customers are due from the Bank, while new loan participation purchases are due to the Bank. The amounts are settled with the Bank within the first few days of the following month.

     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.

     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)	Fourth			Third			Second			First
2007
Interest and fee income	$	80,530		$	84,143		$	81,264		$	78,874
Provision for (reduction in) allowances for credit losses		10,167			(5,175	)		1,091			(2,693	)
Non-interest income		6,653			1,791			1,796			1,802
Non-interest expense		4,128			4,059			3,820			3,580
Income before provision for income taxes		72,888			87,050			78,149			79,789
Provision for income taxes		378			428			418			393
Net income		72,510			86,622			77,731			79,396
Dividends declared on preferred securities		(12,213	)		(12,456	)		(12,438	)		(12,536	)
Net income applicable to common shares	$	60,297		$	74,166		$	65,293		$	66,860
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

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

45

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 Indebtedness (as defined in HPCI’s articles of incorporation) and, therefore, HPCI is not required to obtain the consent of the holders of its common or preferred securities for any such guarantee and/or pledge.

     Currently, HPCI’s assets have been used to collateralize only one such facility. The Bank has a line of credit from the FHLB, limited to $4.8 billion as of December 31, 2007, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had borrowings of $3.1 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 $1.1 billion as of December 31, 2007, 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 $0.9 billion at December 31, 2007. In 2007, the loans pledged consisted of the 1-4 family residential mortgage loans. The agreement also provides that the Bank will pay HPCI a monthly fee based upon the total loans pledged by HPCI. The Bank paid HPCI a total of $5.2 million, $1.0 million, and $3.0 million in the respective annual periods ended December 31, 2007, 2006, and 2005 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, 2006. The fluctuation in collateral fees in 2007 and 2006 is related to $2.1 million of fees from 2006 being recorded in 2007.

     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, 2007 and 2006, the unfunded loan commitments totaled $539.4 million and $624.5 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.

Note 12 — Income Taxes

     HPCI adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not impact HPCI’s financial statements. As of December 31, 2007, there were no unrecognized tax benefits. HPCI does not anticipate the total amount of unrecognized tax benefits to significantly change within the next 12 months.

     The federal tax returns for years ended 2004 and forward are open for review by the Internal Revenue Service.

     HPCI recognizes interest and penalties on tax assessments or tax refunds in the financial statements as a component of its provision for income taxes. There were no amounts recognized for interest and penalties for the years ended December 31, 2007, 2006, and 2005 and no amounts accrued at December 31, 2007 and 2006.

46

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 maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 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, 2007 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 2008 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 2008 Information Statement and is incorporated herein by reference.

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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 2008 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 2008 Information Statement and is incorporated herein by reference.

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 2008 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 50 and 51 of this Form 10-K.

(b)	The exhibits to this Form 10-K begin on page 52.
(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 26th day of March, 2008.

HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant)

By:	/s/ Donald R. Kimble	By:	/s/ Thomas P. Reed
	Donald R. Kimble		Thomas P. Reed
	President and Director (Principal Executive Officer)		Vice President and Director (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 26th day of March, 2008.

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.

49

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.	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).
10.7.	Limited Waiver of Contract Provision, dated August 13, 2007, with Huntington Preferred Capital Holdings, Inc., Huntington Preferred Capital, Inc., and The Huntington National Bank. (previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, and incorporated herein by reference).
12.1.	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
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

50

	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.
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, 2007 and 2006 and for the years ended December 31, 2007, 2006, and 2005.

51

EX-12.1

Exhibit 12.1

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

Huntington Preferred Capital, Inc

	Year Ended December 31,
(in thousands)	2007			2006			2005			2004			2003
Earnings:
Income before taxes	$	317,876		$	345,550		$	314,865		$	284,795		$	308,635
Add: Fixed charges, excluding interest on deposits		—			—			—			—			—
Earnings available for fixed charges, excluding interest on deposits		317,876			345,550			314,865			284,795			308,635
Add: Interest on deposits		—			—			—			—			—
Earnings available for fixed charges, including interest on deposits	$	317,876		$	345,550		$	314,865		$	284,795		$	308,635
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		49,643			47,944			34,634			20,744			18,911
Combined fixed charges and preferred stock dividends	$	49,643		$	47,944		$	34,634		$	20,744		$	18,911
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends		6.40	x		7.21	x		9.09	x		13.73	x		16.32	x

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, 2007, 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 19, 2008.

DIRECTORS/OFFICERS:

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

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 26, 2008
		/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 26, 2008
		/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, 2007, 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 26, 2008

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, 2007, 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 26, 2008

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, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1, 2, 6, and 18 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, 2007, 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 25, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Columbus, Ohio

February 25, 2008

73

CONSOLIDATED BALANCE SHEETS HUNTINGTON BANCSHARES INCORPORATED

	December 31,
(in thousands, except number of shares)	2007			2006
Assets
Cash and due from banks	$	1,416,597		$	1,080,163
Federal funds sold and securities purchased under resale agreements		592,649			440,584
Interest bearing deposits in banks		340,090			74,168
Trading account securities		1,032,745			36,056
Loans held for sale		494,379			270,422
Investment securities		4,500,171			4,362,924
Loans and leases:
Commercial and industrial loans and leases		13,125,565			7,849,912
Commercial real estate loans		9,183,052			4,504,540
Automobile loans		3,114,029			2,125,821
Automobile leases		1,179,505			1,769,424
Home equity loans		7,290,063			4,926,900
Residential mortgage loans		5,447,126			4,548,918
Other consumer loans		714,998			427,910
Loans and leases		40,054,338			26,153,425
Allowance for loan and lease losses		(578,442	)		(272,068	)
Net loans and leases		39,475,896			25,881,357
Bank owned life insurance		1,313,281			1,089,028
Premises and equipment		557,565			372,772
Goodwill		3,059,333			570,876
Other intangible assets		427,970			59,487
Accrued income and other assets		1,486,792			1,091,182
Total assets	$	54,697,468		$	35,329,019
Liabilities and shareholders’ equity
Liabilities
Deposits in domestic offices
Demand deposits — non-interest bearing	$	5,371,747		$	3,615,745
Interest bearing		31,644,460			20,640,368
Deposits in foreign offices		726,714			791,657
Deposits		37,742,921			25,047,770
Short-term borrowings		2,843,638			1,676,189
Federal Home Loan Bank advances		3,083,555			996,821
Other long-term debt		1,937,078			2,229,140
Subordinated notes		1,934,276			1,286,657
Accrued expenses and other liabilities		1,206,860			1,078,116
Total liabilities		48,748,328			32,314,693
Shareholders’ equity
Preferred stock — authorized 6,617,808 shares; none outstanding
Common stock — No par value and authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 235,474,366 shares					2,560,569
Par value of $0.01 and authorized 1,000,000,000 shares; issued 387,504,687 shares; outstanding 366,261,676 shares		3,875
Capital surplus		5,703,316
Less 21,243,011 and 22,391,889 treasury shares at cost, respectively		(480,129	)		(506,946	)
Accumulated other comprehensive loss:
Unrealized (losses) gains on investment securities		(10,011	)		14,254
Unrealized gains on cash flow hedging derivatives		4,553			17,008
Pension and other postretirement benefit adjustments		(44,153	)		(86,328	)
Retained earnings		771,689			1,015,769
Total shareholders’ equity		5,949,140			3,014,326
Total liabilities and shareholders’ equity	$	54,697,468		$	35,329,019

See Notes to Consolidated Financial Statements

74

CONSOLIDATED STATEMENTS OF INCOME HUNTINGTON BANCSHARES INCORPORATED

	Year Ended December 31,
(in thousands, except per share amounts)	2007			2006			2005
Interest and fee income
Loans and leases
Taxable	$	2,388,799		$	1,775,445		$	1,428,371
Tax-exempt		5,213			2,154			1,466
Investment securities
Taxable		221,877			231,294			157,716
Tax-exempt		26,920			23,901			19,865
Other		100,154			37,725			34,347
Total interest income		2,742,963			2,070,519			1,641,765
Interest expense
Deposits		1,026,388			717,167			446,919
Short-term borrowings		92,810			72,222			34,334
Federal Home Loan Bank advances		102,646			60,016			34,647
Subordinated notes and other long-term debt		219,607			201,937			163,454
Total interest expense		1,441,451			1,051,342			679,354
Net interest income		1,301,512			1,019,177			962,411
Provision for credit losses		643,628			65,191			81,299
Net interest income after provision for credit losses		657,884			953,986			881,112
Service charges on deposit accounts		254,193			185,713			167,834
Trust services		121,418			89,955			77,405
Brokerage and insurance income		92,375			58,835			53,619
Other service charges and fees		71,067			51,354			44,348
Bank owned life insurance income		49,855			43,775			40,736
Mortgage banking income		29,804			41,491			28,333
Securities (losses), net		(29,738	)		(73,191	)		(8,055	)
Other income		87,629			163,137			228,062
Total non-interest income		676,603			561,069			632,282
Personnel costs		686,828			541,228			481,658
Outside data processing and other services		127,245			78,779			74,638
Net occupancy		99,373			71,281			71,092
Equipment		81,482			69,912			63,124
Amortization of intangibles		45,151			9,962			829
Marketing		46,043			31,728			26,279
Professional services		40,320			27,053			34,569
Telecommunications		24,502			19,252			18,648
Printing and supplies		18,251			13,864			12,573
Other expense		142,649			137,935			186,410
Total non-interest expense		1,311,844			1,000,994			969,820
Income before income taxes		22,643			514,061			543,574
(Benefit) provision for income taxes		(52,526	)		52,840			131,483
Net income	$	75,169		$	461,221		$	412,091
Average common shares — basic		300,908			236,699			230,142
Average common shares — diluted		303,455			239,920			233,475
Per common share
Net income — basic	$	0.25		$	1.95		$	1.79
Net income — diluted		0.25			1.92			1.77
Cash dividends declared		1.060			1.000			0.845

See Notes to Consolidated Financial Statements

75

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY HUNTINGTON BANCSHARES INCORPORATED

																			Accumulated
	Preferred Stock				Common Stock								Treasury Stock						Other
										Capital									Comprehensive			Retained
(in thousands)	Shares		Amount		Shares		Amount			Surplus			Shares			Amount			Loss			Earnings			Total
Balance — January 1, 2005		—		$—		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, net of tax of $11,626																				(21,333	)					(21,333	)
Unrealized gains on cash flow hedging derivatives, net of tax of ($5,898)																				10,954						10,954
Minimum pension liability adjustment, net of tax of $437																				(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, net of tax of ($26,369)																				48,270						48,270
Unrealized gains on cash flow hedging derivatives, net of tax of ($970)																				1,802						1,802
Minimum pension liability adjustment, net of tax of ($145)																				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 $44,861																				(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
Comprehensive Income:
Net income																							75,169			75,169
Unrealized net losses on investment securities arising during the period, net of reclassification(1) for net realized gains, net of tax of $13,245																				(24,265	)					(24,265	)
Unrealized losses on cash flow hedging derivatives, net of tax of $6,707																				(12,455	)					(12,455	)
Change in accumulated unrealized losses for pension and other post-retirement obligations, net of tax of ($22,710)																				42,175						42,175
Total comprehensive income																										80,624
Assignment of $0.01 par value per share for each share of common stock								(2,557,990	)		2,557,990															—
Cash dividends declared ($1.06 per share)																							(319,249	)		(319,249	)
Shares issued pursuant to acquisitions						129,639		1,296			3,130,996			188			4,245									3,136,537
Recognition of the fair value of share-based compensation											21,836															21,836
Stock options exercised											(9,040	)		1,111			25,822									16,782
Other											1,534			(150	)		(3,250	)								(1,716	)
Balance — December 31, 2007		—		$—		387,505	$	3,875		$	5,703,316			(21,243	)	$	(480,129	)	$	(49,611	)	$	771,689		$	5,949,140

(1) Reclassification adjustments represent net unrealized gains or losses as of December 31 of the prior year on investment securities that were sold during the current year. For the years ended December 31, 2007, 2006, and 2005 the reclassification adjustments were $19,330, net of tax of ($10,408), $47,574, net of tax of ($25,617), and $5,236, net of tax of ($2,819), respectively.

See Notes to Consolidated Financial Statements.

76

CONSOLIDATED STATEMENTS OF CASH FLOWS HUNTINGTON BANCSHARES INCORPORATED

	Year Ended December 31,
(in thousands)	2007			2006			2005
Operating activities
Net income	$	75,169		$	461,221		$	412,091
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		643,628			65,191			81,299
Depreciation and amortization		127,261			111,649			172,977
Net decrease in current and deferred income taxes		(157,169	)		(357,458	)		(98,703	)
Net (increase) decrease in trading account securities		(996,689	)		24,784			275,765
Pension contribution		—			(29,800	)		(63,600	)
Originations of loans held for sale		(2,815,854	)		(2,537,999	)		(2,572,346	)
Principal payments on and proceeds from loans held for sale		2,693,132			2,532,908			2,501,471
Other, net		87,743			(46,037	)		(34,255	)
Net cash (used for) provided by operating activities		(342,779	)		224,459			674,699
Investing activities
Increase in interest bearing deposits in banks		(188,971	)		(48,681	)		7
Net cash (paid) received in acquisitions		(80,060	)		60,772			—
Proceeds from:
Maturities and calls of investment securities		405,482			604,286			463,001
Sales of investment securities		1,528,480			2,829,529			1,995,764
Purchases of investment securities		(1,317,630	)		(3,015,922	)		(2,832,258	)
Proceeds from sales of loans		108,588			245,635			—
Net loan and lease originations, excluding sales		(1,746,814	)		(338,022	)		(1,012,345	)
Proceeds from sale of operating lease assets		27,591			128,666			280,746
Purchases of premises and equipment		(109,450	)		(47,207	)		(57,288	)
Other, net		(32,586	)		(7,760	)		20,415
Net cash (used for) provided by investing activities		(1,405,370	)		411,296			(1,141,958	)
Financing activities
(Decrease) increase in deposits		(165,625	)		936,766			1,655,736
Increase (decrease) in short-term borrowings		1,464,542			(292,211	)		682,027
Proceeds from issuance of subordinated notes		250,010			250,000			—
Maturity/redemption of subordinated notes		(46,660	)		(4,080	)		—
Proceeds from Federal Home Loan Bank advances		2,853,120			2,517,210			809,589
Maturity/redemption of Federal Home Loan Bank advances		(1,492,899	)		(2,771,417	)		(925,030	)
Proceeds from issuance of long-term debt		—			935,000			—
Maturity of long-term debt		(353,079	)		(1,158,942	)		(1,719,403	)
Dividends paid on common stock		(289,758	)		(231,117	)		(200,628	)
Repurchases of common stock		—			(378,835	)		(231,656	)
Other, net		16,997			41,842			(67,960	)
Net cash provided by (used for) financing activities		2,236,648			(155,784	)		2,675
Increase in cash and cash equivalents		488,499			479,971			(464,584	)
Cash and cash equivalents at beginning of period		1,520,747			1,040,776			1,505,360
Cash and cash equivalents at end of period	$	2,009,246		$	1,520,747		$	1,040,776
Supplemental disclosures:
Income taxes paid	$	104,645		$	410,298		$	230,186
Interest paid		1,434,007			1,024,635			640,679
Non-cash activities
Mortgage loans exchanged for mortgage-backed securities		—			—			15,058
Common stock dividends accrued, paid in subsequent quarter		76,762			37,166			28,877
Common stock and stock options issued for purchase acquisitions		3,136,537			575,756			—

See Notes to Consolidated Financial Statements.

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

1. SIGNIFICANT ACCOUNTING POLICIES

–  Nature of Operations — Huntington Bancshares Incorporated (Huntington or The Company) 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, Kentucky and Pennsylvania. Certain activities are also conducted in other states including Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, North Carolina, 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 long-term debt) 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. Significant estimates are further discussed in the critical accounting policies included in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Certain prior period amounts have been reclassified to conform to the current year’s presentation.

–  Securities — Securities purchased with the intention of recognizing short-term profits or which are actively bought and sold 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, except for gains and losses on trading account securities used to hedge the fair value of mortgage servicing rights, which are included in mortgage banking 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 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 sold securities 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 holdings of VISA, Inc. Class B common stock and 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 expected cash flows of the security, the duration and extent to which the fair value of an investment is less than its cost, the historical and implicit volatility of the security and intent and ability to hold the investment until recovery, which may be maturity. Investments with an indicator of

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

impairment are further evaluated to determine the likelihood of a significant adverse effect on the fair value and amount of the impairment as necessary.

–  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. Huntington also acquires loans at a premium and at a discount to their contractual values. Huntington amortizes loan discounts, loan premiums and net loan origination 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 to sell or securitize are classified as held for sale. Loans held for sale are carried at the lower of cost or fair value. Fair value is determined based on collateral value and 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 1, 2002 through June 30, 2005, and does not have a cap. A third policy, similar in structure to the referenced second policy, was in effect until October 9, 2007, and 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.

Automobile leases originated after October 9, 2007 are not covered by a third party residual value insurance policy. The absence of insurance on these automobile leases requires them to be recorded as operating leases (see operating lease assets below).

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 uses 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.

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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 quarterly for impairment in accordance with the provisions of Statement No. 114, Accounting by Creditors for Impairment of a Loan, as amended. This Statement requires an allowance to be established as a component of the allowance for loan and lease losses when it is probable that all amounts due pursuant to the contractual terms of the loan or lease will not be collected and the recorded investment in the loan or lease exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted at the loan’s or lease’s effective interest rate, the observable market price of the loan or lease, or the fair value of the collateral if the loan or lease is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. Interest income is recognized on impaired loans using a cost recovery method unless the receipt of principal and interest as they become contractually due is not in doubt, such as in a troubled debt restructuring (TDR). For TDRs of impaired loans, interest is accrued in accordance with the restructured terms.

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 5 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 and Leases — Loans or direct financing leases 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 or lease 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 and leases sold and servicing rights associated with loan and lease sales are determined when the related loans or leases 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

80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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 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) Real Consumer Spending, and (2) Consumer Confidence. The two regionally focused indices are: (1) the Institute for Supply Management Manufacturing Index, 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. Beginning in 2006, OREO also included government insured loans in the process of 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 October 1st 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

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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 and trading account securities. Changes in fair value of these derivatives and trading account securities are reported as a component of mortgage banking income.

–  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 other 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. 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.

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

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

–  Derivative Financial Instruments — 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 commitments are carried at fair value on the consolidated balance sheet with changes in fair value reflected in mortgage banking revenue. 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.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

For those derivatives to 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 counterparty 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 mitigated through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contract provisions. In accordance with FASB Staff Position (FSP) FIN 39-1, Huntington considers the value of collateral held and collateral provided in determining the net carrying value of it derivatives.

–  Advertising Costs — Advertising costs are expensed as incurred and recorded 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 or penalties due for payment of income taxes are 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.

Under the modified prospective method of Statement No. 123R, compensation expense is recognized during the years ended December 31, 2007 and 2006, for all unvested stock options outstanding at January 1, 2006, 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 (See Note 16 for further information.)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

–  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 2007:

–  Financial Accounting Standards Board (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. Huntington adopted FIN 48 on January 1, 2007. Huntington recognizes 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 adoption of FIN 48 was not significant to Huntington’s consolidated financial statements (See Note 17).

–  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. Huntington adopted the recognition provisions of Statement No. 158 at December 31, 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. Huntington has elected the “two-measurement approach” to transition to a fiscal year-end measurement date. The impact of transitioning to a fiscal year-end measurement date on January 1, 2008, was not material to Huntington’s consolidated financial statements.

Standards Not Yet Fully Adopted as of December 31, 2007:

–  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. Huntington adopted Statement No. 157, effective January 1, 2008. The impact of this new pronouncement was not material to Huntington’s consolidated financial statements.

–  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. Huntington adopted Statement No. 159, effective January 1, 2008. The impact of this new pronouncement was not material to Huntington’s consolidated financial statements.

–  Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109) — In November 2007, SEC SAB 109 was issued. SAB 109 provides the staff’s views on the accounting for written loan commitments recorded at fair value. To make the staff’s views consistent with Statement No. 156, Accounting for Servicing of Financial Assets, and Statement No. 159, SAB 109 revises and rescinds portions of SAB No. 105, Application of Accounting Principles to Loan Commitments, and requires that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB 109 are applicable to written loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company is currently assessing the impact this Statement will have on its consolidated financial statements.

–  FASB Statement No. 141 (Revised 2007), Business Combinations (Statement No. 141R) — Statement No. 141R was issued in December 2007. The revised statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. Statement No. 141R requires prospective application for business combinations consummated in fiscal years beginning on or after December 15, 2008. Early application is prohibited.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

–  FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (Statement No. 160) — Statement No. 160 was issued in December 2007. The statement requires that noncontrolling interests in subsidiaries be initially measured at fair value and classified as a separate component of equity. The statement is effective for fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently assessing the impact this Statement will have on its consolidated financial statements.

3. ACQUISITIONS

On July 1, 2007, Huntington completed its merger with Sky Financial Group, Inc. (Sky Financial) in a stock and cash transaction valued at $3.5 billion. Sky Financial operated over 330 banking offices and over 400 ATMs and served communities in Ohio, Pennsylvania, Indiana, Michigan, and West Virginia.

Under the terms of the merger agreement, Sky Financial shareholders received 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 aggregate purchase price was $3.5 billion, including $0.4 billion of cash and $3.1 billion of common stock and options to purchase common stock. The value of the 129.6 million shares issued in connection with the merger was determined based on the average market price of Huntington’s common stock over a 2-day period immediately before and after the terms of the merger were agreed to and announced. The assets and liabilities of the acquired entity were recorded on the Company’s balance sheet at their fair values as of July 1, 2007, the acquisition date.

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

(in thousands)	July 1, 2007
Equity consideration	$	3,133,232
Cash consideration		357,031
Direct acquisition costs		36,501
Purchase price		3,526,764
Carrying value of tangible net assets acquired		(1,111,393	)
Excess of purchase price over carrying value of net assets acquired		2,415,371
Purchase accounting adjustments:
Loans and leases		192,142
Loans held for sale		137,511
Premises and equipment		51,083
Accrued income and other assets		(33,762	)
Accrued expenses and other liabilities		109,153
Goodwill and other intangible assets		2,871,498
Less other intangible assets:
Core deposit intangible		(328,300	)
Other identifiable intangible assets		(80,450	)
Other intangible assets		(408,750	)
Goodwill	$	2,462,748

Huntington is in the process of preparing valuations of acquired bank branches and operating facilities and will adjust goodwill upon completion of the valuation process. Huntington does not expect any amount of goodwill from the Sky Financial merger to be deductible for tax purposes.

Of the $408.8 million of acquired intangible assets, $328.3 million was assigned to core deposit intangible, and $80.5 million was assigned to customer relationship intangibles. The core deposit and customer relationship intangibles are amortized using an accelerated method of amortization based on the weighted-average useful lives of 8 and 14 years, respectively.

In 2007, exit costs liabilities of $59.3 million were recorded as purchase accounting adjustments and $30.8 million was charged against the accrual. The key components of the liability were lease termination costs for Sky closed buildings of $21.0 million, Sky employee termination benefits of $24.1 million and contract termination costs of $14.2 million. The employee termination benefits included severance payments and related benefits for approximately 1,050 Sky employees terminated or notified of their pending termination in connection with the merger.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The following table summarizes the preliminary estimated fair value of the net assets acquired on July 1, 2007 related to the acquisition of Sky Financial:

(in thousands)	July 1, 2007
Assets
Cash and due from banks	$	341,566
Federal funds sold and securities purchased under resale agreements(1)		1,023,284
Loans held for sale		167,296
Securities and other earning assets		853,633
Loans and leases		12,577,906
Goodwill and other intangible assets		2,871,498
Accrued income and other assets		603,947
Total assets		18,439,130
Liabilities Deposits		12,850,717
Borrowings		1,888,290
Accrued expenses and other liabilities		173,359
Total liabilities		14,912,366
Purchase price	$	3,526,764

(1)  The federal funds sold and securities purchased under resale agreements were with Huntington.

Huntington’s consolidated financial statements include the results of operations of Sky Financial after July 1, 2007, 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 Sky Financial acquisition had occurred at the beginning of each of the periods presented.

(in thousands, except per share amounts)	2007			2006
Net interest income	$	1,602,506		$	1,583,047
Provision for credit losses		(683,152	)		(102,045	)
Net interest income after provision for credit losses		919,354			1,481,002
Non-interest income		748,221			779,939
Non-interest expense		(1,633,509	)		(1,516,481	)
Income before income taxes		34,066			744,460
Benefit (provision) for income taxes		49,651			(128,396	)
Net income	$	83,717		$	616,064
Net income per common share
Basic	$	0.23		$	1.72
Diluted		0.23			1.70
Average common shares outstanding
Basic		365,696			357,393
Diluted		367,069			361,537

The pro forma results include amortization of fair value adjustments on loans, deposits, and debt, and amortization of newly created intangible assets and post-merger acquisition related expenses. The pro forma results for 2007 also include certain non-recurring items, including a $72.4 million loss on the sale of securities by Sky Financial in anticipation of the merger and $11.3 million of additional personnel expenses for retention bonuses and the vesting of stock options. The pro forma number of average common shares outstanding includes adjustments for shares issued for the acquisition and the impact of additional dilutive securities. The pro forma results presented do not reflect cost savings or revenue enhancements anticipated 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 October 2, 2007, Huntington acquired Archer-Meek-Weiler Agency, Inc., Columbus, Ohio (Archer-Meek-Weiler). Archer-Meek-Weiler is a full-service agency that sells personal and commercial insurance as well as group benefits. Throughout the year, Huntington acquired several small companies specializing in providing 3rd party products and services related to the banking industry. These acquisitions, individually, and in the aggregate, are not material to Huntington’s consolidated financial statements.

86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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.

4. INVESTMENT SECURITIES

Investment securities at December 31 were as follows:

			Unrealized
(in thousands)	Amortized Cost		Gross Gains		Gross Losses		Fair Value
2007
U.S. Treasury	$	549	$	7	$	—	$	556
Federal Agencies Mortgage-backed securities		1,559,388		13,743		(1,139)		1,571,992
Other agencies		170,195		2,031		(2)		172,224
Total Federal agencies		1,729,583		15,774		(1,141)		1,744,216
Asset-backed securities		869,654		2,915		(38,080)		834,489
Municipal securities		691,384		8,507		(2,565)		697,326
Private label collaterized mortgage obligations		784,339		4,109		(5,401)		783,047
Other securities		440,152		432		(47)		440,537
Total investment securities	$	4,515,661	$	31,744	$	(47,234)	$	4,500,171

			Unrealized
(in thousands)	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

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:

	2007				2006
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Under 1 year	$	104,477	$	104,520	$	7,490	$	7,473
1-5 years		87,584		89,720		203,728		203,867
6-10 years		186,577		188,273		170,075		169,680
Over 10 years		3,714,072		3,694,722		3,802,375		3,824,111
Non-marketable equity securities		414,583		414,583		150,754		150,754
Marketable equity securities		8,368		8,353		6,481		7,039
Total investment securities	$	4,515,661	$	4,500,171	$	4,340,903	$	4,362,924

87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

At December 31, 2007, 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 $2.3 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, 2007.

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, 2007.

	Less than 12 Months					Over 12 Months					Total
			Unrealized					Unrealized					Unrealized
(in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Treasury	$	—	$	—		$	—	$	—		$	—	$	—
Federal agencies
Mortgage-backed securities		128,629		(1,139	)		—		—			128,629		(1,139	)
Other agencies		497		(2	)		—		—			497		(2	)
Total Federal agencies		129,126		(1,141	)		—		—			129,126		(1,141	)
Asset-backed securities		653,603		(33,422	)		71,790		(4,658	)		725,393		(38,080	)
Municipal securities		163,721		(1,432	)		106,305		(1,133	)		270,026		(2,565	)
Private label collaterized mortgage obligations		273,137		(5,401	)		—		—			273,137		(5,401	)
Other securities		6,627		(47	)		—		—			6,627		(47	)
Total temporarily impaired securities	$	1,226,214	$	(41,443	)	$	178,095	$	(5,791	)	$	1,404,309	$	(47,234	)

As of December 31, 2007, Management has evaluated all other investment securities with unrealized losses and all non-marketable securities for impairment. The remaining 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, 2007.

Gross gains from sales of securities of $15.2 million, $8.4 million, and $8.5 million, were realized in 2007, 2006, and 2005, respectively. Gross losses from the sales of securities totaled $1.6 million in 2007, $55.2 million in 2006, and $16.6 million in 2005. For the periods ended December 31, 2007 and 2006, Huntington also recognized an additional $43.3 million and $26.4 million, respectively of losses relating to securities that were identified as other-than-temporarily impaired. These securities, included in the asset-backed securities portfolio, had a total carrying value of $7.8 million at December 31, 2007.

5. LOANS AND LEASES

At December 31, 2007, $4.5 billion of commercial and industrial loans were pledged to secure potential discount window borrowings from the Federal Reserve Bank, and $6.7 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.

88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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

	At December 31,
(in thousands)	2007			2006
Commercial and industrial
Lease payments receivable	$	977,183		$	624,656
Estimated residual value of leased assets		52,438			44,893
Gross investment in commercial lease financing receivables		1,029,621			669,549
Deferred origination fees and costs		4,469			3,983
Unearned income		(139,422	)		(86,849	)
Total net investment in commercial lease financing receivables	$	894,668		$	586,683
Consumer
Lease payments receivable	$	543,640		$	857,127
Estimated residual value of leased assets		740,621			1,068,766
Gross investment in consumer lease financing receivables		1,284,261			1,925,893
Deferred origination fees and costs		(1,368	)		(810	)
Unearned income		(103,388	)		(155,659	)
Total net investment in consumer lease financing receivables	$	1,179,505		$	1,769,424

The future lease rental payments due from customers on direct financing leases at December 31, 2007, totaled $1.5 billion and were as follows: $0.5 billion in 2008; $0.4 billion in 2009; $0.3 billion in 2010; $0.2 billion in 2011, and $0.1 billion in 2012 and thereafter. Included in the estimated residual value of leased consumer assets was a valuation reserve of $4.5 million and $7.3 million at December 31, 2007 and 2006, respectively, for expected residual value impairment not covered by residual value insurance.

Franklin Credit Management Corporation (Franklin) Portfolio

As a result of the acquisition of Sky Financial, the Company has a commercial lending relationship with Franklin Credit Management Corporation (Franklin). Franklin is a specialty consumer finance company primarily engaged in the servicing and resolution of performing, reperforming and nonperforming residential mortgage loans. Franklin’s portfolio consists of loans secured by 1-4 family residential real estate that generally fall outside the underwriting standards of Fannie Mae and Freddie Mac and involve elevated credit risk as a result of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt or past credit difficulties. Franklin purchased these loan portfolios at a discount to the unpaid principal balance and originated loans with interest rates and fees calculated to provide a rate of return adjusted to reflect the elevated credit risk inherent in these types of loans. Franklin originated non-prime loans through its wholly-owned subsidiary, Tribeca Lending Corp. and has generally held for investment the loans acquired and a significant portion of the loans originated. Tribeca currently accounts for approximately 25% of Franklin’s business activities.

Commercial loans to Franklin and its Tribeca subsidiary at December 31, 2007 were as follows:

										Participated to
(in thousands)	Franklin			Tribeca			Subtotal			others			Total
Variable rate, term loan (Facility A)	$	600,000		$	400,000		$	1,000,000		$	(175,303	)	$	824,697
Variable rate, subordinated term loan (Facility B)		318,937			91,133			410,070			(73,994	)		336,076
Fixed rate, junior subordinated term loan (Facility C)		125,000			—			125,000			(8,224	)		116,776
Line of credit facility		1,033			—			1,033			—			1,033
Other variable rate term loans		4,327			44,537			48,864			(22,269	)		26,595
Subtotal		1,049,297			535,670			1,584,967		$	(279,790	)	$	1,305,177
Participated to others		(194,045	)		(85,745	)		(279,790	)
Total principal owed to Huntington		855,252			449,925			1,305,177
Amounts charged off		(116,776	)					(116,776	)
Total book value of loans	$	738,476		$	449,925		$	1,188,401

The loan participations to others have no recourse to Huntington. The term debt exposure is secured by over 30,000 individual first- and second-priority lien residential mortgages. In addition, pursuant to an exclusive lockbox arrangement, Huntington receives all payments made to Franklin and Tribeca on these individual mortgages.

89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Single Family Homebuilders

At December 31, 2007, Huntington had $1.5 billion of loans to single family homebuilders, including loans made to both middle market and small business homebuilders. Such loans represented 4% of total loans and leases. Of this portfolio, 66% were to finance projects currently under construction, 26% to finance land under development, and 8% to finance land held for development.

There has been a slowdown in the housing market across Huntington’s geographic footprint, reflecting declining prices and excess inventories of houses to be sold, particularly in the eastern Michigan and northern Ohio markets. As a result, homebuilders have shown signs of financial deterioration. Huntington has taken the following steps to mitigate the risk arising from this exposure: (1) all loans have been reviewed three times during the last 12 months and are continuously monitored, (2) credit valuation adjustments have been made across the entire portfolio based on the current condition of each relationship, and (3) reserves have been increased based on proactive risk identification and thorough borrower analysis.

Home Equity and Residential Mortgage Loans

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. Home equity loans totaled $7.3 billion and $4.9 billion at December 31, 2007 and 2006, respectively, or 18% and 19% of total loans at the end of each respective period. From a credit risk perspective, 84% of the home equity loans had a loan to value ratio of less than 90% at December 31, 2007. The charge-off policy for home equity loans is described in Note 1. Other than the credit risk concentration described above, there was no other economic, industry, or geographic concentration of credit risk in the loan and lease portfolio at December 31, 2007.

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)	2007			2006
Balance, beginning of year	$	56,506		$	76,488
Loans made		125,229			105,337
Repayments		(98,366	)		(91,639	)
Changes due to status of executive officers and directors		13,024			(33,680	)
Balance, end of year	$	96,393		$	56,506

Nonaccrual Loans, Non-Performing Assets and Past Due Loans and Leases

At December 31, 2007 and 2006, loans in non-accrual status, loans past due 90 days or more and still accruing interest, and restructured loans were as follows:

	At December 31,
(in thousands)	2007		2006
Commercial and industrial	$	87,679	$	58,393
Commercial real estate		148,467		37,947
Residential mortgage		59,557		32,527
Home equity		24,068		15,266
Total nonaccrual loans and leases		319,771		144,133
Restructured loans		1,187,368		—
Other real estate, net		75,271		49,487
Impaired loans held for sale(1)		73,481		—
Other nonperforming assets(2)		4,379		—
Total nonperforming assets	$	1,660,270	$	193,620
Accruing loans past due 90 days or more	$	140,977	$	59,114

(1)	Represent loans obtained from the Sky acquisition that are intended to be sold. Held for sale loans are carried at the lower of cost or fair value.
(2)	Other NPAs represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores.

The amount of interest that would have been recorded under the original terms for total loans classified as non-accrual or renegotiated was $51.3 million for 2007, $14.2 million for 2006, and $7.7 million for 2005. Amounts actually collected and

90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

recorded as interest income for these loans totaled $2.3 million, $3.4 million, and $1.9 million for 2007, 2006, and 2005, respectively.

6. LOAN SALES AND SECURITIZATIONS

Residential Mortgage Loans

For the years ended December 31, 2007 and 2006, Huntington sold $109.5 million and $247.4 million of residential mortgage loans held for investment, resulting in minimal pre-tax gains in each year.

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. MSRs are accounted for under the fair value provisions of 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 years ended December 31, 2007 and 2006:

(in thousands)	2007			2006
Fair value, beginning of period	$	131,104		$	109,890
New servicing assets created		32,058			29,013
Servicing assets acquired		81,450			2,474
Change in fair value during the period due to:
Time decay(1)		(6,226	)		(4,086	)
Payoffs(2)		(14,361	)		(11,058	)
Changes in valuation inputs or assumptions(3)		(16,131	)		4,871
Fair value, end of year	$	207,894		$	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.

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, 2007 to changes in these assumptions follows:

				Decline in fair
				value due to
				10%			20%
				adverse			adverse
(in thousands)	Actual			change			change
Constant pre-payment rate		13.34	%	$	(9,488	)	$	(18,601	)
Discount rate		9.28			(7,004	)		(13,557	)

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.

Servicing fees, net of amortization of capitalized servicing assets, included in mortgage banking income amounted to $15.4 million, $9.5 million, and $3.8 million in 2007, 2006, and 2005, respectively. The unpaid principal balance of residential mortgage loans serviced for third parties was $15.1 billion, $8.3 billion, and $7.3 billion at December 31, 2007, 2006, and 2005, respectively.

91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Automobile Loans

Sales of automobile loans for which servicing is retained were $259.2 million, $710.3 million and $425.6 million in 2007, 2006 and 2005, respectively. Pre-tax gains related to sales of automobile loans totaled $2.1 million, $3.1 million and $1.2 million in 2007, 2006 and 2005, respectively.

Automobile loan servicing rights are accounted for under the amortization provision of Statement No. 156. 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 0.69%, other ancillary fees of approximately 0.41%, 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.

Changes in the carrying value of automobile loan servicing rights for the two years ended December 31, 2007, 2006 and 2005, and the fair value at the end of each period were as follows:

	Year Ended December 31,
(in thousands)		2007			2006
Carrying value, beginning of year		$	7,916		$	10,805
New servicing assets			1,900			4,748
Amortization			(5,717	)		(7,637	)
Impairment charges			—			—
Carrying value, end of year		$	4,099		$	7,916
Fair value, end of year		$	5,005		$	9,457

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 0.60% of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing assets, included in other non-interest income amounted to $11.9 million in 2007, $14.2 million in 2006, and $12.5 million in 2005. The unpaid principal balance of automobile loans serviced for third parties was $1.0 billion, $1.5 billion, and $1.7 billion at December 31, 2007, 2006, and 2005, 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 2007 or 2005.

7. 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

92

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)	2007			2006			2005
Allowance for loan and leases losses, beginning of year (ALLL)	$	272,068		$	268,347		$	271,211
Acquired allowance for loan and lease losses		188,128			23,785			—
Loan and lease losses		(517,943	)		(119,692	)		(115,848	)
Recoveries of loans previously charged off		40,312			37,316			35,791
Net loan and lease losses		(477,631	)		(82,376	)		(80,057	)
Provision for loan and lease losses		628,802			62,312			83,782
Economic reserve transfer(1)		—			—			(6,253	)
Allowance for assets sold and securitized(2)		—			—			(336	)
Allowance for loans transferred to held-for-sale		(32,925	)		—			—
Allowance for loan and lease losses, end of year	$	578,442		$	272,068		$	268,347
Allowance for unfunded loan commitments and letters of credit, beginning of year (AULC)	$	40,161		$	36,957		$	33,187
Acquired AULC		11,541			325
Provision for unfunded loan commitments and letters of credit losses		14,826			2,879			(2,483	)
Economic reserve transfer(1)		—			—			6,253
Allowance for unfunded loan commitments and letters of credit, end of year	$	66,528		$	40,161		$	36,957
Total allowances for credit losses (ACL)	$	644,970		$	312,229		$	305,304
Recorded balance of impaired loans, at end of year(3):
With specific reserves assigned to the loan and lease balances(4)	$	1,318,518		$	35,212		$	41,525
With no specific reserves assigned to the loan and lease balances		33,062			25,662			14,032
Total	$	1,351,580		$	60,874		$	55,557
Average balance of impaired loans for the year(3)	$	424,797		$	65,907		$	29,441
Allowance for loan and lease losses on impaired loans(3)		142,058			7,612			14,526

(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 2005, 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 2007, 2006 and 2005 on impaired loans while they were considered impaired was $0.9 million, less than $0.1 million, and less than $0.1 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.
(4)	The loans to Franklin, classified as troubled debt restructuring, are included in impaired loans at the end of the year.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes to the carrying amount of goodwill by line of business for the years ended December 31, 2007 and 2006, were as follows:

	Regional			Dealer					Treasury/		Huntington
(in thousands)	Banking			Sales		PFCMG			Other		Consolidated
Balance, January 1, 2006	$	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
Goodwill acquired during the period		2,370,804			—		56,946			61,845		2,489,595
Adjustments		(504	)		—		(4,450	)		3,816		(1,138	)
Balance, December 31, 2007	$	2,906,155		$	—	$	87,517		$	65,661	$	3,059,333

The change in goodwill for 2007, primarily related to the acquisitions of Sky Financial and Archer-Meek-Weiler, and the finalization of purchase accounting adjustments from the acquisitions made late in 2006. There were no impairment losses for each of the three years ended December 31, 2007, 2006, and 2005. In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is evaluated for impairment on an annual basis at October 1st of each year or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

At December 31, 2007 and 2006, Huntington’s other intangible assets consisted of the following:

	Gross
	Carrying		Accumulated			Net
(in thousands)	Amount		Amortization			Carrying Value
December 31, 2007
Core deposit intangible	$	373,300	$	(46,057	)	$	327,243
Customer relationship		104,574		(7,055	)		97,519
Other		23,655		(20,447	)		3,208
Total other intangible assets	$	501,529	$	(73,559	)	$	427,970
December 31, 2006
Core deposit intangible	$	45,000	$	(7,525	)	$	37,475
Customer relationship		19,622		(1,634	)		17,988
Other		23,655		(19,631	)		4,024
Total other intangible assets	$	88,277	$	(28,790	)	$	59,487

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

	Amortization
(in thousands)	Expense
2008	$	75,642
2009		67,366
2010		59,597
2011		52,600
2012		45,503

9. PREMISES AND EQUIPMENT

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

	At December 31,
(in thousands)	2007			2006
Land and land improvements	$	122,224		$	79,273
Buildings		355,560			270,942
Leasehold improvements		176,952			154,097
Equipment		565,303			491,428
Total premises and equipment		1,220,039			995,740
Less accumulated depreciation and amortization		(662,474	)		(622,968	)
Net premises and equipment	$	557,565		$	372,772

Depreciation and amortization charged to expense and rental income credited to net occupancy expense for the three years ended December 31, 2007, 2006 and 2005 were:

	Year Ended December 31,
(in thousands)	2007		2006		2005
Total depreciation and amortization of premises and equipment	$	64,052	$	52,333	$	50,355
Rental income credited to occupancy expense		12,808		11,602		11,010

94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

10.  SHORT-TERM BORROWINGS

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

	At December 31,
(in thousands)	2007		2006
Federal funds purchased	$	1,013,119	$	520,354
Securities sold under agreements to repurchase		1,693,307		1,111,959
Other borrowings		137,212		43,876
Total short-term borrowings	$	2,843,638	$	1,676,189

Other borrowings consist of borrowings from the U.S. Treasury and other notes payable.

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

	Year Ended December 31,
(in thousands)	2007			2006
Average balance during the year	$	1,490,264		$	1,065,649
Average interest rate during the year		3.59	%		3.33	%
Maximum month-end balance during the year	$	2,188,629		$	1,213,673

11. FEDERAL HOME LOAN BANK ADVANCES

Huntington’s long-term advances from the Federal Home Loan Bank had weighted average interest rates of 5.11% and 5.40% at December 31, 2007 and 2006, respectively. These advances, which predominantly had variable interest rates, were collateralized by qualifying real estate loans. As of December 31, 2007 and 2006, Huntington’s maximum borrowing capacity was $4.8 billion and $3.2 billion, respectively. The advances outstanding at December 31, 2007 of $3.1 billion mature as follows: less than $0.1 billion in 2008; $0.1 billion in 2009; $0.5 billion in 2010; $1.5 billion in 2011; $1.0 billion in 2012, and less than $0.1 billion thereafter.

12. SUBORDINATED NOTES

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

	At December 31,
(in thousands)	2007		2006
Parent company:
6.11% subordinated notes due 2008	$	50,020	$	—
6.21% subordinated notes due 2013		48,070		—
5.66% junior subordinated debentures due 2027(1)		184,836		206,186
5.62% junior subordinated debentures due 2028(2)		93,093		103,093
8.54% junior subordinated debentures due 2029		23,389		23,428
5.60% junior subordinated debentures due 2030		66,848		—
6.14% junior subordinated debentures due 2033(3)		6,224		—
6.13% junior subordinated debentures due 2033(4)		31,411		—
5.76% junior subordinated debentures due 2036(5)		78,465		—
6.16% junior subordinated debentures due 2036(5)		78,466		—
6.69% junior subordinated debentures due 2067(6)		249,356		—
The Huntington National Bank:
8.18% subordinated notes due 2010		145,167		152,303
6.21% subordinated notes due 2012		64,773		—
5.00% subordinated notes due 2014		198,076		193,122
5.59% subordinated notes due 2016		253,365		248,908
6.67% subordinated notes due 2018		213,793		212,526
5.45% subordinated notes due 2019		148,924		147,091
Total subordinated notes	$	1,934,276	$	1,286,657

(1)	Variable effective rate at December 31, 2007, based on three month LIBOR + 0.70.
(2)	Variable effective rate at December 31, 2007, based on three month LIBOR + 0.625.
(3)	Variable effective rate at December 31, 2007, based on three month LIBOR + 3.25.
(4)	Variable effective rate at December 31, 2007, based on three month LIBOR + 2.95.
(5)	Variable effective rate at December 31, 2007, based on three month LIBOR + 1.40.
(6)	The junior subordinated debentures due 2067 are subordinate to all other junior subordinated debentures.

95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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 20 for more information regarding such financial instruments. All principal is due upon maturity of the note as described in the table above.

In 2007, $31.4 million of the junior subordinated debentures due in 2027 and 2028 were repurchased resulting in a gain of $2.9 million and was recorded in other non-interest income.

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 $0.8 billion as of December 31, 2007 and $0.3 billion in 2006.

13. OTHER LONG-TERM DEBT

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

	At December 31,
(in thousands)	2007		2006
The Huntington National Bank	$	715,465	$	808,112
5.33% Securitization trust note payable due 2012(1)		155,666		408,745
5.57% Securitization trust note payable due 2018(2)		1,015,947		962,283
7.88% Class C preferred securities of REIT subsidiary, no maturity		50,000		50,000
Total other long-term debt	$	1,937,078	$	2,229,140

(1)	Variable effective rate at December 31, 2007, based on one month LIBOR + 0.33.
(2)	Variable effective rate at December 31, 2007, 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 20 for more information regarding such financial instruments.

The weighted-average interest rate for other long-term debt was 5.23% and 5.48% at December 31, 2007 and 2006, respectively.

The securitization trust notes payable are collateralized by $1.4 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, 2007, Huntington was in compliance with all such covenants.

Other long-term debt maturities for the next five years are as follows: $0.2 billion in 2008; $0.2 billion in 2009; $0.3 billion in 2010; none in 2011; $0.2 billion in 2012 and $1.0 billion thereafter. These maturities are based upon the par values of long-term debt.

14. SHAREHOLDERS’ EQUITY

Change in Par Value and Shares Authorized

During the second quarter of 2007, Huntington amended its charter to, among other things, assign a par value of $0.01 to each share of common stock. Shares of common stock previously had no assigned par value. Huntington also amended its charter to increase the number of authorized shares of common stock from 500 million shares to 1.0 billion shares.

Share Repurchase Program

On April 20, 2006, the Company announced that its board of directors authorized a new program for the repurchase of up to 15 million shares of common stock (the 2006 Repurchase Program). The 2006 Repurchase Program does not have an expiration date. The 2006 Repurchase Program cancelled and replaced the prior share repurchase program, authorized by the board of directors in 2005. 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.

96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Huntington did not repurchase any shares under the 2006 Repurchase Program for the year ended December 31, 2007. At the end of the period, 3.9 million shares may be purchased under the 2006 Repurchase Program.

15. 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 to include the effect of potentially dilutive common shares. 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)	2007		2006		2005
Net income	$	75,169	$	461,221	$	412,091
Average common shares outstanding		300,908		236,699		230,142
Dilutive potential common shares		2,547		3,221		3,333
Diluted average common shares outstanding		303,455		239,920		233,475
Earnings Per Share
Basic	$	0.25	$	1.95	$	1.79
Diluted		0.25		1.92		1.77

Potentially dilutive common shares include incremental shares issued upon exercise of outstanding stock options, the vesting of restricted stock units and awards, and the distribution of shares from deferred compensation plans. Dilutive potential common shares related to stock options 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 14.9 million, 5.5 million, and 5.7 million options to purchase shares of common stock outstanding at the end of 2007, 2006, and 2005, 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 $23.20 per share, $25.69 per share, and $25.68 per share at the end of each respective period.

16. 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 closing 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 term of ten years. All options granted after May 2004 have a 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 is the closing market price of the Company’s common stock on the date of award.

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. Compensation costs are 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

97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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, 2007, 2006 and 2005.

	2007			2006			2005
Assumptions
Risk-free interest rate		4.74	%		4.96	%		4.07	%
Expected dividend yield		5.26			4.24			3.34
Expected volatility of Huntington’s common stock		21.1			22.2			26.3
Expected option term (years)		6.0			6.0			6.0
Weighted-average grant date fair value per share	$	2.80		$	4.21		$	5.28

The following pro forma disclosures for net income and earnings per diluted common share for the year ended December 31, 2005 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
Pro forma results
Net income, as reported	$	412.1
Pro forma expense, net of tax		(11.9	)
Pro forma net income	$	400.2
Net income per common share:
Basic, as reported	$	1.79
Basic, pro forma		1.74
Diluted, as reported		1.77
Diluted, pro forma		1.71

Huntington’s stock option activity and related information for the year ended December 31, 2007, 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, 2007		20,573		$21.36
Granted		2,131		20.03
Acquired(1)		7,374		18.40
Exercised		(1,048	)	18.10
Forfeited/expired		(965	)	22.80
Outstanding at December 31, 2007		28,065		$20.55	4.5	$1,578
Exercisable at December 31, 2007		24,106		$20.32	4.2	$1,578

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

As a result of the acquisition of Sky Financial, the outstanding stock options to purchase Sky Financial’s common stock were converted into 7.4 million options to purchase shares of Huntington common stock with a weighted average exercise price of $18.40. All shares were fully vested on the conversion date and were included in the purchase price of Sky Financial.

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 2007, 2006 and 2005 was $4.3 million, $11.8 million, and $11.6 million, respectively.

For the years ended December 31, 2007 and 2006, share-based compensation expense was $21.8 million and $18.6 million, respectively. The tax benefits recognized related to share-based compensation for the years ended December 31, 2007 and 2006, were $7.6 million and $6.5 million, respectively.

98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Cash received from the exercise of options for 2007, 2006, and 2005 was $17.4 million, $36.8 million, and $31.9 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $2.8 million, $2.8 million, and $8.7 million for 2007, 2006, and 2005, respectively.

Huntington issues shares to fulfill stock option exercises from available shares held in treasury. At December 31, 2007, the Company believes there are adequate shares in treasury to satisfy anticipated stock option exercises in 2008.

The following table summarizes the status of Huntington’s nonvested share awards for the year ended December 31, 2007:

				Weighted-					Weighted-
				Average					Average
	Restricted			Grant Date		Restricted			Grant Date
	Stock			Fair Value		Stock			Fair Value
(in thousands, except per share amounts)	Units			Per Share		Awards			Per Share
Nonvested at January 1, 2007		468			$23.37		—		$	—
Granted		682			20.00		222			22.74
Vested		(8	)		23.34		(222	)		22.74
Forfeited		(56	)		21.56		—			—
Nonvested at December 31, 2007		1,086			$21.35		—		$	—

In connection with the merger of Sky Financial, Huntington granted restricted stock awards of 221,569 shares of Huntington common stock. The restricted stock awards vest in equal monthly installments at the end of each calendar month from the completion of the merger through December 31, 2009, subject to acceleration on certain terminations of employment and change in control transactions. The vesting of the restricted stock awards accelerated on December 31, 2007, with the retirement of the executive to whom they were granted.

The weighted-average grant date fair value of nonvested shares granted for the years ended December 31, 2007 and 2006, were $20.67 and $23.37, respectively. The total fair value of awards vested during the years ended December 31, 2007 and 2006, was $3.5 million and $17.0 million, respectively. As of December 31, 2007, the total unrecognized compensation cost related to nonvested awards was $15.1 million with a weighted-average expense recognition period of 2.2 years.

The following table presents additional information regarding options outstanding as of December 31, 2007.

	Options Outstanding				Exercisable Options
			Weighted-
			Average
			Remaining	Weighted-			Weighted-
			Contractual	Average			Average
			Life	Exercise			Exercise
(in thousands, except per share amounts)	Shares		(Years)	Price	Shares		Price
Range of Exercise Prices
$9.91 to $15.00		1,979	2.9	$14.00		1,979	$	14.00
$15.01 to $20.00		9,182	4.1	17.80		9,171		17.80
$20.01 to $25.00		14,673	5.4	22.14		10,725		22.20
$25.01 to $28.35		2,231	1.1	27.21		2,231		27.21
Total		28,065	4.5	$20.55		24,106	$	20.32

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, all options vested on August 27, 2007. The options outstanding under this grant have a weighted average exercise price of $19.94 per share.

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 28.3 million awards to grant or purchase shares of common stock authorized for issuance under the plans at December 31, 2007, 22.0 million were outstanding and 6.3 million were available for future grants.

99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

17. INCOME TAXES

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, city, and foreign jurisdictions. Federal income tax audits have been resolved through 2003. Various state and other jurisdictions remain open to examination for tax years 2000 and forward.

As of December 31, 2007, there were no unrecognized tax benefits. Huntington does not anticipate the total amount of unrecognized tax benefits to significantly change within the next 12 months.

The Company recognizes interest and penalties on income tax assessments or income tax refunds in the financial statements as a component of its provision for income taxes. There were no amounts recognized for interest and penalties for the years ended December 31, 2007, 2006, and 2005 and no amounts accrued at December 31, 2007 and 2006.

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

	At December 31,
(in thousands)	2007			2006			2005
Current tax (benefit) provision
Federal	$	135,196		$	340,665		$	163,383
State		288			222			210
Total current tax provision		135,484			340,887			163,593
Deferred tax (benefit) provision
Federal		(188,518	)		(288,475	)		(32,681	)
State		508			428			571
Total deferred tax benefit		(188,010	)		(288,047	)		(32,110	)
(Benefit) provision for income taxes	$	(52,526	)	$	52,840		$	131,483

Tax benefit associated with securities transactions included in the above amounts were $10.4 million in 2007, $25.6 million in 2006, and $2.8 million in 2005.

The following is a reconcilement of provision for income taxes:

	2007			2006			2005
(in thousands)	Amount			Amount			Amount
Provision for income taxes computed at the statutory rate	$	7,925		$	179,921		$	190,251
Increases (decreases):
Tax-exempt interest income		(13,161	)		(10,449	)		(8,741	)
Tax-exempt bank owned life insurance income		(17,449	)		(15,321	)		(14,257	)
Asset securitization activities		(18,627	)		(10,157	)		(6,651	)
Federal tax loss carryback		—			(33,086	)		(28,705	)
General business credits		(8,884	)		(7,130	)		(6,878	)
Repatriation of foreign earnings		—			—			5,741
Resolution of federal income tax audit		—			(52,604	)		—
Other, net		(2,330	)		1,666			723
(Benefit) provision for income taxes	$	(52,526	)	$	52,840		$	131,483

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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

	At December 31,
(in thousands)	2007		2006
Deferred tax assets:
Allowances for credit losses	$	170,231	$	132,085
Loss and other carry-forwards		36,500		37,872
Fair value adjustments		33,238		40,971
Partnerships investments		22,257		5,327
Operating assets		30,286		21,291
Accrued expense/prepaid		41,446		30,995
Other		51,239		29,628
Total deferred tax assets		385,197		298,169
Deferred tax liabilities:
Lease financing		413,227		547,488
Pension and other employee benefits		21,154		34,133
Purchase accounting adjustments		27,913		13,978
Mortgage servicing rights		38,732		32,123
Loan origination costs		16,793		19,497
Other		56,256		57,556
Total deferred tax liability		574,075		704,775
Net deferred tax liability before valuation allowance		188,878		406,606
Valuation allowance		35,852		37,315
Net deferred tax liability	$	224,730	$	443,921

At December 31, 2007, Huntington’s deferred tax asset related to loss and other carry-forwards was $36.5 million. This was comprised of a net operating loss carry-forward of $0.1 million for U.S. federal tax purposes, which will begin expiring in 2023, an alternative minimum tax credit carry-forward of $0.5 million, and a capital loss carry-forward of $35.9 million, which will expire in 2010. A valuation allowance in the amount of $35.9 million has been established for the capital loss carry-forward because management believes it is more likely than not that realization will not occur. The valuation allowance on this asset decreased $1.4 million from 2006 to 2007 as a result of the unexpected realization of capital gains. 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, 2007 or 2006 relating to these carry-forwards.

At December 31, 2007 and 2006, federal income taxes had not been provided on $90.1 million and $30.8 million of undistributed earnings of foreign subsidiaries that have been reinvested for an indefinite period of time. If the earnings had been distributed, an additional $20.4 million and $11.1 million of tax expense would have resulted in 2007 and 2006, respectively.

18. BENEFIT PLANS

Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory defined benefit pension plan covering substantially all employees. The Plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code. There was no minimum required contribution to the Plan in 2007.

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.

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The following table shows the weighted-average assumptions used to determine the benefit obligation at December 31, 2007 and 2006, and the net periodic benefit cost for the years then ended. Huntington selected September 30, 2007 as the measurement date for all calculations and contracted an actuary to provide measurement services.

							Post-Retirement
	Pension Benefits						Benefits
	2007			2006			2007			2006
Weighted-average assumptions used to determine benefit obligations at December 31
Discount rate		6.30	%		5.74	%		6.30	%		5.74	%
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		5.97	%		5.43	%		5.97	%		5.43	%
Expected return on plan assets		8.00			8.00			N/A			N/A
Rate of compensation increase		5.00			5.00			N/A			N/A

N/A, Not Applicable

The expected long-term rate of return on plan assets is an assumption reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The expected long-term rate of return is established at the beginning of the plan year based upon historical returns and projected returns on the underlying mix of invested assets.

The 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)	2007			2006			2007			2006
Projected benefit obligation at beginning of measurement year (September 30)	$	425,704		$	418,091		$	48,221		$	43,616
Changes due to:
Service cost		19,087			17,262			1,608			1,302
Interest cost		24,408			22,157			2,989			2,332
Benefits paid		(7,823	)		(7,491	)		(3,242	)		(3,540	)
Settlements		(12,080	)		(11,523	)		—			—
Plan amendments		2,295			—			15,685			1,700
Actuarial assumptions and gains and losses		(23,763	)		(12,792	)		(6,253	)		2,811
Total changes		2,124			7,613			10,787			4,605
Projected benefit obligation at end of measurement year (September 30)	$	427,828		$	425,704		$	59,008		$	48,221

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, 2007, Plan assets were invested 75% in equity investments and 25% in bonds, with an average duration of 3.8 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.

Changes to certain actuarial assumptions, including a higher discount rate, decreased the pension benefit obligation at September 30, 2007 by $23.8 million.

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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)	2007			2006
Fair value of plan assets at beginning of measurement year (September 30)	$	481,015		$	440,787
Changes due to:
Actual return on plan assets		56,981			30,232
Employer contributions		—			29,800
Settlements		(13,280	)		(12,313	)
Benefits paid		(7,823	)		(7,491	)
Total changes		35,878			40,228
Fair value of plan assets at end of measurement year (September 30)	$	516,893		$	481,015

Huntington’s accumulated benefit obligation under the Plan was $387 million and $384 million at September 30, 2007 and 2006, 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, 2007:

	Pension Benefits									Post-Retirement Benefits
(in thousands)	2007			2006			2005			2007			2006			2005
Service cost	$	19,087		$	17,552		$	14,186		$	1,608		$	1,302		$	1,378
Interest cost		24,408			22,157			19,016			2,989			2,332			2,903
Expected return on plan assets		(37,056	)		(33,577	)		(25,979	)		—			—			—
Amortization of transition asset		4			(1	)		(4	)		1,104			1,104			1,104
Amortization of prior service cost		1			1			1			379			489			379
Amortization of gain		—			—			—			(368	)		(722	)		(126	)
Settlements		2,218			3,565			3,642			—			—			—
Recognized net actuarial loss		11,076			17,509			10,689			—			—			—
Benefit cost	$	19,738		$	27,206		$	21,551		$	5,712		$	4,505		$	5,638

Included in service costs are $0.4 million, $0.4 million and $0.3 million of plan expenses that were recognized in the three years ended December 31, 2007, 2006 and 2005. It is Huntington’s policy to recognize settlement gains and losses as incurred. Management expects net periodic pension cost to approximate $16.2 million and net periodic post-retirement benefits cost to approximate $5.7 million for 2008.

The estimated transition asset, prior service cost and net gain for the plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $4.7 million, $0.6 million and ($1.1 million), respectively.

Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Huntington has registered for the Medicare subsidy and a resulting $15.5 million reduction in the post-retirement obligation is being recognized over a 10-year period beginning October 1, 2005.

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

At September 30, 2007 and 2006, 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
	2007					2006
(in thousands)	Balance		%			Balance		%
Huntington funds — money market	$	65		—	%	$	820		—	%
Huntington funds — equity funds		375,883		73			331,022		69
Huntington funds — fixed income funds		129,867		25			133,641		28
Huntington common stock		11,078		2			15,532		3
Fair value of plan assets (September 30)	$	516,893		100	%	$	481,015		100	%

The number of shares of Huntington common stock held by the Plan was 642,364 at December 31, 2007 and 2006. 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 2007 and 2006 were $52.2 million and $33.4 million, respectively.

At December 31, 2007, the following table shows when benefit payments, which include expected future service, as appropriate, were expected to be paid:

(in thousands of dollars)	Pension Benefits		Post-Retirement Benefits
2008	$	22,907	$	5,351
2009		24,460		5,526
2010		26,695		5,711
2011		30,201		5,879
2012		33,418		5,953
2013 through 2017		193,426		29,713

There is no expected minimum contribution for 2008 to the Plan. However, Huntington may choose to make a contribution to the Plan up to the maximum deductible limit in the 2008 plan year. Expected contributions for 2008 to the post-retirement benefit plan are $4.6 million.

The assumed health-care cost trend rate has an effect on the amounts reported. A one percentage point increase would decrease service and interest costs and the post-retirement benefit obligation by less than $0.1 million and $0.6 million, respectively. A one-percentage point decrease would increase service and interest costs and the post-retirement benefit obligation by less than $0.1 million and $0.5 million, respectively. The 2008 health-care cost trend rate was projected to be 9.2% for pre-65 participants and 10.0% for post-65 participants compared with an estimate of 9.6% for pre-65 participants and 9.7% for post-65 participants in 2006. These rates are assumed to decrease gradually until they reach 5.0% for both pre-65 participants and post-65 participants in the year 2019 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, 2007 and 2006, Huntington has an accrued pension liability of $49.3 million and $27.9 million , respectively associated with these plans. Pension expense for the plans was $2.5 million, $2.6 million, and $2.3 million in 2007, 2006, and 2005, 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 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.

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The following table presents the amounts recognized in the consolidated balance sheets at December 31, 2007 and 2006 for all of Huntington defined benefit plans.:

(in thousands)	2007		2006
Accrued income and other assets	$	89,246	$	55,311
Accrued expenses and other liabilities		85,228		75,230

The following tables present the amounts recognized in accumulated other comprehensive loss (net of tax) as of December 31, 2007 and 2006 and the changes in accumulated other comprehensive income for the year ended December 31, 2007.

(in thousands)	2007			2006
Net actuarial loss	$	(36,301	)	$	(78,209	)
Prior service cost		(4,914	)		(3,808	)
Transition liability		(2,938	)		(4,311	)
Defined benefit pension plans	$	(44,153	)	$	(86,328	)

				Tax Expense
(in thousands)	Pre-tax			(benefit)			Net of tax
Balance, beginning of year		(132,813	)		46,485			(86,328	)
Net actuarial (loss) gain:
Amounts arising during the year		53,312			(18,659	)		34,653
Amortization included in net periodic benefit costs		12,169			(4,260	)		7,909
Prior service cost:
Amounts arising during the year		(2,318	)		811			(1,507	)
Amortization included in net periodic benefit costs		615			(215	)		400
Transition obligation:
Amounts arising during the year		—			—			—
Amortization included in net periodic benefit costs		1,107			(387	)		720
Balance, end of year		(67,928	)		23,775			(44,153	)

Huntington has a defined contribution plan that is available to eligible employees. Huntington matches participant contributions, up to the first 3% of base pay contributed to the plan. Half of the employee contribution is matched on the 4th and 5th percent of base pay contributed to the plan. The cost of providing this plan was $12.9 million in 2007, $10.3 million in 2006, and $9.6 million in 2005. The number of shares of Huntington common stock held by this plan was 6,591,876 at December 31, 2007, and 6,708,731 at December 31, 2006. The market value of these shares was $97.3 million and $159.3 million at the same respective dates. Dividends received by the plan were $27.9 million during 2007 and $20.3 million during 2006.

19. 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:

	2007						2006
	Carrying						Carrying
(in thousands)	Amount			Fair Value			Amount			Fair Value
Financial Assets:
Cash and short-term assets	$	2,349,336		$	2,349,336		$	1,594,915		$	1,594,915
Trading account securities		1,032,745			1,032,745			36,056			36,056
Loans held for sale		494,379			494,460			270,422			270,422
Investment securities		4,500,171			4,500,171			4,362,924			4,362,924
Net loans and direct financing leases		39,475,896			40,158,604			25,811,357			25,945,357
Derivatives		101,893			101,893			44,793			44,793
Financial Liabilities:
Deposits		(37,742,921	)		(36,295,978	)		(25,047,770	)		(23,754,770	)
Short-term borrowings		(2,843,638	)		(2,776,882	)		(1,676,189	)		(1,676,189	)
Federal Home Loan Bank advances		(3,083,555	)		(3,084,590	)		(996,821	)		(996,821	)
Other long term debt		(1,937,078	)		(1,956,342	)		(2,229,140	)		(2,229,140	)
Subordinated notes		(1,934,276	)		(1,953,570	)		(1,286,657	)		(1,351,657	)
Derivatives		(79,883	)		(79,883	)		(27,041	)		(27,041	)

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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 — generally based on collateral value and observable market prices of similar instruments. If market prices are not available, fair value is determined using internally developed models based on the estimated cash flows, adjusted for credit risk. The credit risk adjustment is discounted using a rate that is appropriate for each maturity and incorporates the effects of interest rate changes.

–  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 securities. Retained interests in securitized assets are valued using a discounted cash flow analysis. The carrying amount and fair value of securities exclude the fair value of asset/liability management interest rate contracts designated as hedges of securities available for sale.

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

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

–  Debt — fixed-rate, long-term debt is based upon quoted market prices or, in the absence of quoted market prices, discounted cash flows using rates for similar debt with the same maturities. The carrying amount of variable-rate obligations approximates fair value and do not reflect the impact of Huntington’s own credit risk.

20. 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, 2007, identified by the underlying interest rate-sensitive instruments:

	Fair Value		Cash Flow
(in thousands )	Hedges		Hedges		Total
Instruments associated with:
Deposits	$	560,000	$	315,000	$	875,000
Federal Home Loan Bank advances		—		525,000		525,000
Subordinated notes		750,000		—		750,000
Other long-term debt		50,000		—		50,000
Total notional value at December 31, 2007	$	1,360,000	$	840,000	$	2,200,000

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

The following table presents additional information about the interest rate swaps used in Huntington’s Asset and Liability Management activities at December 31, 2007:

			Average				Weighted-Average Rate
	Notional		Maturity	Fair
(in thousands )	Value		(years)	Value			Receive			Pay
Liability conversion swaps
Receive fixed — generic	$	820,000	8.5	$	16,881			5.28	%		5.24	%
Receive fixed — callable		540,000	5.8		(4,604	)		4.80			4.91
Pay fixed — generic		840,000	1.5		(9,050	)		5.14			4.98
Total liability conversion swaps	$	2,200,000	5.2	$	3,227			5.11	%		5.06	%

Interest rate caps used in Huntington’s Asset and Liability Management activities at December 31, 2007, are shown in the table below:

			Average
	Notional		Maturity	Fair		Weighted-Average
(in thousands )	Value		(years)	Value		Strike Rate
Interest rate caps — purchased	$	500,000	1.1	$	57		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 ($3.0 million) in 2007, ($3.1 million) in 2006 and an increase of $23.6 million in 2005.

The amounts recognized in connection with the ineffective portion of Huntington’s fair value hedging in 2007 was ($1.1 million), and in 2006 was $1.4 million. The amounts recognized in 2005 were insignificant. During 2007, 2006, and 2005, 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 2007, 2006, and 2005 for derivatives designated as either fair value or cash flow hedges.

At December 31, 2006, the fair value of the swap portfolio used for asset and liability management was a liability of $9.6 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, 2007 and 2006, aggregate credit risk associated with these derivatives, net of collateral that has been pledged by the counterparty, was $31.4 million and $42.6 million, respectively. The credit risk associated with interest rate swaps is calculated after considering master netting agreements.

During 2006, Huntington terminated certain interest rate swaps used to hedge the future expected cash flows of certain FHLB advances and deferred these gains in accumulated other comprehensive income. The deferred swap gains were being amortized into interest expense over the remaining terms of the outstanding advances. During the second quarter of 2007, Huntington prepaid the FHLB advances, and recognized a gain of $4.1 million, which represented the remaining unamortized portion of the terminated swap gains.

During the 2007 third quarter, Huntington recognized a gain of $0.4 million on the remaining portion of unamortized interest rate swaps used to hedge the future expected cash flows relating to certain trust preferred debt that was redeemed during the quarter.

A total of $4.4 million of the unrealized net losses on cash flow hedges is expected to be recognized in 2008.

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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)	2007			2006
Derivative assets:
Interest rate lock agreements	$	753		$	236
Forward trades and options		260			1,176
Total derivative assets		1,013			1,412
Derivative liabilities:
Interest rate lock agreements		(800	)		(838	)
Forward trades and options		(4,262	)		(699	)
Total derivative liabilities		(5,062	)		(1,537	)
Net derivative liability	$	(4,049	)	$	(125	)

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, 2007, was $1.0 billion. The total notional amount corresponds to trading assets with a fair value of $7.0 million and trading liabilities with a fair value of $4.3 million. Total gains and losses for the three years ended December 31, 2007, 2006 and 2005 were ($1.7 million), $1.6 million, and ($2.5 million), respectively and were also included in mortgage banking income.

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 $17.8 million in 2007, $10.8 million in 2006, and $8.3 million in 2005. The total notional value of derivative financial instruments used by Huntington on behalf of customers, including offsetting derivatives was $6.4 billion at the end of 2007 and $4.6 billion at the end of the prior year. Huntington’s credit risk from interest rate swaps used for trading purposes was $116.0 million and $40.0 million at the same dates.

In connection with securitization activities, Huntington purchased interest rate caps with a notional value totaling $1.4 billion. These purchased caps were assigned to the securitization trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.4 billion outside the securitization structure. Both the purchased and sold caps are marked to market through income.

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

21. 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)	2007		2006
Contract amount represents credit risk
Commitments to extend credit
Commercial	$	6,756	$	4,416
Consumer		4,680		3,374
Commercial real estate		2,565		1,645
Standby letters of credit		1,549		1,156

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, 2007, approximately 38% 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 $4.6 million and $4.3 million at December 31, 2007, and 2006, respectively.

Commitments to Sell Loans

Huntington enters into forward contracts relating to its mortgage banking business. At December 31, 2007 and 2006, Huntington had commitments to sell residential real estate loans of $555.9 million and $319.9 million, respectively. These contracts mature in less than one year.

Litigation

Between December 19, 2007 and February 1, 2008, two putative class actions were filed in the United States District Court for the Southern District of Ohio, Eastern Division, against the Company and certain of its current or former officers and directors purportedly on behalf of purchasers of the Company’s securities during the periods July 20, 2007 to November 16, 2007 or July 20, 2007 to January 10, 2008. These complaints seek to allege that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated there under, and Section 20(a) of the Exchange Act by issuing a series of allegedly false and/or misleading statements concerning the Company’s financial results, prospects, and condition, relating, in particular, to the Company’s transactions with Franklin Credit Management (“Franklin”). It is expected that both cases will be consolidated into a single action. At this early stage of these lawsuits, it is not possible for management to assess the probability of an adverse outcome, or reasonably estimate the amount of any potential loss.

On January 16, 2008, a shareholder derivative action was filed in the Court of Common Pleas of Delaware County, Ohio, against certain of the Company’s current or former officers and directors seeking to allege breach of fiduciary duty, waste of corporate assets, and unjust enrichment, all in connection with the Company’s acquisition of Sky Financial Group, Inc., certain transactions between the Company and Franklin Credit Management, and the financial disclosures relating to such transactions. The Company is named as a nominal defendant in this action. At this early stage of the lawsuit, it is not possible for management to assess the probability of an adverse outcome, or reasonably estimate the amount of any potential loss.

On February 20, 2008, a putative class action lawsuit was filed in the United States District Court for the Southern District of Ohio against the Company, the Huntington Bancshares Incorporated Pension Review Committee, the Huntington Investment and Tax Savings Plan (the Plan) Administrative Committee, and certain of the Company’s officers and directors purportedly on behalf of participants in or beneficiaries of the Plan between July 20, 2007 and the present. The complaint seeks to allege breaches of

109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

fiduciary duties in violation of the Employee Retirement Income Security Act (ERISA) relating to the Company’s stock being offered as an investment alternative for participants in the Plan. The complaint seeks money damages and equitable relief. At this early stage of this lawsuit, it is not possible for management to assess the probability of a material adverse outcome, or reasonably estimate the amount of any potential loss.

It is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations for a particular period. However, although no assurance can be given, based on information currently available, consultation with counsel, and available insurance coverage, management believes that the eventual outcome of these claims against the Company and its subsidiaries will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position or results of operations.

Commitments Under Capital and Operating Lease Obligations

At December 31, 2007, Huntington and its subsidiaries were obligated under noncancelable leases for land, buildings, and equipment. Many of these leases contain renewal options and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specified prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in the consumer or other price indices.

The future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2007, were $46.6 million in 2008, $43.6 million in 2009, $40.2 million in 2010, $37.7 million in 2011, $34.6 million in 2012, and $160.2 million thereafter. At December 31, 2007, total minimum lease payments have not been reduced by minimum sublease rentals of $52.8 million due in the future under noncancelable subleases. At December 31, 2007, the future minimum sublease rental payments that Huntington expects to receive are $15.9 million in 2008; $14.1 million in 2009; $11.6 million in 2010; $8.5 million in 2011; $1.0 million in 2012; and $1.7 million thereafter. The rental expense for all operating leases was $51.3 million, $34.8 million, and $34.0 million for 2007, 2006, and 2005, respectively. Huntington had no material obligations under capital leases.

22. OTHER REGULATORY MATTERS

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, 2007, 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)	2007			2006			2007			2006			2007			2006
Huntington Bancshares Incorporated
Amount	$	3,460		$	2,784		$	4,995		$	3,986		$	3,460		$	2,784
Ratio		7.51	%		8.93	%		10.85	%		12.79	%		6.77	%		8.00	%
The Huntington National Bank
Amount	$	3,037		$	1,990		$	4,650		$	3,214		$	3,037		$	1,990
Ratio		6.64	%		6.47	%		10.17	%		10.44	%		5.99	%		5.81	%

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

110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

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 2007 and 2006, 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 2007 and 2006, the average balance of these deposits were $39.7 million and $43.7 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, 2007, the Bank could lend $465.0 million to a single affiliate, subject to the qualifying collateral requirements defined in the regulations. The Bank has committed to a plan to reduce its exposure to Franklin to 15% of its total risk-based capital by September 30, 2008. Management anticipates that it can achieve this plan through a combination of expected repayments of principal, the transfer of these balances to a subsidiary of the holding company, or through the sale of the loans to third parties.

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, 2007, the bank could not have declared and paid additional dividends to the parent company without regulatory approval.

23. PARENT COMPANY FINANCIAL STATEMENTS

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

Balance Sheets	December 31,
(in thousands)	2007		2006
ASSETS
Cash and cash equivalents	$	153,489	$	412,724
Due from The Huntington National Bank		144,526		31,481
Due from non-bank subsidiaries		332,517		277,245
Investment in The Huntington National Bank		5,573,495		2,035,175
Investment in non-bank subsidiaries		878,409		725,875
Accrued interest receivable and other assets		165,416		45,592
Total assets	$	7,247,852	$	3,528,092
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term borrowings	$	2,578	$	3,252
Long-term borrowings		902,169		329,898
Dividends payable, accrued expenses, and other liabilities		393,965		180,616
Total liabilities		1,298,712		513,766
Shareholders’ equity		5,949,140		3,014,326
Total liabilities and shareholders’ equity(1)	$	7,247,852	$	3,528,092

(1) See page 76 for Huntington’s Consolidated Statements of Changes in Shareholders’ Equity.

111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Statements of Income	Year Ended December 31,
(in thousands)	2007			2006			2005
Income
Dividends from
The Huntington National Bank	$	239,000		$	575,000		$	180,000
Non-bank subsidiaries		41,784			47,476			3,800
Interest from
The Huntington National Bank		18,622			13,167			35,253
Non-bank subsidiaries		12,180			10,880			8,770
Management fees from subsidiaries		3,882			9,539			30,539
Other		1,180			23			406
Total income		316,648			656,085			258,768
Expense
Personnel costs		24,818			31,427			25,060
Interest on borrowings		41,189			17,856			22,772
Other		14,667			20,040			24,741
Total expense		80,674			69,323			72,573
Income before income taxes and equity in undistributed net income of subsidiaries		235,974			586,762			186,195
Income taxes		(39,509	)		(20,922	)		(2,499	)
Income before equity in undistributed net income of subsidiaries		275,483			607,684			188,694
Increase (decrease) in undistributed net income of:
The Huntington National Bank		(176,083	)		(142,672	)		208,061
Non-bank subsidiaries		(24,231	)		(3,791	)		15,336
Net income	$	75,169		$	461,221		$	412,091

112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Statements of Cash Flows	Year Ended December 31,
(in thousands)	2007			2006			2005
Operating activities
Net income	$	75,169		$	461,221		$	412,091
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in equity in undistributed net income of subsidiaries		200,315			146,463			(223,397	)
Depreciation and amortization		4,367			2,150			2,674
Other, net		(51,283	)		170,367			(49,557	)
Net cash provided by operating activities		228,568			780,201			141,811
Investing activities
Net cash paid for acquisition		(313,311	)		—			—
Repayments from subsidiaries		333,469			370,049			154,152
Advances to subsidiaries		(442,418	)		(397,216	)		(206,765	)
Proceeds from sale of securities available for sale		—			—			—
Net cash provided by (used in) investing activities		(422,260	)		(27,167	)		(52,613	)
Financing activities
Proceeds from issuance of long-term borrowings		250,010			250,200			—
Payment of borrowings		(42,577	)		(249,515	)		(99,437	)
Dividends paid on common stock		(289,758	)		(231,117	)		(200,628	)
Acquisition of treasury stock		—			(378,835	)		(231,656	)
Proceeds from issuance of common stock		16,782			41,842			39,194
Net cash used for financing activities		(65,543	)		(567,425	)		(492,527	)
Change in cash and cash equivalents		(259,235	)		185,609			(403,329	)
Cash and cash equivalents at beginning of year		412,724			227,115			630,444
Cash and cash equivalents at end of year	$	153,489		$	412,724		$	227,115
Supplemental disclosure:
Interest paid	$	41,189		$	17,856		$	22,754

24. 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.

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

Regional Banking: This segment provides traditional banking products and services to consumer, small business and commercial customers located in its 13 operating regions within the six states of Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. It provides these services through a banking network of over 600 branches, and over 1,400 ATMs, along with Internet and telephone banking channels. It also provides certain services outside of these six 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. At December 31, 2007, Retail Banking accounted for 51% and 80% of total Regional Banking loans and deposits, respectively. Commercial Banking serves middle market and large 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.

113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Dealer Sales: This segment provides a variety of banking products and services to more than 3,600 automotive dealerships within the Company’s primary banking markets, as well as in Arizona, Florida, Georgia, Nevada, New Jersey, New York, North Carolina, 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 leases, finances the dealerships’ new and used vehicle inventories, land, buildings, and other real estate owned by the dealerships, 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, and private banking products and services. PFCMG 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. Net interest income/(expense) 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, as well as any investment securities and trading assets gains or losses. The non-interest expense includes certain corporate administrative, merger costs, 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.

114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

Listed below is certain operating basis financial information reconciled to Huntington’s 2007, 2006, and 2005 reported results by line of business:

	Regional			Dealer						Treasury/			Huntington
INCOME STATEMENTS (in thousands)	Banking			Sales			PFCMG			Other			Consolidated
2007
Net interest income	$	1,116,920		$	133,139		$	84,442		$	(32,989	)	$	1,301,512
Provision for credit losses		(602,483	)		(28,879	)		(12,266	)		—			(643,628	)
Non-interest income		460,535			41,721			157,708			16,639			676,603
Non-interest expense		(816,374	)		(80,807	)		(169,980	)		(244,683	)		(1,311,844	)
Income taxes		(55,509	)		(22,812	)		(20,967	)		151,814			52,526
Net income	$	103,089		$	42,362		$	38,937		$	(109,219	)	$	75,169
2006
Net interest income	$	883,177		$	134,927		$	73,097		$	(72,024	)	$	1,019,177
Provision for credit losses		(45,296	)		(14,206	)		(5,689	)		—			(65,191	)
Non-interest income		340,005			83,599			157,240			(19,775	)		561,069
Non-interest expense		(653,641	)		(112,307	)		(133,297	)		(101,749	)		(1,000,994	)
Income taxes		(183,486	)		(32,204	)		(31,974	)		194,824			(52,840	)
Net income	$	340,759		$	59,809		$	59,377		$	1,276		$	461,221
2005
Net interest income	$	779,706		$	145,523		$	72,767		$	(35,585	)	$	962,411
Provision for credit losses		(51,255	)		(25,922	)		(4,122	)		—			(81,299	)
Non-interest income		305,041			169,675			132,114			25,452			632,282
Non-interest expense		(590,598	)		(187,039	)		(122,580	)		(69,603	)		(969,820	)
Income taxes		(155,014	)		(35,783	)		(27,363	)		86,677			(131,483	)
Net income	$	287,880		$	66,454		$	50,816		$	6,941		$	412,091

	Assets				Deposits
	At December 31,				At December 31,
BALANCE SHEETS (in millions)	2007		2006		2007		2006
Regional Banking	$	34,360	$	21,055	$	32,626	$	20,122
Dealer Sales		5,823		5,169		58		59
PFCMG		2,963		2,097		1,626		1,168
Treasury/Other		11,551		7,008		3,433		3,699
Total	$	54,697	$	35,329	$	37,743	$	25,048

115

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED

25. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations, for the years ended December 31, 2007 and 2006:

	2007
(in thousands, except per share data)	Fourth			Third			Second			First
Interest income	$	814,398		$	851,155		$	542,461		$	534,949
Interest expense		(431,465	)		(441,522	)		(289,070	)		(279,394	)
Net interest income		382,933			409,633			253,391			255,555
Provision for credit losses		(512,082	)		(42,007	)		(60,133	)		(29,406	)
Non-interest income		170,557			204,674			156,193			145,177
Non-interest expense		(439,552	)		(385,563	)		(244,655	)		(242,072	)
Income (loss) before income taxes		(398,144	)		186,737			104,796			129,254
(Provision) benefit for income taxes		158,864			(48,535	)		(24,275	)		(33,528	)
Net income (loss)	$	(239,280	)	$	138,202		$	80,521		$	95,726
Net income per common share — Basic	$	(0.65	)	$	0.38		$	0.34		$	0.41
Net income per common share — Diluted		(0.65	)		0.38			0.34			0.40

	2006
(in thousands, 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

116