UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY PERIOD ENDED September 30, 2013

Commission File Number 000-33243

Huntington Preferred Capital, Inc.

Ohio

31-1356967

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

41 South High Street, Columbus, Ohio 43287

Registrant's telephone number (614) 480-8300

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

x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes ¨ No

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 ¨	Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

As of November 12, 2013, 14,000,000 shares of common stock without par value were outstanding, all of which were held by affiliates of the registrant.

HUNTINGTON PREFERRED CAPITAL, INC.

INDEX

PART 1.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Balance Sheets at September 30, 2013 and December 31, 2012	4

	Condensed Statements of Comprehensive Income for the three-months and nine-months ended September 30, 2013 and 2012	5

	Condensed Statements of Changes in Shareholders' Equity for the nine-months ended September 30, 2013 and 2012	6

	Condensed Statements of Cash Flows for the nine-months ended September 30, 2013 and 2012	7

	Notes to Unaudited Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION

Item 6.	Exhibits	43

Signatures		44

Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:

ACL		Allowance for Credit Losses
Agreements		Third Amended and Restated Loan Participation Agreement, dated May 12, 2005, between the Bank and HPCI and the Third Amended and Restated Loan Subparticipation Agreement, dated May 12, 2005, between Holdings and HPCI
ALPL		Allowance for Loan Participation Losses
ARM		Adjustable Rate Mortgage
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
AULPC		Allowance for Unfunded Loan Participation Commitments
Bank		The Huntington National Bank
CFPB		Consumer Financial Protection Bureau
Codification		FASB Accounting Standards Codification
the Company		(see HPCI)
CRE		Commercial Real Estate
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act
Exchange Act		Securities Exchange Act of 1934, as amended
EVE		Economic Value of Equity
Fannie Mae		(see FNMA)
FFO		Funds from Operations
FHFA		Federal Housing Finance Agency
FHLB		Federal Home Loan Bank
FHLMC		Federal Home Loan Mortgage Corporation
FICO		Fair Isaac Corporation
Form 10-K		HPCI's Annual Report on Form 10-K for the year ended December 31, 2012
FNMA		Federal National Mortgage Association
FRB		Federal Reserve Bank
Freddie Mac		(see FHLMC)
GAAP		Generally Accepted Accounting Principles in the United States of America
Holdings		Huntington Preferred Capital Holdings, Inc.
HPCI		Huntington Preferred Capital, Inc.
HPCII		Huntington Preferred Capital II, Inc.
Huntington		Huntington Bancshares Incorporated
IRC		Internal Revenue Code
IRS		Internal Revenue Service
LGD		Loss Given Default
LIBOR		London Interbank Offered Rate
LTV		Loan to Value
MD&A		Management's Discussion and Analysis of Financial Condition and Results of Operations
NCO		Net Charge-off
NPAs		Nonperforming Assets
N.R.		Not relevant. Denominator of calculation is a gain in the current period compared with a loss in the prior period, or vice-versa.
OCC		Office of the Comptroller of the Currency
OLEM		Other Loans Especially Mentioned
PD		Probability of Default
Problem loans		Includes nonperforming assets (Table 6), accruing loan participation interests past due 90 days or more (aging
		analysis section of Footnote 3), Criticized commercial real estate loan participation interests (credit quality
		indicators section of Footnote 3), and troubled debt restructured loan participation interests (TDR loan
		participation interests section of Footnote 3).
RBC		Risk-Based Capital
REIT		Real Estate Investment Trust
SAD		Special Assets Division
SEC		Securities and Exchange Commission
TDR		Troubled Debt Restructuring
UCS		Uniform Classification System

Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Huntington Preferred Capital, Inc.

Condensed Balance Sheets

(Unaudited)

	September 30,			December 31,
(dollar amounts in thousands, except share data)	2013			2012
Assets:
Cash and interest-bearing deposits with The Huntington National Bank	$	381,891		$	719,222
Loan participation interests:
Commercial real estate		2,832,018			2,875,870
Consumer and residential real estate		371,044			439,073
Total loan participation interests		3,203,062			3,314,943
Allowance for loan participation losses		(41,412	)		(59,451	)
Net loan participation interests		3,161,650			3,255,492
Accrued income and other assets		7,912			8,671
Total assets	$	3,551,453		$	3,983,385

Liabilities and shareholders' equity:
Liabilities:
Allowance for unfunded loan participation commitments	$	1,258		$	1,057
Dividends and distributions payable		940			500,000
Due to The Huntington National Bank		28,118			62,942
Other liabilities		695			870
Total liabilities		31,011			564,869

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 (see Notes 4, 6, and 8 regarding redemption)		50,000			50,000
Preferred securities, Class E, variable-rate noncumulative and conditionally exchangeable; $250 par and liquidation value; 1,400,000 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		2,617,516			2,617,516
Retained earnings		101,926			—
Total shareholders' equity		3,520,442			3,418,516
Total liabilities and shareholders' equity	$	3,551,453		$	3,983,385

See notes to unaudited condensed financial statements.

Huntington Preferred Capital, Inc.

Condensed Statements of Comprehensive Income

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollar amounts in thousands)	2013			2012		2013			2012
Interest and fee income:
Interest on loan participation interests:
Commercial real estate	$	24,281		$	27,517	$	73,072		$	83,975
Consumer and residential real estate		5,464			5,691		17,153			18,487
Total loan participation interest income		29,745			33,208		90,225			102,462
Fees from loan participation interests		162			196		629			650
Interest on deposits with The Huntington National Bank		260			327		595			761
Total interest and fee income		30,167			33,731		91,449			103,873

Provision (reduction in allowance) for credit losses		(15,188	)		5,117		(23,984	)		(22,266	)

Interest income after provision (reduction in allowance) for credit losses		45,355			28,614		115,433			126,139

Noninterest income:
Rental income		18			18		54			54
Collateral fees		271			291		839			916
Total noninterest income		289			309		893			970

Noninterest expense:
Servicing costs		1,373			1,528		4,257			4,752
Franchise tax		192			555		584			555
Other		195			240		608			588
Total noninterest expense		1,760			2,323		5,449			5,895

Income before provision for income taxes		43,884			26,600		110,877			121,214
Provision for income taxes		—			182		40			182
Net income	$	43,884		$	26,418	$	110,837		$	121,032

Comprehensive income	$	43,884		$	26,418	$	110,837		$	121,032

Dividends declared on preferred securities		2,918			3,272		8,911			10,134

Net income applicable to common shares (1)	$	40,966		$	23,146	$	101,926		$	110,898

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

See notes to unaudited condensed financial statements.

Huntington Preferred Capital, Inc.

Condensed Statements of Changes in Shareholders' Equity

(Unaudited)

	Preferred								Preferred		Common		Retained
(dollar amounts in thousands, except number of shares)	Class A		Class B		Class C		Class E						Earnings			Total

Nine Months Ended September 30, 2012

Balance, beginning of period	$	1,000	$	400,000	$	50,000	$	350,000	$	—	$	2,810,116	$	166,822		$	3,777,938

Net income														121,032			121,032

Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(1,511	)		(1,511	)
Dividends declared on Class C preferred securities														(2,953	)		(2,953	)
Dividends declared on Class E preferred securities														(5,590	)		(5,590	)
Balance, end of period	$	1,000	$	400,000	$	50,000	$	350,000	$	—	$	2,810,116	$	277,720		$	3,888,836

Nine Months Ended September 30, 2013

Balance, beginning of period	$	1,000	$	400,000	$	50,000	$	350,000	$	—	$	2,617,516	$	—		$	3,418,516

Net income														110,837			110,837

Dividends declared on Class A preferred securities														(80	)		(80	)
Dividends declared on Class B preferred securities														(860	)		(860	)
Dividends declared on Class C preferred securities														(2,953	)		(2,953	)
Dividends declared on Class E preferred securities														(5,018	)		(5,018	)
Balance, end of period	$	1,000	$	400,000	$	50,000	$	350,000	$	—	$	2,617,516	$	101,926		$	3,520,442

Shares outstanding:
December 31, 2011		1,000		400,000		2,000,000		1,400,000		—		14,000,000
September 30, 2012		1,000		400,000		2,000,000		1,400,000		—		14,000,000
December 31, 2012		1,000		400,000		2,000,000		1,400,000		—		14,000,000
September 30, 2013		1,000		400,000		2,000,000		1,400,000		—		14,000,000

See notes to unaudited condensed financial statements.

Huntington Preferred Capital, Inc.

Condensed Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
(dollar amounts in thousands)	2013			2012
Operating activities
Net income	$	110,837		$	121,032
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (reduction in allowance) for credit losses		(23,984	)		(22,266	)
Change in due to/from The Huntington National Bank		5,397			1,503
Other, net		1,047			3,276
Net cash provided by (used for) operating activities		93,297			103,545

Investing activities
Net participation interests acquired		(954,902	)		(1,404,315	)
Sales and repayments of loans underlying participation interests		1,032,245			1,621,057
Net cash provided by (used for) investing activities		77,343			216,742

Financing activities
Dividends paid on preferred securities		(7,971	)		(6,718	)
Dividends paid on common stock		(307,400	)		—
Return of capital to common shareholders		(192,600	)		—
Net cash provided by (used for) financing activities		(507,971	)		(6,718	)

Increase (decrease) in cash and cash equivalents		(337,331	)		313,569
Cash and cash equivalents at beginning of period		719,222			228,958
Cash and cash equivalents at end of period	$	381,891		$	542,527

Supplemental information:
Dividends and distributions declared, not paid	$	940		$	3,416
Non-cash change in loan participation activity with The Huntington National Bank		40,221			2,742

See notes to unaudited condensed financial statements.

Huntington Preferred Capital, Inc.

Notes to Unaudited Condensed Financial Statements

Note 1 - Organization

HPCI was organized under Ohio law in 1992, and designated as a REIT in 1998. HPCI’s principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to its shareholders. Two related parties own HPCI’s common stock: HPCII and Holdings.

HPCII and Holdings are direct and indirect subsidiaries of 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 September 30, 2013, the Bank, on a consolidated basis with its subsidiaries, accounted for over 99% of Huntington’s consolidated total assets and year-to-date net income. Thus, for purposes of presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington to be substantially the same.

Note 2 - Basis of Presentation and New Accounting Pronouncements

The accompanying unaudited condensed financial statements of HPCI reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the financial position, the results of operations, and cash flows for the periods presented. These unaudited condensed financial statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. 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. Cash and cash equivalents used in the Condensed Statements of Cash Flows is defined as “Cash and interest-bearing deposits with The Huntington National Bank.” In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Financial Statements or disclosed in the Notes to Unaudited Condensed Financial Statements. The Notes to the Financial Statements appearing in the Form 10-K, include descriptions of significant accounting policies, as updated by the information contained in this report, and should be read in conjunction with these interim financial statements. All of HPCI’s common stock is owned by affiliates; therefore, net income per common share information is not presented.

HPCI elected to be treated as a REIT for federal income tax purposes and intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, was not subject to federal income taxes. HPCI is also included in certain of Huntington’s unitary and combined state income and franchise tax returns. On March 8, 2012, HPCI’s board of directors adopted Huntington’s Policy Statement on Intercorporate State Tax Allocation, dated January 1, 2012. As a result, beginning in 2012, Huntington’s unitary and combined state income and franchise tax provision was allocated to each member of the unitary and combined group based on the filing group’s effective tax rate. Under the intercompany state tax allocation agreement with Huntington, HPCI provides and remits state income and franchise taxes to Huntington.

ASU 2013-02— Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012

The amendments should be applied retrospectively. The amendment had no impact on HPCI’s Unaudited Condensed Financial Statements.

Note 3 – Loan Participation Interests and Allowance for Credit Losses

Loan participation interests are categorized based on the collateral underlying the loan. At September 30, 2013 and December 31, 2012, loan participation interests were comprised of the following:

	September 30,			December 31,
(dollar amounts in thousands)	2013			2012

Commercial real estate	$	2,832,018		$	2,875,870
Consumer and residential real estate		371,044			439,073

Total loan participation interests		3,203,062			3,314,943

Allowance for loan participation losses		(41,412	)		(59,451	)

Net loan participation interests	$	3,161,650		$	3,255,492

Underlying loans are generally collateralized by real estate. As shown in the table above, the Company’s primary loan participation interest portfolios are: CRE and consumer and residential real estate. Classes are generally disaggregations of a portfolio. The classes within the CRE portfolio are: retail properties, multi family, office, industrial and warehouse, and other CRE. The classes within the consumer and residential real estate portfolio are: first-lien loan participation interests and junior-lien loan participation interests.

Other than the credit risk concentration related to loan participation interests secured by real estate as described above, there were no underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries, or business activity. Loans made to borrowers in the five states of Ohio, Michigan, Indiana, Pennsylvania, and Kentucky comprised approximately 95% of the portfolio at both September 30, 2013 and December 31, 2012.

Loan Participation Interest Purchases and Sales

The following table summarizes significant portfolio purchase activity during the three-month and nine-month periods ended September 30, 2013 and 2012:

			Consumer and
	Commercial		Residential
(dollar amounts in thousands)	Real Estate		Real Estate		Total
Portfolio loan participation interests purchased during the:

Three-month period ended September 30, 2013	$	517,182	$	—	$	517,182
Three-month period ended September 30, 2012		396,204		—		396,204

Nine-month period ended September 30, 2013		946,766		—		946,766
Nine-month period ended September 30, 2012		1,351,609		—		1,351,609

There were no significant portfolio loan participation interest sales during the three-month and nine-month periods ended September 30, 2013 and 2012.

NPAs and Past Due Loan Participation Interests

Loan participation interests are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date.

Any loan participation interest in any portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt.

Loan participation interests in all classes within the CRE portfolio are placed on nonaccrual status at 90-days past due. First-lien consumer and residential real estate loan participation interests are placed on nonaccrual status at 150-days past due. Junior-lien consumer and residential real estate loan participation interests are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual. When a loan participation interest with discharged non-reaffirmed debt in a Chapter 7 bankruptcy filing is identified, and the loan participation interest is determined to be collateral dependent, the consumer and residential real estate loan participation interest is placed on nonaccrual status.

For all classes within all portfolios, when a loan participation interest is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss.

For all classes within all portfolios, cash receipts received on NPAs are applied against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. However, for secured non-reaffirmed debt in a Chapter 7 bankruptcy, payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured. For unsecured non-reaffirmed debt in a Chapter 7 bankruptcy where the carrying value has been fully charged-off, payments are recorded as loan recoveries.

Regarding all classes within the CRE portfolio, the determination of a borrower’s ability to make the required principal and interest payments is based on an examination of the borrower’s current financial statements, industry, management capabilities, and other qualitative measures. For all classes within the consumer and residential real estate portfolio, the determination of a borrower’s ability to make the required principal and interest payments is based on multiple factors, including number of days past due and, in some instances, an evaluation of the borrower’s financial condition. When, in Management’s judgment, the borrower’s ability to make required principal and interest payments resumes and collectability is no longer in doubt, the loan participation interest is returned to accrual status. For these loan participation interests that have been returned to accrual status, cash receipts are applied according to the contractual terms of the loan.

The following table presents NPAs by loan class at September 30, 2013 and December 31, 2012:

	2013		2012
(dollar amounts in thousands)	September 30,		December 31,

Commercial real estate:
Industrial and warehouse	$	1,382	$	1,652
Retail properties		1,101		4,771
Office		7,144		13,745
Multi family		126		1,109
Other commercial real estate		4,302		6,624
Total commercial real estate		14,055		27,901

Consumer and residential real estate:
Secured by first-lien		7,185		7,190
Secured by junior-lien		541		780
Total consumer and residential real estate		7,726		7,970
Total nonperforming assets	$	21,781	$	35,871

The following table presents an aging analysis of loan participation interests, including past due loan participation interests, by loan class at September 30, 2013 and December 31, 2012: (1)

	September 30, 2013
	Past Due										Total Loan		90 or more
					90 or						Participation		days past due
(dollar amounts in thousands)	30-59 days		60-89 days		more days		Total		Current		Interests		and accruing

Commercial real estate:
Industrial and warehouse	$	—	$	136	$	559	$	695	$	626,739	$	627,434	$	—
Retail properties		372		256		934		1,562		569,227		570,789		—
Office		999		—		7,144		8,143		497,495		505,638		—
Multi family		172		—		—		172		287,297		287,469		—
Other commercial real estate		570		465		4,249		5,284		835,404		840,688		—
Total commercial real estate	$	2,113	$	857	$	12,886	$	15,856	$	2,816,162	$	2,832,018	$	—

Consumer and residential real estate:
Secured by first-lien	$	1,923	$	2,182	$	6,342	$	10,447	$	293,697	$	304,144	$	1,426
Secured by junior-lien		1,086		957		1,224		3,267		63,633		66,900		590
Total consumer and residential real estate	$	3,009	$	3,139	$	7,566	$	13,714	$	357,330	$	371,044	$	2,016

Total loan participation interests	$	5,122	$	3,996	$	20,452	$	29,570	$	3,173,492	$	3,203,062	$	2,016

	December 31, 2012
	Past Due										Total Loan		90 or more
					90 or						Participation		days past due
(dollar amounts in thousands)	30-59 days		60-89 days		more days		Total		Current		Interests		and accruing

Commercial real estate:
Industrial and warehouse	$	3,177	$	83	$	1,021	$	4,281	$	672,218	$	676,499	$	—
Retail properties		24		—		4,506		4,530		571,118		575,648		—
Office		52		367		13,634		14,053		457,323		471,376		—
Multi family		424		—		975		1,399		300,819		302,218		—
Other commercial real estate		1,226		1,435		5,078		7,739		842,390		850,129		—
Total commercial real estate	$	4,903	$	1,885	$	25,214	$	32,002	$	2,843,868	$	2,875,870	$	—

Consumer and residential real estate:
Secured by first-lien	$	4,418	$	2,091	$	9,123	$	15,632	$	339,292	$	354,924	$	2,713
Secured by junior-lien		2,037		1,040		1,314		4,391		79,758		84,149		509
Total consumer and residential real estate	$	6,455	$	3,131	$	10,437	$	20,023	$	419,050	$	439,073	$	3,222

Total loan participation interests	$	11,358	$	5,016	$	35,651	$	52,025	$	3,262,918	$	3,314,943	$	3,222

(1) NPAs are included in this aging analysis based on the loan participation interest's past due status.

Allowance for Credit Losses

The ACL is comprised of the ALPL and the AULPC, and reflects Management’s judgment regarding the appropriate level necessary to absorb credit losses inherent in the loan participation interests portfolio. It is HPCI’s policy to utilize the Bank’s analysis as of the end of each reporting date to estimate the required level of the ALPL and AULPC. The determination of the ACL requires significant estimates, including the timing and amounts of expected future cash flows on impaired loan participation interests, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loan participation interests, all of which may be susceptible to change.

The appropriateness of the ACL is based on Management’s current judgments about the credit quality of the loan participation interests portfolio. These judgments consider on-going evaluations of the loan participation interests portfolio, including such factors as the differing economic risks associated with each loan participation interests category, the financial condition of specific borrowers, the level of delinquent loan participation interests, the value of any collateral and, where applicable, the existence of any guarantees or other documented support. Further, Management evaluates the impact of changes in interest rates and overall economic conditions on the ability of borrowers to meet their financial obligations when quantifying the exposure to credit losses and assessing the appropriateness of the ACL at each reporting date. In addition to general economic conditions and the other factors described above, additional factors also considered include the impact of declining residential real estate values and the diversification of commercial real estate loan participation interests. Also, the ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current performance.

ALPL is transferred to HPCI either directly or through Holdings from the Bank on loan participation interests underlying the participation interests at the time the participation interests are acquired. This transfer of ALPL is reflected as ALPL acquired, rather than HPCI recording provision for credit losses. Based on Management’s quarterly evaluation of the factors previously mentioned, the ALPL may either be increased through a provision for credit losses, net of recoveries, and charged to earnings or lowered through a reduction in allowance for credit losses, net of recoveries, and credited to earnings. Credit losses are charged against the ALPL when Management believes the loan participation interest balance, or a portion thereof, is uncollectible.

The ALPL consists of two components: (1) the transaction reserve, which includes an allocation per ASC 310-10, specific reserves related to loan participation interests considered to be impaired, and loan participation interests involved in TDRs allocated per ASC 310-40, and (2) the general reserve. The transaction reserve component includes both (1) an estimate of loss based on pools of commercial and consumer loan participation interests with similar characteristics and (2) an estimate of loss based on an impairment review of each impaired CRE loan participation interest greater than $1.0 million. For the CRE portfolio, the estimate of loss based on pools of loan participation interests with similar characteristics is made by applying a PD factor and a LGD factor to each individual loan based on a continuously updated loan grade, using a standardized loan grading system. The PD and LGD factors are determined for each loan grade using statistical models based on historical performance data. The PD factor considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio, earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s industry and future prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors are developed based on credit migration models that track historical movements of loan participation interests between loan ratings over time and a combination of long-term average loss experience of our own portfolio and external industry data using a 24-month emergence period.

In the case of more homogeneous portfolios, such as the consumer and residential real estate portfolio, the determination of the transaction reserve also incorporates PD and LGD factors, however, the estimate of loss is based on pools of loan participation interests with similar characteristics. The PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit score provides a basis of understanding the borrowers past and current payment performance, and this information is used to estimate expected losses over the subsequent 12-month period. The performance of first-lien loans ahead of junior-lien loans is available to use as part of the updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors 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, and adjustments to the allowance factors are made as required. Models utilized in the ALPL estimation process are subject to the Bank’s model validation policies.

The general reserve consists of economic reserve and risk-profile reserve components. The economic reserve component considers the potential impact of changing market and economic conditions on portfolio performance. The risk-profile component considers items unique to our structure, policies, processes, and portfolio composition, as well as qualitative measurements and assessments of the portfolios including, but not limited to, management quality, concentrations, portfolio composition, industry comparisons, and internal review functions.

During the current quarter, the Bank made enhancements to the commercial risk rating system used for assessing credit risk when determining the ALPL. The enhancements provide greater granularity in overall corporate risk ratings and incorporate a broader set of financial metrics in the determination of the PD and LGD factors. The PD and LGD factors combine to represent the transaction reserve component for a given credit exposure.

In conjunction with the enhancements to the commercial risk rating system noted above, the Bank revised the process for incorporating risk inherent in the economic and risk profile components of the general reserve. These enhancements allow the Bank to better reflect the credit exposure inherent in our portfolio, as well as overall risks in the economic environment. These changes did not have a material impact on the overall ACL.

The estimate for the AULPC is determined using the same procedures and methodologies as used for the ALPL. The loss factors used in the AULPC are the same as the loss factors used in the ALPL while also considering a historical utilization of unused commitments.

The ACL is increased through a provision for credit losses 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. There were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of the current period’s ALPL and AULPC.

The following table presents ALPL and AULPC activity by portfolio segment for the three-month and nine-month periods ended September 30, 2013 and 2012:

				Consumer and
	Commercial			Residential
	Real Estate			Real Estate			Total
(dollar amounts in thousands)
Three-month period ended September 30, 2013
ALPL balance, beginning of period	$	45,328		$	7,789		$	53,117
ALPL for loan participation interests acquired		5,462			—			5,462
Loan participation interest charge-offs		(837	)		(1,396	)		(2,233	)
Recoveries of loan participation interests previously charged-off		521			337			858
(Reduction in) provision for loan participation interest losses		(15,965	)		173			(15,792	)
ALPL balance, end of period	$	34,509		$	6,903		$	41,412
AULPC balance, beginning of period	$	654		$	—		$	654
(Reduction in) provision for unfunded loan participation commitment losses		604			—			604
AULPC balance, end of period	$	1,258		$	—		$	1,258
ACL balance, end of period	$	35,767		$	6,903		$	42,670

Nine-month period ended September 30, 2013
ALPL balance, beginning of period	$	50,415		$	9,036		$	59,451
ALPL for loan participation interests acquired		10,706			—			10,706
Loan participation interest charge-offs		(3,441	)		(4,444	)		(7,885	)
Recoveries of loan participation interests previously charged-off		2,500			825			3,325
(Reduction in) provision for loan participation interest losses		(25,671	)		1,486			(24,185	)
ALPL balance, end of period	$	34,509		$	6,903		$	41,412
AULPC balance, beginning of period	$	1,057		$	—		$	1,057
(Reduction in) provision for allowance for unfunded loan participation commitment losses		201			—			201
AULPC balance, end of period	$	1,258		$	—		$	1,258
ACL balance, end of period	$	35,767		$	6,903		$	42,670

				Consumer and
	Commercial			Residential
	Real Estate			Real Estate			Total
(dollar amounts in thousands)
Three-month period ended September 30, 2012
ALPL balance, beginning of period	$	50,667		$	10,842		$	61,509
ALPL for loan participation interests acquired		5,787			—			5,787
Loan participation interest charge-offs		(4,857	)		(6,202	)		(11,059	)
Recoveries of loan participation interests previously charged-off		859			275			1,134
(Reduction in) provision for loan participation interest losses		(318	)		5,010			4,692
ALPL balance, end of period	$	52,138		$	9,925		$	62,063
AULPC balance, beginning of period	$	897		$	—		$	897
(Reduction in) provision for allowance for unfunded loan participation commitment losses		425			—			425
AULPC balance, end of period	$	1,322		$	—		$	1,322
ACL balance, end of period	$	53,460		$	9,925		$	63,385

Nine-month period ended September 30, 2012
ALPL balance, beginning of period	$	71,555		$	12,217		$	83,772
ALPL for loan participation interests acquired		17,404			—			17,404
Loan participation interest charge-offs		(12,605	)		(10,337	)		(22,942	)
Recoveries of loan participation interests previously charged-off		5,489			893			6,382
(Reduction in) provision for loan participation interest losses		(29,705	)		7,152			(22,553	)
ALPL balance, end of period	$	52,138		$	9,925		$	62,063
AULPC balance, beginning of period	$	1,035		$	—		$	1,035
(Reduction in) provision for allowance for unfunded loan participation commitment losses		287			—			287
AULPC balance, end of period	$	1,322		$	—		$	1,322
ACL balance, end of period	$	53,460		$	9,925		$	63,385

Any loan participation interest in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings are charged-off to estimated collateral value, less anticipated selling costs.

CRE loan participation interests are either charged-off or written down to net realizable value at 90-days past due. First-lien consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral, less anticipated selling costs at 150-days past due. Junior-lien consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral, less anticipated selling costs at 120-days past due.

Credit Quality Indicators

To facilitate the monitoring of credit quality for CRE loan participation interests, and for purposes of determining an appropriate ACL level for these loan participation interests, the following categories of credit grades are utilized:

Pass = Higher quality loan participation interests that do not fit any of the other categories described below.

OLEM = The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect the Company’s position in the future. For these reasons, the loan participation interests are considered to be potential problem loan participation interests.

Substandard = Inadequately protected loan participation interests by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan participation interest. These loan participation interests have identified weaknesses that could hinder normal repayment or collection of the debt. It is likely that the Company will sustain some loss if any identified weaknesses are not mitigated.

Doubtful = Loan participation interests that have all of the weaknesses inherent in those loan participation interests classified as Substandard, with the added elements of the full collection of the loan participation interest is improbable and that the possibility of loss is high.

The categories above, which are derived from standard regulatory rating definitions, are assigned upon initial approval of the loan and updated as appropriate.

Commercial loan participation interests categorized as OLEM, Substandard, or Doubtful are considered Criticized loan participation interests. Commercial loan participation interests categorized as Substandard or Doubtful are also considered Classified loan participation interests.

For all classes within the consumer and residential real estate portfolio, each loan participation interest is assigned a specific PD factor that is generally based on the borrower’s most recent credit bureau score (FICO), which is updated quarterly. A FICO credit bureau score is a credit score developed by Fair Isaac Corporation based on data provided by the credit bureaus. The FICO credit bureau score is widely accepted as the standard measure of consumer credit risk used by lenders, regulators, rating agencies, and consumers. The higher the FICO credit bureau score, the higher likelihood of repayment and, therefore, an indicator of higher credit quality.

The risk in the loan portfolio is assessed by utilizing numerous risk characteristics. The classifications described above, and presented in the table below, represent one of those characteristics that are closely monitored in the overall credit risk management process.

The following table presents loan participation interest balances by credit quality indicator as of September 30, 2013 and December 31, 2012:

	September 30, 2013
	Credit Risk Profile by UCS classification
(dollar amounts in thousands)	Pass		OLEM		Substandard		Doubtful		Total
Commercial real estate:
Industrial and warehouse	$	604,926	$	7,112	$	15,396	$	—	$	627,434
Retail properties		557,163		7,066		6,560		—		570,789
Office		478,678		3,639		23,321		—		505,638
Multi family		286,658		172		639		—		287,469
Other commercial real estate		821,915		7,528		11,245		—		840,688
Total commercial real estate	$	2,749,340	$	25,517	$	57,161	$	—	$	2,832,018

	Credit Risk Profile by FICO score (1)
	750+		650-749		<650		Total
Consumer and residential real estate:
Secured by first-lien	$	153,771	$	100,761	$	49,612	$	304,144
Secured by junior-lien		21,644		26,440		18,816		66,900
Total consumer and residential real estate	$	175,415	$	127,201	$	68,428	$	371,044

	December 31, 2012
	Credit Risk Profile by UCS classification
(dollar amounts in thousands)	Pass		OLEM		Substandard		Doubtful		Total
Commercial real estate:
Industrial and warehouse	$	646,537	$	13,660	$	16,302	$	—	$	676,499
Retail properties		558,396		9,927		7,325		—		575,648
Office		450,862		4,872		15,642		—		471,376
Multi family		298,039		1,178		3,001		—		302,218
Other commercial real estate		826,403		7,133		16,593		—		850,129
Total commercial real estate	$	2,780,237	$	36,770	$	58,863	$	—	$	2,875,870

	Credit Risk Profile by FICO score (1)
	750+		650-749		<650		Total
Consumer and residential real estate:
Secured by first-lien	$	175,314	$	120,661	$	58,949	$	354,924
Secured by junior-lien		28,488		31,805		23,856		84,149
Total consumer and residential real estate	$	203,802	$	152,466	$	82,805	$	439,073

(1)

Reflects currently updated customer credit scores.

Impaired Loan Participation Interests

For all classes within the CRE portfolio, all loan participation interests with an outstanding balance of greater than $1.0 million are considered for individual impairment evaluation on a quarterly basis. Generally, consumer loan participation interests within any class are not individually evaluated on a regular basis for impairment. Additionally, all TDRs, regardless of the outstanding balance amount, are also considered impaired.

Once a loan participation interest has been identified for an assessment of impairment, the loan participation interest is considered impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those estimates.

When a loan participation interest in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan participation interest’s effective interest rate or, as a practical expedient, the observable market price of the loan participation interest, or the fair value of the collateral if the loan participation interest is collateral-dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan participation interest adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan participation interest changes over time. A specific reserve is established as a component of the ALPL when a loan participation interest has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan participation interest's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, the impairment is recalculated and the specific reserve is appropriately adjusted. Similarly, if impairment is measured based on the observable market price of an impaired loan participation interest or the fair value of the collateral, less costs to sell, of an impaired collateral-dependent loan participation interest, the specific reserve is adjusted.

When a loan participation interest within any class is impaired, interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts received on nonaccrual impaired loan participation interests within any class are generally applied entirely against principal until the loan participation interest has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loan participation interests within any class are applied in the same manner as accruing loan participation interests that are not considered impaired.

The following tables present the balance of the ALPL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan participation interest balance at September 30, 2013 and December 31, 2012: (1)

			Consumer and
	Commercial		Residential
	Real Estate		Real Estate		Total

ALPL at September 30 2013 :
(dollar amounts in thousands)

Portion of ALPL balance:

Attributable to loan participation interests individually evaluated for impairment	$	1,209	$	624	$	1,833
Attributable to loan participation interests collectively evaluated for impairment		33,300		6,279		39,579
Total ALPL balance	$	34,509	$	6,903	$	41,412

Loan Participation Interests Ending Balance at September 30, 2013:

Portion of loan participation interest ending balance:

Individually evaluated for impairment	$	9,360	$	30,226	$	39,586
Collectively evaluated for impairment		2,822,658		340,818		3,163,476
Total loan participation interests evaluated for impairment	$	2,832,018	$	371,044	$	3,203,062

ALPL at December 31, 2012:

Portion of ALPL balance:

Attributable to loan participation interests individually evaluated for impairment	$	1,195	$	640	$	1,835
Attributable to loan participation interests collectively evaluated for impairment		49,220		8,396		57,616
Total ALPL balance	$	50,415	$	9,036	$	59,451

Loan Participation Interests Ending Balance at December 31, 2012:

Portion of loan participation interest ending balance:

Individually evaluated for impairment	$	18,086	$	30,275	$	48,361
Collectively evaluated for impairment		2,857,784		408,798		3,266,582
Total loan participation interests evaluated for impairment	$	2,875,870	$	439,073	$	3,314,943

(1)

No loans with deteriorated credit quality, as defined by ASC 310-30, have been acquired.

The following tables present, by class, the ending, unpaid principal balance, and the related ALPL, along with the average balance and interest income recognized only for loan participation interests individually evaluated for impairment at September 30, 2013 and December 31, 2012: (1), (2)

(dollar amounts in thousands)							Three Months Ended				Nine Months Ended
	September 30, 2013						September 30, 2013				September 30, 2013
			Unpaid						Interest				Interest
	Ending		Principal		Related		Average		Income		Average		Income
	Balance		Balance (4)		Allowance		Balance		Recognized		Balance		Recognized

With no related allowance recorded:
Commercial real estate:
Industrial and warehouse	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Retail properties		—		—		—		—		—		741		—
Office		—		—		—		—		—		—		—
Multi family		—		—		—		—		—		—		—
Other commercial real estate		—		—		—		—		—		—		—
Total commercial real estate	$	—	$	—	$	—	$	—	$	—	$	741	$	—

Consumer and residential real estate:
Secured by first-lien	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by junior-lien		—		—		—		—		—		—		—
Total consumer and residential real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—

With an allowance recorded:
Commercial real estate: (3)
Industrial and warehouse	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Retail properties		—		—		—		—		—		—		—
Office		5,056		8,222		1,166		5,076		—		5,139		—
Multi family		34		34		4		34		—		636		11
Other commercial real estate		4,270		4,270		39		2,220		15		1,935		15
Total commercial real estate	$	9,360	$	12,526	$	1,209	$	7,330	$	15	$	7,710	$	26

Consumer and residential real estate:
Secured by first-lien	$	26,863	$	28,140	$	440	$	27,202	$	264	$	27,216	$	794
Secured by junior-lien		3,363		3,363		184		3,403		41		3,448		124
Total consumer and residential real estate	$	30,226	$	31,503	$	624	$	30,605	$	305	$	30,664	$	918

(dollar amounts in thousands)							Three Months Ended				Nine Months Ended
	December 31, 2012						September 30, 2012				September 30, 2012
			Unpaid						Interest				Interest
	Ending		Principal		Related		Average		Income		Average		Income
	Balance		Balance (4)		Allowance		Balance		Recognized		Balance		Recognized
With no related allowance recorded:
Commercial real estate:
Industrial and warehouse	$	—	$	—	$	—	$	676	$	5	$	225	$	5
Retail properties		3,334		4,139		—		—		—		—		—
Office		5,847		5,848		—		—		—		—		—
Multi family		—		—		—		—		—		—		—
Other commercial real estate		—		—		—		—		—		—		—
Total commercial real estate	$	9,181	$	9,987	$	—	$	676	$	5	$	225	$	5

Consumer and residential real estate:
Secured by first-lien	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by junior-lien		—		—		—		—		—		—		—
Total consumer and residential real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—

With an allowance recorded:
Commercial real estate:
Industrial and warehouse	$	—	$	—	$	—	$	1,361	$	10	$	3,456	$	39
Retail properties		—		—		—		6,176		—		5,300		—
Office		5,266		8,332		480		1,774		—		3,327		—
Multi family		944		944		114		1,019		2		1,268		6
Other commercial real estate		2,695		5,108		601		1,628		9		1,391		15
Total commercial real estate	$	8,905	$	14,384	$	1,195	$	11,958	$	21	$	14,742	$	60

Consumer and residential real estate:
Secured by first-lien	$	26,719	$	29,346	$	350	$	23,218	$	260	$	18,820	$	653
Secured by junior-lien		3,556		4,879		290		3,158		48		2,900		133
Total consumer and residential real estate	$	30,275	$	34,225	$	640	$	26,376	$	308	$	21,720	$	786

(1)

These tables do not include loan participation interests which are fully charged-off.

(2)

All consumer and residential real estate impaired loan participation interests are considered impaired due to their status as a TDR.

(3)

At September 30, 2013, $34 thousand of the $9,360 thousand of commercial real estate loan participation interests with an allowance recorded were considered impaired due to their status as a TDR. At December 31, 2012, $167 thousand of the $8,905 thousand of commercial real estate loan participation interests with an allowance recorded were considered impaired due to their status as a TDR.

(4)

The differences between the ending balance and unpaid principal balance amounts represent partial charge-offs.

TDR Loan Participation Interests

TDRs are modified loan participation interests where a concession was provided to a borrower experiencing financial difficulties. Loan participation interest modifications are considered TDRs when the concessions provided are not available to the borrower through either the Bank’s normal channels or other sources. However, not all loan participation interest modifications are TDRs.

TDR Concession Types

The Bank’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. Commercial TDRs are reviewed and approved by the Bank’s Special Assets Division. The types of concessions provided to borrowers include:

Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt.

Amortization or maturity date change beyond what the collateral supports, including any of the following:

(1)

Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(2)

Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

(3)

Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan.

Chapter 7 bankruptcy: A bankruptcy court’s discharge of a borrower’s debt is considered a concession when the borrower does not reaffirm the discharged debt.

Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest.

Principal forgiveness may result from any TDR modification of any concession type. However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the three-month and nine-month periods ended September 30, 2013 and 2012, was not significant.

TDRs by Loan Participation Interest Type

The following is a description of TDRs by loan participation interest type:

Commercial real estate loan participation interest TDRs – CRE accruing TDRs often result from loan participation interests receiving a concession with terms that are not considered a market transaction to the Bank. The TDR remains in accruing status as long as the customer is less than 90-days past due on payments per the restructured loan participation interest terms and no loss is expected.

CRE nonaccrual TDRs result from either: (1) an accruing CRE TDR being placed on nonaccrual status, or (2) a workout where an existing CRE NAL is restructured and a concession was given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note is underwritten based upon the Bank’s normal underwriting standards and is sized so projected cash flows are sufficient to repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to continue a project or weather a temporary economic downturn and allows the Bank to maximize repayment based upon the current expectations for a borrower’s or project’s performance.

Our strategy involving TDR borrowers includes working with these borrowers to allow them to refinance elsewhere as well as allow them time to improve their financial position and remain our customer through refinancing their notes according to market terms and conditions in the future. A refinancing or modification of a loan occurs when either the loan matures according to the terms of the TDR-modified agreement or the borrower requests a change to the loan agreements. At that time, the loan is evaluated to determine if it is creditworthy. It is subjected to the Bank’s normal underwriting standards and process for similar credit extensions, both new and existing.

In accordance with ASC 310-20-35, the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan participation. A new loan participation is considered for removal of the TDR designation, whereas a continuation of the prior note requires a continuation of the TDR designation. In order for the TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms of the refinanced loan participation must not represent a concession.

Consumer and residential real estate loan participation interest TDRs – Consumer and residential real estate TDRs represent loan modifications associated with traditional first-lien mortgage loans, as well as first-lien and junior-lien home equity loans, in which a concession has been provided to the borrower. The primary concessions given to these borrowers are amortization or maturity date changes and interest rate reductions. Consumer and residential real estate loans identified as TDRs involve borrowers unable to refinance their mortgages through the Bank’s normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be delinquent.

TDR Impact on Credit Quality

The ALPL is largely driven by updated risk ratings assigned to CRE loan participation interests, updated borrower credit scores on consumer and residential real estate, and borrower delinquency history in both portfolios. These updated risk ratings and credit scores consider the default history of the borrower, including payment redefaults. As such, the provision for credit losses is impacted primarily by changes in borrower payment performance rather than the TDR classification. TDRs can be classified as either accrual or nonaccrual loan participation interests. Nonaccrual TDRs are included in NPAs whereas accruing TDRs are excluded from NPAs as it is probable that all contractual principal and interest due under the restructured terms will be collected.

TDRs may include multiple concessions and the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of concessions for the CRE portfolio are the extension of the maturity date coupled with an increase in the interest rate. In these instances, the primary concession is the maturity date extension.

TDR concessions may also result in the reduction of the ALPL within the CRE portfolio. This reduction is derived from payments and the resulting application of the reserve calculation within the ALPL. The transaction reserve for non-TDR loans is calculated based upon several estimated probability factors, such as PD and LGD, both of which were previously discussed. Upon the occurrence of a TDR in the CRE portfolio, the reserve is measured based on discounted expected cash flows or collateral value, less selling costs, of the modified loan in accordance with ASC 310-10. The resulting TDR ALPL calculation often results in a lower ALPL amount because: (1) the discounted expected cash flows or collateral value indicate a lower estimated loss, (2) if the modification includes a rate increase, the discounting of cash flows or the collateral value, less selling costs, on the modified loan, using the pre-modification interest rate, exceeds the carrying value of the loan, or (3) payments may occur as part of the modification. The ALPL for CRE loans may increase as a result of the modification, as the discounted cash flow analysis may indicate additional reserves are required.

TDR concessions on consumer and residential real estate loans may increase the ALPL. The concessions made to these borrowers often include interest rate reductions and, therefore, the TDR ALPL calculation results in a greater ALPL compared with the non-TDR calculation as the reserve is measured based on the estimation of the discounted expected cash flows or collateral value, less selling costs, on the modified loan in accordance with ASC 310-10. The resulting TDR ALPL calculation often results in a higher ALPL amount because (1) the discounted expected cash flows or collateral value, less selling costs, indicate a higher estimated loss or, (2) due to the rate decrease, the discounting of the cash flows on the modified loan participation interest, using the pre-modification interest rate, indicates a reduction in the expected cash flows or collateral value, less selling costs. In certain instances, the ALPL may decrease as a result of payments made in connection with the modification.

Commercial real estate loan participation interest TDRs – In instances where the Bank substantiates that it will collect the outstanding balance in full, the note is considered for return to accrual status upon the borrower sustaining sufficient cash flows for a six-month period of time. This nine-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring, any interest or principal payments received on that note are applied to first reduce the outstanding book balance and then to recoveries of charged-off principal, unpaid interest, and/or fee expenses.

Consumer and residential real estate loan participation interest TDRs – Modified loans identified as TDRs are aggregated into pools for analysis. Cash flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.

The following table presents, by class and the reason for the modification, the number of contracts, post-modification outstanding balance, and the financial effects of the modification for the three-month and nine-month periods ended September 30, 2013 and 2012:

	New Troubled Debt Restructurings During The Three-Month Period Ended (1), (2)
	September 30, 2013							September 30, 2012
			Post-modification							Post-modification
(dollar amounts in thousands)	Number of		Outstanding		Financial effects			Number of		Outstanding		Financial effects
	Contracts		Balance		of modification⁽³⁾			Contracts		Balance		of modification⁽³⁾

CRE - Multi family:

Interest rate reduction		—	$	—	$	—			—	$	—	$	—
Amortization or maturity date change		—		—		—			1		42		—
Total CRE - Multi family		—	$	—	$	—			1	$	42	$	—

CRE - Other commercial real estate:
Interest rate reduction		—	$	—	$	—			—	$	—	$	—
Amortization or maturity date change		—		—		—			1		303		27
Other		—		—		—			—		—		—
Total CRE - Other commercial real estate		—	$	—	$	—			1	$	303	$	27

Consumer and residential real estate secured by first-lien:
Interest rate reduction		3	$	118	$	4			33	$	4,558	$	836
Amortization or maturity date change		2		84		5			1		21		—
Chapter 7 bankruptcy		6		295		(3	)		54		1,810		2,094
Other		—		—		—			—		—		—
Total consumer and residential real estate secured by first-lien		11	$	497	$	6			88	$	6,389	$	2,930

Consumer and residential real estate secured by junior-lien:
Interest rate reduction		1	$	14	$	3			7	$	648	$	107
Amortization or maturity date change		1		3		—			1		3		—
Chapter 7 bankruptcy		3		—		(1	)		93		509		1,259
Other		—		—		—			—		—		—
Total consumer and residential real estate secured by junior-lien		5	$	17	$	2			101	$	1,160	$	1,366

Total new troubled debt restructurings		16	$	514	$	8			189	$	7,549	$	4,296

	New Troubled Debt Restructurings During The Nine-Month Period Ended (1), (2)
	September 30, 2013							September 30, 2012
			Post-modification							Post-modification
(dollar amounts in thousands)	Number of		Outstanding		Financial effects			Number of		Outstanding		Financial effects
	Contracts		Balance		of modification⁽³⁾			Contracts		Balance		of modification⁽³⁾

CRE - Retail properties:
Interest rate reduction		—	$	—	$	—			1	$	892	$	(2	)
Amortization or maturity date change		—		—		—			—		—		—
Other		—		—		—			—		—		—
Total CRE - Retail properties		—	$	—	$	—			1	$	892	$	(2	)

CRE - Multi family:
Interest rate reduction		—	$	—	$	—			—	$	—	$	—
Amortization or maturity date change		—		—		—			1		42		—
Other		—		—		—			—		—		—
Total CRE - Multi family		—	$	—	$	—			1	$	42	$	—

CRE - Other commercial real estate:
Interest rate reduction		—	$	—	$	—			—	$	—	$	—
Amortization or maturity date change		—		—		—			1		303		27
Other		—		—		—			—		—		—
Total CRE - Other commercial real estate		—	$	—	$	—			1	$	303	$	27

Consumer and residential real estate secured by first-lien:
Interest rate reduction		9	$	847	$	107			102	$	12,842		2,116
Amortization or maturity date change		5		443		8			6		632		1
Chapter 7 bankruptcy		26		1,532		(30	)		54		1,810		2,094
Other		—		—		—			—		—		—
Total consumer and residential real estate secured by first-lien		40	$	2,822	$	85			162	$	15,284	$	4,211

Consumer and residential real estate secured by junior-lien:
Interest rate reduction		7	$	173	$	28			15	$	876	$	143
Amortization or maturity date change		3		16		—			4		51		(2	)
Chapter 7 bankruptcy		23		105		(23	)		93		509		1,259
Other		—		—		—			—		—		—
Total consumer and residential real estate secured by junior-lien		33	$	294	$	5			112	$	1,436	$	1,400

Total new troubled debt restructurings		73	$	3,116	$	90			277	$	17,957	$	5,636

(1)

TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower.

(2)

For the three-month periods ended September 30, 2013 and 2012, there were no new troubled debt restructurings for the following classes: CRE - Industrial and warehouse, CRE - Retail properties, and CRE - Office. For the nine-month periods ended September 30, 2013 and 2012, there were no new troubled debt restructurings for the following classes: CRE - Industrial and warehouse, and CRE - Office.

(3)

Amounts represent the financial impact via provision for loan participation losses as a result of the modification.

Any loan participation interest within any portfolio or class is considered as payment redefaulted at 90-days past due.

The following tables present TDRs modified within the previous twelve months that have subsequently redefaulted during the three-month and nine-month periods ended September 30, 2013 and 2012:

	Troubled Debt Restructurings That Have Redefaulted
	Within One Year of Modification During The
	Three Months Ended September 30, 2013				Three Months Ended September 30, 2012
	Number of		Ending		Number of		Ending
(dollar amounts in thousands)	Contracts		Balance		Contracts		Balance
Consumer and residential real estate secured by first-lien:
Interest rate reduction		—	$	—		—	$	—
Amortization or maturity date change		—		—		4		489
Chapter 7 bankruptcy		—		—		1		34
Other		—		—		—		—
Total consumer and residential real estate secured by first-lien		—	$	—		5	$	523

Consumer and residential real estate secured by junior-lien:
Interest rate reduction		—	$	—		—	$	—
Amortization or maturity date change		—		—		1		20
Chapter 7 bankruptcy		—		—		—		—
Other		—		—		—		—
Total consumer and residential real estate secured by junior-lien		—	$	—		1	$	20

Total troubled debt restructurings with subsequent redefault		—	$	—		6	$	543

	Troubled Debt Restructurings That Redefaulted
	Within One Year Of Modification During The⁽¹⁾
	Nine Months Ended September 30, 2013				Nine Months Ended September 30, 2012⁽²⁾
	Number of		Ending		Number of		Ending
(dollar amounts in thousands)	Contracts		Balance		Contracts		Balance

Consumer and residential real estate secured by first-lien:
Interest rate reduction		—	$	—		—	$	—
Amortization or maturity date change		—		—		4		489
Chapter 7 bankruptcy		1		2		1		34
Other		—		—		—		—
Total consumer and residential real estate secured by first-lien		1	$	2		5	$	523

Consumer and residential real estate secured by junior-lien:
Interest rate reduction		—	$	—		—	$	—
Amortization or maturity date change		—		—		1		20
Chapter 7 bankruptcy		—		—		—		—
Other		—		—		—		—
Total consumer and residential real estate secured by junior-lien		—	$	—		1	$	20

Total troubled debt restructurings with subsequent redefault		1	$	2		6	$	543

(1)

Subsequent redefault is defined as a payment redefault within 12 months of the restructuring date. Payment redefault is defined as 90-days past due for any loan participation interest in any portfolio or class. Any loan participation interest in any portfolio or class may be considered in payment redefault prior to the guidelines noted above when collection of principal or interest is in doubt.

(2)

During the three-month and nine-month periods ended September 30, 2013 and 2012, there were no troubled debt restructurings that redefaulted within one year of modification for the following classes: CRE - Industrial and warehouse, CRE - Retail properties, CRE - Office, CRE - Multi family, and CRE - Other commercial real estate.

Note 4 - Related Party Transactions

The Bank is required, under the Agreements, to service HPCI’s loan participation interest 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 real estate, consumer, and residential real estate loans underlying the participations held by HPCI in accordance with normal industry practice under the amended 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. Loan servicing costs totaled $1.4 million and $1.5 million for the three-month periods ended September 30, 2013 and 2012, respectively. For the nine-month periods ended September 30, 2013 and 2012, loan servicing costs totaled $4.3 million and $4.8 million, respectively.

In 2013 and 2012, the annual servicing rates the Bank charged with respect to outstanding principal balances were:

	January 1, 2012
	through
	September 30, 2013
Commercial real estate		0.125	%
Consumer		0.650
Residential real estate		0.267

Pursuant to the 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 CRE loans, HPCI has waived its right to receive any origination fees associated with participation interests in CRE loans. The Bank and HPCI performed a review of loan servicing fees in 2013, 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 2014.

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 pays the Bank and Huntington for the cost related to the time spent by employees for performing these functions. These personnel costs totaled $0.1 million for each of the three-month periods ended September 30, 2013 and 2012, and are included in other noninterest expense. Personnel costs for each of the respective nine-month periods was $0.3 million.

The following table represents the ownership of HPCI’s outstanding common and preferred securities as of September 30, 2013:

	Number of
	Common		Number of Preferred Securities
Shareholder:	Shares		Class A		Class B		Class C		Class E
Held by related parties:
HPCII		11,130,000		—		—		—		—
Holdings		2,870,000		895		—		—		—
Tower Hill Securities, Inc.		—		—		—		—		1,400,000
HPC Holdings-II, Inc.		—		—		400,000		—		—
Total held by related parties		14,000,000		895		400,000		—		1,400,000
Other shareholders		—		105		—		2,000,000		—
Total shares outstanding		14,000,000		1,000		400,000		2,000,000		1,400,000

As of September 30, 2013, 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 September 30, 2013, HPCI board members and executive officers beneficially owned, in the aggregate, a total of 6,965 shares, or less than 1%, of the HPCI Class C preferred securities. All of the Class E preferred securities are owned by Tower Hill Securities, Inc. In the event HPCI redeems its Class C or Class E preferred securities, holders of such securities will be entitled to receive $25.00 per share for Class C shares, $250.00 per share for Class E shares, plus any accrued and unpaid dividends on such shares. The redemption amount may be significantly lower than the current market price of the Class C preferred securities.

Both the Class C and Class E preferred securities are entitled to one-tenth of one vote per share on all matters submitted to HPCI shareholders. If the Bank becomes under-capitalized, or is placed in conservatorship or receivership, the OCC may require the exchange of Class C and Class E Preferred securities for preferred securities of the Bank with substantially equivalent terms. The Class E preferred securities are currently redeemable and Class C preferred securities are redeemable at HPCI’s option on or after December 31, 2021, subject to the prior written approval of the OCC. In the event HPCI redeems its Class C or Class E preferred securities, holders will be entitled to receive $25.00 per share for Class C shares, $250.00 per share for Class E shares, plus any accrued and unpaid dividends on such shares. The redemption amount may be significantly different than the current market price of the Class C preferred securities.

In addition, at any time following the occurrence of certain special events, including a regulatory capital event described in the paragraph below, HPCI will have the right to redeem the Class C preferred securities in whole, subject to the prior written approval of the OCC. (Also see the Class C Preferred Securities section in Note 6 and Subsequent Event in Note 8.)

On July 2, 2013, the Federal Reserve Board voted to adopt final Basel III capital rules for U.S. Banking organizations. The final rules establish an integrated regulatory capital framework that will implement, in the United States, the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.

Based on our review of the final rules and an opinion of outside counsel dated November 6, 2013, we have determined that there is a significant risk that our Class C preferred securities will no longer constitute Tier 1 capital for the Bank for purposes of the capital adequacy guidelines or policies of the OCC, when Basel III becomes effective for Huntington Bancshares Incorporated and its affiliates. As a result, a regulatory capital event has occurred. On November 7, 2013, the board of directors approved the redemption of Class C preferred securities effective on December 31, 2013 (the Redemption Date). All required regulatory approvals have been received.

On the Redemption Date, holders of our Class C preferred securities will be entitled to receive the redemption price of $25.00 per share. The redemption price may differ from the redemption date market price of the Class C preferred securities (Also see Subsequent Event in Note 8).

HPCI had a noninterest-bearing payable due to the Bank of $28.1 million at September 30, 2013 and $62.9 million at December 31, 2012. 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 FHLB. For further information regarding this, see Note 6.

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 5 - Fair Values of Assets and Liabilities

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are classified within one of three levels in a valuation hierarchy based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2, or 3 are recorded at fair value at the beginning of the reporting period.

Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an on-going basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

Periodically, HPCI records nonrecurring adjustments of collateral-dependent loan participation interests measured for impairment when establishing the ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction. HPCI considers these fair values Level 3. In cases where the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized.

At September 30, 2013, HPCI identified the following loan participation interests that were measured at fair value on a nonrecurring basis. The fair value impairment for the nine-month period ended September 30, 2013, was recorded within the provision for credit losses.

Fair Value Measurements Using

Quoted Prices

Significant

Total

In Active

Other

Gains/(Losses)

Markets for

Observable

Unobservable

For the Nine

Fair Value at

Identical Assets

Inputs

Months Ended

(dollar amounts in thousands)

September 30, 2013

(Level 1)

(Level 2)

(Level 3)

September 30, 2013

Loan participation interests

2,105

—

2,105

(340

)

There were no changes in the valuation techniques or related inputs used to measure similar assets in prior periods.

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 fair value based on its highly liquid nature. All amounts at September 30, 2013 and December 31, 2012 are classified as Level 1 in the valuation hierarchy.

Loan participation interests — Underlying variable rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of probable losses and the credit risk associated in the loan portfolio. As of September 30, 2013, the net carrying amount of $3.2 billion corresponded to a fair value of $2.8 billion. As of December 31, 2012, the net carrying value of $3.3 billion corresponded to a fair value of $2.9 billion. All amounts at September 30, 2013 and December 31, 2012 are classified as Level 3 in the valuation hierarchy. At September 30, 2013, the valuation of the loan portfolio reflected discounts that HPCI believed are consistent with transactions occurring in the marketplace.

Note 6 - Commitments and Contingencies

Class C Preferred Securities

Pledged Assets

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 with a maximum borrowing capacity of $4.4 billion as of September 30, 2013, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had outstanding borrowings of $0.3 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 $0.9 billion as of September 30, 2013, 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 $0.3 billion at September 30, 2013. In 2013, 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 $0.3 million for each of the three-month periods ended September 30, 2013 and 2012, as compensation for making such assets available to the Bank. The amounts paid to HPCI for the nine-month periods ended September 30, 2013 and 2012 were $0.8 million and $0.9 million, respectively.

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 September 30, 2013 and December 31, 2012, HPCI’s unfunded loan participation interest commitments totaled $205.1 million and $273.4 million, respectively.

Dividends

Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend at September 30, 2013 without regulatory approval due to the deficit position of its undivided profits. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends to non-bank subsidiaries or outside shareholders without regulatory approval. There can be no assurance that regulatory approval will be granted for future dividends.

Note 7 - 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 8 - Subsequent Event

On November 7, 2013, the board of directors approved the redemption effective on December 31, 2013 (the Redemption Date), of all of the 2,000,000 outstanding shares of 7.875% Noncumulative Series C Preferred Stock of HPCI. On the Redemption Date, holders of such securities will be entitled to receive the redemption price of $25.00 per share for Class C preferred securities. The redemption price may differ from the market price of the Class C preferred securities on or prior to the Redemption Date.

As previously disclosed, our Amended and Restated Articles of Incorporation (Articles) provide that, at any time following the occurrence of certain special events, we have the right to redeem all outstanding Class C preferred securities at a redemption price of $25.00 per share plus accrued dividends for the then-current dividend period, without interest. The occurrence of such an event will not, however, give a preferred shareholder any right to request that such Class C preferred securities be redeemed.

The special event that allows us to redeem the Class C preferred securities is a regulatory capital event. A regulatory capital event is defined in our Articles as our determination, based on an opinion of counsel experienced in such matters, that as a result of certain changes in the applicable laws, regulations, or related interpretations, there is a significant risk that our 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.

Following the Redemption Date, HPCI will not declare or pay any future quarterly dividends with respect to the Class C preferred securities, the Class C preferred securities will cease to be outstanding, and the former holders of Class C preferred securities will have no rights with respect to their ownership of such Class C preferred securities other than the right to receive the redemption price. The redemption price will not include the regular quarterly dividend that was declared on November 7, 2013, as that dividend will have been paid immediately prior to the redemption of the Class C preferred securities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

We are an Ohio corporation operating as a REIT for federal income tax purposes. Our principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to our shareholders.

We are 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 Agreements, to service our loan portfolio in a manner substantially the same as for similar work for transactions on our 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 us accounting and reporting services as required. The Bank is required to adhere to our policies relating to the relationship between us 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 our participation interests to date were acquired directly or indirectly from the Bank.

This MD&A provides information we believe necessary for understanding our financial condition, changes in financial condition, results of operations, and cash flows. The MD&A included in our 2012 Form 10-K should be read in conjunction with this MD&A as this discussion provides only material updates to the 2012 Form 10-K. This MD&A should also be read in conjunction with the financial statements, notes and other information contained in this report.

Forward-looking Statements

This report, including MD&A, contains certain forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: (1) worsening of credit quality performance due to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) changes in general economic, political, or industry conditions; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; (3) movements in interest rates; (4) competitive pressures on the Bank’s product pricing and services; (5) success, impact, and timing of the Bank’s business strategies; (6) changes in accounting policies and principles and the accuracy of our assumptions and estimates used to prepare our financial statements; (7) extended disruption of vital infrastructure; (8) the final outcome of significant litigation, (9) the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, and the CFPB; and (10) the outcome of judicial and regulatory decisions regarding practices in the residential mortgage industry, including among other things, the processes followed for foreclosing residential mortgages. Additional factors that could cause results to differ materially from those described above can be found in our 2012 Form 10-K, and documents subsequently filed by us with the SEC.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

Risk Factors

We are subject to a number of risks that may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts are made to manage those risks while optimizing returns. Credit risk related to retail properties is of particular concern in the current economy. See Credit Risk section of this report. Additionally, more information on risk is set forth under the heading “Risk Factors” included in Item 1A of our 2012 Form 10-K, and subsequent filings with the SEC.

Updates to Risk Factors

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

At any time following the occurrence of certain special events, we will have the right to redeem the Class C 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 preferred securities be redeemed. The special events that would allow us to redeem the Class C preferred securities are:

a tax event which occurs when we receive 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 our capital stock will not be fully deductible by us or we will be subject to a significant amount of additional taxes or governmental charges;

an investment company event which occurs when we receive 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 we will be considered an investment company under the Investment Company Act of 1940; or

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 our 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).

Critical Accounting Policies and Use of Significant Estimates

Our financial statements are prepared in accordance with 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 our financial statements. Note 1 to the Financial Statements included in our 2012 Form 10-K, as supplemented by this report, lists significant accounting policies used by Management in the development and presentation of our financial statements. This MD&A, 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 us and our 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 was used or if estimates changed from period-to-period. Estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that significantly differ from when those estimates were made.

Our most significant accounting estimates relate to our ACL. This significant accounting estimate and related application is discussed in our 2012 Form 10-K. The related fair value measurement on a nonrecurring basis can be found in Note 5 of Notes to the Unaudited Condensed Financial Statements.

QUALIFICATION TESTS

Qualification as a REIT involves application of specific provisions of the IRC relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT's total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT's total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. At September 30, 2013, we 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 nontaxable status for federal income tax purposes. For the tax year 2012, we met all annual income and distribution tests.

We operate in a manner that will not cause us 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, we must invest at least 55% of our assets in Qualifying Interests and an additional 25% of our assets in real estate-related assets, although this percentage may be reduced to the extent that more than 55% of our assets are invested in Qualifying Interests. The assets in which we may invest under the IRC therefore may be further limited by the provisions of the Investment Company Act and positions taken by the SEC staff. At September 30, 2013, we were exempt from registration as an investment company under the Investment Company Act, and we intend to operate our business in a manner that will maintain this exemption.

RESULTS OF OPERATIONS

Our income is primarily derived from our 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 our preferred dividend obligations. The preferred stock is considered equity and, therefore, the dividends are not reflected as interest expense.

The following table details the results of operations for the last five quarters. The $17.5 million, or 66% increase in net income for the 2013 third quarter, compared with same period in 2012, was primarily the result of lower provision for credit losses.

Table 1 - Selected Quarterly Income Statement Data

	2013								2012					3Q13 vs. 3Q12
(dollar amounts in thousands)	Third			Second			First		Fourth			Third		$ chg			%Chg
Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	24,281		$	24,105		$	24,686	$	26,157		$	27,517	$	(3,236	)		(12	)%
Consumer and residential real estate		5,464			5,713			5,976		5,873			5,691		(227	)		(4	)
Total loan participation interest income		29,745			29,818			30,662		32,030			33,208		(3,463	)		(10	)
Fees from loan participation interests		162			133			334		155			196		(34	)		(17	)
Interest on deposits with the Bank		260			211			124		389			327		(67	)		(20	)
Total interest and fee income		30,167			30,162			31,120		32,574			33,731		(3,564	)		(11	)
Provision (reduction in allowance) for credit losses		(15,188	)		(9,855	)		1,059		(1,637	)		5,117		(20,305	)		N.M.
Interest income after provision (reduction in allowance) for credit losses		45,355			40,017			30,061		34,211			28,614		16,741			59
Noninterest income:
Rental income		18			18			18		18			18		-			-
Collateral fees		271			274			294		271			291		(20	)		(7	)
Total noninterest income		289			292			312		289			309		(20	)		(6	)

Noninterest expense:
Servicing costs		1,373			1,413			1,471		1,466			1,528		(155	)		(10	)
Franchise tax		192			196			196		187			555		(363	)		(65	)
Other		195			226			186		239			240		(45	)		(19	)
Total noninterest expense		1,760			1,835			1,853		1,892			2,323		(563	)		(24	)
Income before provision for income taxes	$	43,884		$	38,474		$	28,520	$	32,608		$	26,600	$	17,284			65	%
Provision (reduction in allowance) for income taxes		—			—			40		(143	)		182		(182	)		(100	)
Net income	$	43,884		$	38,474		$	28,480	$	32,751		$	26,418	$	17,466			66	%
Dividends declared on preferred shares		2,918			2,935			3,058		3,071			3,272		(354	)		(11	)
Net income applicable to common shares⁽¹⁾	$	40,966		$	35,539		$	25,422	$	29,680		$	23,146	$	17,820			77	%

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

N.M. - Not meaningful, as denominator of calculation is income in prior period compared with a loss in current period.

The following table details the results of operations for the nine-month periods ended September 30, 2013 and 2012. The $10.2 million, or 8%, decline in net income for the first nine-month period of 2013, compared with the same period in 2012, primarily reflected lower CRE loan participation interest income.

Table 2 - Selected Year to Date Income Statement Data

	Nine Months Ended September 30,						Change
(dollar amounts in thousands)	2013			2012			Amount			Percent
Interest and fee income
Interest on loan participation interests:
Commercial real estate	$	73,072		$	83,975		$	(10,903	)		(13	)%
Consumer and residential real estate		17,153			18,487			(1,334	)		(7	)
Total loan participation interest income		90,225			102,462			(12,237	)		(12	)
Fees from loan participation interests		629			650			(21	)		(3	)
Interest on deposits with the Bank		595			761			(166	)		(22	)
Total interest and fee income		91,449			103,873			(12,424	)		(12	)
Reduction in allowance for credit losses		(23,984	)		(22,266	)		(1,718	)		8
Interest income after reduction in allowance for credit losses		115,433			126,139			(10,706	)		(8	)
Noninterest income:
Rental income		54			54			—			—
Collateral fees		839			916			(77	)		(8	)
Total noninterest income		893			970			(77	)		(8	)
Noninterest expense:
Servicing costs		4,257			4,752			(495	)		(10	)
Franchise tax		584			555			29			5
Other		608			588			20			3
Total noninterest expense		5,449			5,895			(446	)		(8	)
Income before provision for income taxes		110,877			121,214			(10,337	)		(9	)
Provision for income taxes		40			182			(142	)		(78	)
Net income	$	110,837		$	121,032		$	(10,195	)		(8	)%
Dividends declared on preferred shares		8,911			10,134			(1,223	)		(12	)
Net income applicable to common shares⁽¹⁾	$	101,926		$	110,898		$	(8,972	)		(8	)%

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

Interest and Fee Income

Our primary source of revenue is interest and fee income on our participation interests in loans. At September 30, 2013 and 2012, we did not have any interest-bearing liabilities or related interest expense. Interest income is impacted by changes in the levels of interest rates and earning assets. The yield on earning assets is the percentage of interest income to average earning assets.

The tables below show our average balances, interest and fee income, and yields for the three-month and nine-month periods ended September 30, 2013 and 2012:

Table 3 - Quarterly Interest and Fee Income

	Three Months Ended September 30,
	2013							2012
(dollar amounts in millions)	Average Balance		Income⁽¹⁾		Yield			Average Balance		Income⁽¹⁾		Yield
Loan participation interests:(2)
Commercial real estate	$	2,762.1	$	24.4		3.51	%	$	3,036.8	$	27.7		3.63	%
Consumer and residential real estate		382.4		5.5		5.67			367.2		5.7		6.17
Total loan participation interests		3,144.5		29.9		3.77			3,404.0		33.4		3.90
Interest-bearing deposits in the Bank		403.0		0.3		0.25			511.7		0.3		0.25
Total	$	3,547.5	$	30.2		3.37	%	$	3,915.7	$	33.7		3.43	%

⁽¹⁾Income includes interest and fees.

⁽²⁾For the purposes of this analysis, average balances include nonaccrual loans.

Interest and fee income was $30.2 million for the 2013 third quarter compared with $33.7 million for the year-ago quarter. As shown in Table 3, the decrease in interest and fee income was due to a decrease in yields on loan participation interests and lower average loan participation interest balances. In the 2013 third quarter, the loan yield decreased 13 basis points to 3.77%, while average loan participation interest balances decreased $259.5 million, or 8%, compared to the year-ago quarter.

Table 4 - Year-To-Date Interest and Fee Income

	Nine Months Ended September 30,
	2013							2012
(dollar amounts in millions)	Average Balance		Income⁽¹⁾		Yield			Average Balance		Income⁽¹⁾		Yield
Loan participation interests: (2)
Commercial real estate	$	2,773.9	$	73.6		3.55	%	$	3,080.4	$	84.6		3.67	%
Consumer and residential real estate		406.2		17.2		5.65			393.1		18.5		6.29
Total loan participation interests		3,180.1		90.8		3.82			3,473.5		103.1		3.97
Interest-bearing deposits in the Bank		312.6		0.6		0.25			399.9		0.8		0.25
Total	$	3,492.7	$	91.4		3.50	%	$	3,873.4	$	103.9		3.58	%

⁽¹⁾Income includes interest and fees.

⁽²⁾For the purposes of this analysis, average balances include nonaccrual loans.

Interest and fee income was $91.4 million for the first nine-month period of 2013 compared with $103.9 million for the comparable year-ago period. As shown in Table 4, the decrease in interest and fee income was due to a decrease in yields on loan participation interests and lower average loan participation interest balances. In the first nine-month period of 2013, the loan yield decreased 15 basis points to 3.82%, while average loan participation interest balances decreased $293.4 million, or 8%, compared to the year-ago period.

At September 30, 2013 and December 31, 2012, approximately 76% and 75%, respectively, of the portfolio was comprised of variable interest rate loan participations.

Provision (reduction in allowance) for credit losses

The provision (reduction in allowance) for credit losses is the charge (credit) to earnings necessary to maintain the ACL at a level appropriate to absorb our estimate of inherent probable losses in the loan portfolio. Loan participations are acquired net of related ALPL. As a result, this ALPL is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than us recording provision for credit losses. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. As loan participations mature, refinance, or other such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL.

The reduction in allowance for credit losses was $15.2 million for the three-month period ended September 30, 2013 compared to a provision for credit losses of $5.1 million for the three-month period ended September 30, 2012. The 2013 third quarter included the implementation of enhancements to our commercial ALPL model. On a year-to-date basis, the first nine-month period of 2013 recorded a reduction in allowance for credit losses of $24.0 million compared to a reduction in allowance for credit losses of $22.3 million in the comparable year-ago period. The reduction in allowance for credit losses in the first nine-month period of 2012 and 2013 primarily reflected credit quality improvement in the underlying portfolio. The current quarter’s provision for credit losses was $16.6 million less than total NCOs, and the provision for credit losses for the first nine-month period of 2013 was $28.5 million less than total NCOs for the same period. (See Credit Quality discussion).

Given the relatively absolute low level of the provision for credit losses and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter-to-quarter basis is expected. See ACL discussion within the Credit Quality section.

Noninterest Income and Noninterest Expense

Noninterest income for the 2013 third quarter and the year-ago quarter was $0.3 million. For the nine-month periods ended September 30, 2013 and 2012, noninterest income was $0.9 million and $1.0 million, respectively. Noninterest income includes fees from the Bank for use of our assets as collateral for the Bank’s advances from the FHLB. For the 2013 third quarter and the year-ago quarter, these fees totaled $0.3 million, and for the nine-month periods ended September 30, 2013 and 2012, these fees totaled $0.8 million and $0.9 million, respectively. See Note 6 to the Unaudited Condensed Financial Statements included in this report for more information regarding the use of our assets as collateral for the Bank’s advances from the FHLB.

Noninterest expense was $1.8 million in the 2013 third quarter and $2.3 million in the year-ago quarter. Noninterest expense for the nine-month periods ended September 30, 2013 and 2012 was $5.4 million and $5.9 million, respectively. The predominant component of noninterest expense is the fee paid to the Bank for servicing the loans underlying the participation interest. For the 2013 third quarter, servicing costs amounted to $1.4 million, compared with $1.5 million for the year-ago quarter. For the nine-month periods ended September 30, 2013 and 2012, servicing costs were $4.3 million and $4.8 million, respectively. The decrease in the servicing costs from the comparable periods reflected lower loan participation interest balances. The annual servicing rates the Bank charged with respect to outstanding principal balances in 2013 and 2012 were:

	January 1, 2012
	through
	September 30, 2013
Commercial and commercial real estate		0.125	%
Consumer		0.650
Residential real estate		0.267

Pursuant to the Agreements, the amount and terms of the loan-servicing fee between the Bank and us 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 CRE loans, we waive our right to receive any origination fees associated with participation interests in CRE loans. We, along with the Bank, performed a review of loan servicing fees in 2013, and agreed to retain current servicing rates for all loan participation categories, including the continued waiver by us of our right to origination fees, until such time as servicing fees are reviewed in 2014.

HPCI is included in certain of Huntington’s unitary franchise tax returns. On March 8, 2012, HPCI’s board of directors adopted Huntington’s Policy Statement on Intercorporate State Tax Allocation, dated January 1, 2012. As a result, beginning in 2012, Huntington’s unitary franchise tax provision is allocated to each member of the unitary filing group based upon the filing group’s effective tax rate. Under the intercompany state tax allocation agreement with Huntington, we will provide and remit state franchise tax to or receive a state franchise tax benefit from the tax paying member. The franchise tax was $0.2 million in the 2013 third quarter and $.06 million in the year-ago quarter. Franchise tax for the nine-month periods ended September 30, 2013 and 2012, was $0.6 million.

Provision for Income Taxes

We have elected to be treated as a REIT for federal income tax purposes and intend to maintain compliance with the provisions of the IRC and, therefore, are not subject to federal income taxes. Thus, we had no provision for federal income taxes for the nine-month periods ended September 30, 2013 and 2012.

HPCI is included in certain of Huntington’s unitary and combined state income tax returns. Huntington’s unitary and combined state income tax provision is allocated to each member of the unitary and combined filing group’s based upon the filing group’s effective tax rate. Under the intercompany state tax allocation agreement with Huntington, we will provide and remit state income taxes to or receive a state income tax benefit from the tax paying member. For the nine-month period ended September 30, 2013, provision for state income taxes was $40 thousand. For the three and nine-month periods ended September 30, 2012, provision for state income taxes was $182 thousand.

RISK MANAGEMENT AND CAPITAL

Risk awareness, identification and assessment, reporting, and active management are key elements in overall risk management. The Bank manages risk to an aggregate moderate-to-low risk profile strategy through a control framework and by monitoring and responding to identified potential risks. Controls include, among others, effective segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment process. Management relies on the Bank’s credit management controls, processes, and procedures in evaluating and responding to risk within the loan participation interest portfolio.

Credit Risk

(This section should be read in conjunction with Note 3 of Notes to the Unaudited Condensed Financial Statements.)

Credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The identification, monitoring, and managing of credit risk continues to be a primary focus. In addition to the traditional credit risk mitigation strategies of credit policies and processes, market risk management activities, and portfolio diversification, additional quantitative measurement capabilities were implemented that utilize external data sources, enhanced use of modeling technology, and internal stress testing processes.

Under the Agreements, the Bank may, in accordance with our guidelines, dispose of any underlying loan participation interest that is rated as Substandard or lower, is placed in a nonaccrual status, or is renegotiated due to the financial deterioration of the borrower. The Bank may, in accordance with our 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 Agreements. Prior to completion of foreclosure or liquidation, the loan participation interest is sold to the Bank at fair market value. The Bank then incurs all costs associated with repossession and foreclosure.

Loan Participation Interest Credit Exposure Mix

At September 30, 2013, CRE loan participation interests were 88% of total loan participation interests, compared with 87% at December 31, 2012. Total consumer and residential real estate loan participation interests were 12% of total loan participation interests at September 30, 2013, compared with 13% at December 31, 2012.

Commercial Real Estate Credit

Refer to the “Commercial Real Estate Credit” section of our 2012 Form 10-K for our commercial credit underwriting and on-going credit management processes.

The CRE portfolio is diversified by customer size, as well as geographically. No outstanding CRE loan participation interests comprised an industry or geographic concentration of lending. CRE loan participation interests outstanding by property type and borrower location at September 30, 2013 and December 31, 2012, were as follows:

Table 5 - Commercial Real Estate Loan Participation Interests by Property Type and Borrower Location

	September 30, 2013
(dollar amounts in thousands)	Ohio		Michigan		Indiana		Pennsylvania		Kentucky		Other		Total Amount		%
Industrial and warehouse	$	378,749	$	174,566	$	35,510	$	9,531	$	13,549	$	15,529	$	627,434		22	%
Retail properties		374,145		80,000		46,925		10,230		10,087		49,402		570,789		20
Office		272,045		139,053		12,861		60,281		11,230		10,168		505,638		18
Multi family		137,295		20,367		85,391		2,838		18,865		22,713		287,469		10
Other commercial real estate		470,890		206,559		30,240		33,949		38,942		60,108		840,688		30

Total	$	1,633,124	$	620,545	$	210,927	$	116,829	$	92,673	$	157,920	$	2,832,018		100	%

	December 31, 2012
(dollar amounts in thousands)	Ohio		Michigan		Indiana		Pennsylvania		Kentucky		Other		Total Amount		%
Industrial and warehouse	$	404,117	$	187,959	$	39,668	$	12,815	$	15,191	$	16,750	$	676,500		24	%
Retail properties		345,907		95,595		41,789		26,707		12,783		52,867		575,648		20
Office		280,826		80,825		13,498		70,943		7,790		17,494		471,376		16
Multi family		148,727		31,955		67,411		13,097		19,086		21,941		302,217		11
Other commercial real estate		482,246		178,538		31,345		43,629		40,519		73,852		850,129		29

Total	$	1,661,823	$	574,872	$	193,711	$	167,191	$	95,369	$	182,904	$	2,875,870		100	%

CRE loan participation interests are diversified by customer size, as well as customer location throughout the Bank’s lending area of Ohio, Michigan, Indiana, Kentucky, and Pennsylvania.

Consumer and Residential Real Estate Credit

Refer to the “Consumer Credit” section of our 2012 Form 10-K for our consumer credit underwriting and on-going credit management processes.

Credit Quality

Credit quality performance during the first nine-month period of 2013 was consistent with our expectations. NPAs declined 39% compared to December 31, 2012 and NCOs during the first nine-month period of 2013 were lower than 2012 levels. Also, the ACL coverage ratio of NPAs increased to 196% at September 30, 2013, compared with 169% at December 31, 2012.

NPAs

NPAs consist of loan participation interests in underlying loans that are no longer accruing interest. Any loan participation interest in our portfolio may be placed on nonaccrual status prior to the policies described below when collection of principal or interest is in doubt. Also, when a loan with a discharged non-reaffirmed debt in a Chapter 7 bankruptcy filing is identified and the loan is determined to be collateral dependent, the consumer loan participation interest is placed on nonaccrual status.

Underlying CRE loan participation interests are placed on nonaccrual status at 90-days past due. Underlying first-lien loan participation interests in consumer and residential real estate loans are placed on nonaccrual status at 150-days past due. Junior-lien loan participation interests in consumer and residential real estate loans are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien loan has been identified as nonaccrual.

For all classes in all portfolios, when a loan is placed on nonaccrual status, any accrued interest income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss. When, in Management’s judgment, the borrower’s ability to make required principal and interest payments has resumed and collectability is no longer in doubt, the loan participation interest is returned to accrual status.

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

Table 6 - Quarterly Nonperforming Assets

	2013									2012
(dollar amounts in thousands)	September 30,			June 30,			March 31,			December 31,			September 30,

Participation interest in nonaccrual assets:
Commercial real estate	$	14,055		$	15,285		$	18,707		$	27,901		$	24,965
Consumer and residential real estate		7,726			8,164			9,485			7,970			7,585
Total nonperforming assets	$	21,781		$	23,449		$	28,192		$	35,871		$	32,550

Accruing loan participation interests past due 90 days or more	$	2,015		$	1,311		$	1,233		$	3,222		$	2,767

NPAs as a % of total loan participation interests		0.68	%		0.76	%		0.89	%		1.08	%		0.97	%
ALPL as a % of NPAs		190			227			216			166			191
ACL as a % of NPAs		196			229			219			169			195

The $14.1 million, or 39%, decrease in total NPAs compared with December 31, 2012, was in the commercial real estate portfolio and primarily reflected payments and payoffs.

ACL

We maintain two reserves, both of which are available to absorb credit losses inherent in the loan participation interests portfolio: the ALPL and the AULPC. Together, these reserves constitute the total ACL. Additions to the ALPL and AULPC result primarily from the transfer of the ACL associated with purchased loan participation interests at Huntington’s carrying value between entities under common control.

The following table shows the activity in HPCI’s ALPL and AULPC for each of the last five quarters, and for the nine-month periods ended September 30, 2013 and 2012:

Table 7 - Allowance for Credit Loss Activity

	2013									2012
(dollar amounts in thousands)	Third			Second			First			Fourth			Third
ALPL balance, beginning of period	$	53,117		$	61,032		$	59,451		$	62,063		$	61,509
Allowance of loan participation interests acquired		5,462			3,022			2,223			3,190			5,787
Net charge-offs:
Commercial real estate		(316	)		(743	)		117			(3,035	)		(3,998	)
Consumer and residential real estate		(1,059	)		(509	)		(2,051	)		(1,395	)		(5,927	)
Total net charge-offs		(1,375	)		(1,252	)		(1,934	)		(4,430	)		(9,925	)
Provision (reduction in allowance) for loan participation interest losses		(15,792	)		(9,685	)		1,292			(1,372	)		4,692
ALPL balance, end of period	$	41,412		$	53,117		$	61,032		$	59,451		$	62,063
AULPC balance, beginning of period	$	654		$	824		$	1,057		$	1,322		$	897
Provision (reduction in allowance) for unfunded loan participation commitment losses		604			(170	)		(233	)		(265	)		425
AULPC balance, end of period	$	1,258		$	654		$	824		$	1,057		$	1,322
Total allowance for credit losses, end of period	$	42,670		$	53,771		$	61,856		$	60,508		$	63,385

ALPL as a % of total loan participation interests		1.29	%		1.72	%		1.92	%		1.79	%		1.85	%
ACL as a % of total loan participation interests		1.33			1.74			1.94			1.83			1.88

	Nine Months Ended September 30,
(dollar amounts in thousands)	2013			2012
ALPL balance, beginning of period	$	59,451		$	83,772
Allowance of loan participation interests acquired		10,706			17,404
Net charge-offs:
Commercial real estate		(941	)		(7,116	)
Consumer and residential real estate		(3,619	)		(9,444	)
Total net charge-offs		(4,560	)		(16,560	)
Provision for (reduction in) ALPL		(24,185	)		(22,553	)
ALPL balance, end of period	$	41,412		$	62,063
AULPC balance, beginning of period	$	1,057		$	1,035
Provision for (reduction in) AULPC		201			287
AULPC balance, end of period	$	1,258		$	1,322
Total allowance for credit losses, end of period	$	42,670		$	63,385

The ACL decreased $17.8 million to $42.7 million at September 30, 2013, compared with $60.5 million at December 31, 2012. The decline reflects improved credit quality in the underlying loan participation interest portfolio, as well as lower ending balances. Given the relatively absolute low level of the ACL, some degree of quarter-to-quarter volatility is expected. Management believes that our ACL is appropriate and its coverage level is reflective of the quality of the portfolio and the current operating environment.

NCOs

Any loan participation interest in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment. Additionally, discharged, collateral dependent non-reaffirmed debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less selling costs.

CRE loan participation interests are either charged-off or written down to net realizable value at 90-days past due. First-lien consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due. Junior-lien consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 120-days past due.

The table below reflects NCO detail for each of the last five quarters:

Table 8 - Net Charge-offs (1)

	2013													2012
(dollar amounts in thousands)	September 30,				June 30,				March 31,					December 31,				September 30,

Commercial real estate	$	316	0.05	%	$	743	0.11	%	$	(117	)	(0.02	)%	$	3,035	0.41	%	$	3,998	0.53	%
Consumer and residential real estate		1,059	1.11			509	0.50			2,051		1.91			1,395	1.52			5,927	6.46
Total net charge-offs	$	1,375	0.17	%	$	1,252	0.16	%	$	1,934		0.24	%	$	4,430	0.54	%	$	9,925	1.17	%

	Nine months ended September 30,
(dollar amounts in thousands)	2013				2012

Commercial real estate	$	942	0.05	%		7,116	0.31	%
Consumer and residential real estate		3,619	1.19			9,444	3.20
Total net charge-offs	$	4,561	0.19	%		16,560	0.64	%

(1) Percentages represent the annualized percentage of related average loan participation interests.

The 2013 third quarter NCOs decreased $8.6 million, or 86%, compared to the year-ago quarter. On a year-to-date basis, NCOs during the first nine-month period of 2013 decreased $12.0 million, or 72%, compared to the first nine-month period of 2012. The 2012 third quarter and 2012 year-to-date period included a $3.0 million charge-off related to one CRE participation interest, as well as $3.4 million of NCOs associated with Chapter 7 bankruptcy loan participation interests. The remaining decline reflected improved credit quality in the underlying loan participation interest portfolio. Given the relatively low absolute level of NCOs and the uncertain and uneven nature of the economic recovery, some degree of volatility on a quarter-to-quarter basis is expected.

Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates as changes can have a significant impact on reported earnings. The interest rate risk process is designed to compare income simulations in market scenarios designed to alter the direction, magnitude, and speed of interest rate changes, as well as the slope of the yield curve. If there is a decline in market interest rates, we may experience a reduction in interest income from our loan participation interests and a corresponding decrease in funds available to be distributed to shareholders. When rates rise, we are exposed to declines in the economic value of equity since approximately 24% of our loan participation portfolio is fixed rate.

INCOME SIMULATION AND ECONOMIC VALUE ANALYSIS

Interest rate risk measurement is performed quarterly. Two broad approaches to modeling interst rate risk are employed. These are income similation and economic value simulation. An income simulation analysis is used to measure the sensitivity of forecasted net interest income to changes in market rates over a one-year time period. Economic value of equity (EVE) analysis is used to measure the sensitivity of the values of period-end assets and liabilities to changes in market interest rates. EVE serves as a complement to income simulation modeling as it provides risk exposure estimates for time periods beyond the one-year simulation horizon.

The models used for these measurements take into account prepayment speeds on mortgage loans, mortgage-backed securities, and consumer installment loans. Balance sheet growth assumptions are not considerd in the income simulation model as it is modeled with runoff assumptions.

The baseline scenario for income simulation analysis, with which all other scenarios are compared, is based on market interest rates implied by the prevailing yeild curve as of the period end. Alternative interest rate scenarios are then compared with the baseline scenario. These alternative interest rate scenarios include parallel rate shifts on a gradual basis.

The simulations for evaluating short-term interest rate risk exposure are scenarios that model gradual +100, +200, and -25 basis point parallel shifts in market interest rates over the next 12-month period beyond the interest rate change implied by the current yield curve. As of December 31, 2008, management insistuted an assumption that market interest rates would not fall below 0% over the next 12-month period for the scenarios that used the -25 basis point parrallel shift in market interest rates. This assumption is still in effect as of September 30, 2013.

The table below shows the results of these scenarios as of September 30, 2013:

Table 9 - Interest Income Sensitivity

	Change in Interest Income for a Given
	Change in Interest Rates
(dollar amounts in millions)	Over / (Under) Base Case Parallel Ramp
Basis point change scenario		-25			+100			+200
September 30, 2013
Net interest income	$	-2.1		$	8.3		$	16.8
Percentage change		-2.2	%		8.8	%		17.9	%

The gradual 25 basis point decline in market rates over the next 12-month period assumes market interest rates would reach a bottom and not fall below historical levels.

Table 10 - Economic Value Sensitivity

	Change in Economic Value for a Given
	Change in Interest Rates
(dollar amounts in millions)	Over / (Under) Base Case Parallel Shocks
Basis point change scenario		-25			+100			+200
September 30, 2013
Fair value of loan participation interests	$	5.3		$	-22.4		$	-45.9
Percentage change		0.1	%		-0.6	%		-1.3	%

The 25 basis point decline in market rates over the next 12-month period assumes market interest rates would reach a bottom and not fall below historical levels.

In recent quarters, due to the absolute low levels of interest rates, the analysis of the impact from the decline in rates has become less meaningful. The reason for this is that current interest rates are lower than the modeled impact. Where appropriate, we use rate floors in the analysis to ensure that modeled rates do not go below 0%.

Off-Balance Sheet Arrangements

Under the terms of the Agreements, we are obligated to make funds or credit available to the Bank, either directly or indirectly through Holdings so that the Bank may extend credit or pay letters-of-credit issued for the account of any borrowers, to the extent provided in the loan agreements underlying our participation interests. At September 30, 2013 and December 31, 2012, HPCI’s unfunded loan participation interest commitments totaled $205.1 million and $273.4 million, respectively. It is expected that the existing cash balances and cash flows generated by the existing portfolio will be sufficient to meet these obligations.

Liquidity And Capital Resources

The objective of our liquidity management is to ensure the availability of sufficient cash flows to fund our 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, we take 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, we 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 IRC 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 September 30, 2013 and December 31, 2012, we maintained cash and interest-bearing balances with the Bank totaling $381.9 million and $719.2 million, respectively. During the 2013 first quarter, we paid common stock dividends and the return of capital to common shareholders totaling $500.0 million. We maintain and transact all of our cash activity with the Bank and may invest available funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.

At September 30, 2013, we had no material liabilities or contractual obligations, other than unfunded loan participation interest commitments of $205.1 million, with a weighted average remaining maturity of 1.8 years. In addition to anticipated cash flows, we have cash and interest bearing balances with the bank totaling $381.9 million to supplement the funding of these liabilities and contractual commitments.

As of September 30, 2013 and December 31, 2012, shareholders’ equity was $3.5 billion and $3.4 billion, respectively.

Regulatory approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings. Based on a regulatory dividend limitation, the Bank could not have declared and paid a dividend at September 30, 2013 without regulatory approval. As a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends to non-bank subsidiaries or outside shareholders without regulatory approval. There can be no assurance that regulatory approval will be granted for future dividends.

Regulatory capital ratios are the primary metrics used by regulators in assessing the safety and soundness of banks. At September 30, 2013, Huntington and the Bank met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions. The capital ratios for Huntington and the Bank at the end of the most recent five quarters are as follows:

Table 11 - Regulatory Capital Ratios

	2013									2012
	September 30,			June 30,			March 31,			December 31,			September 30,
Tier 1 leverage ratio
Huntington		10.85	%		10.64	%		10.57	%		10.36	%		10.29	%
Bank		10.01			9.68			9.38			9.05			8.68
Tier 1 risk-based capital ratio
Huntington		12.36			12.24			12.16			12.02			11.88
Bank		11.41			11.13			10.79			10.49			10.03
Total risk-based capital ratio
Huntington		14.67			14.57			14.55			14.50			14.36
Bank		13.11			12.83			12.77			12.78			12.52

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes material changes in market risk exposures from disclosures presented in HPCI's Form 10-K.

Item 4. Controls and Procedures

HPCI maintains disclosure controls and procedures designed to ensure that the information disclosed in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported appropriately and on a timely basis. HPCI's management, with the participation of its President (principal executive officer) and the Vice President (principal financial officer), evaluated the effectiveness of HPCI’s 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.

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 September 30, 2013, to which this report relates, that have materially affected, or are reasonably likely to materially affect, HPCI's internal control over financial reporting.

PART II. OTHER INFORMATION

In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported.

Item 1A: Risk Factors

Information required by this item is set forth in Part 1 Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and incorporated herein by reference.

Item 6. Exhibits

This report incorporates by reference the documents listed below that HPCI has previously filed with the SEC. The SEC allows incorporation by reference in this document. The information incorporated by reference is considered to be a part of this document, except for any information that is superseded by information that is included directly in this document.

This information 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 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. The reports and other information filed by HPCI with the SEC are also available at Huntington’s Internet web site. The address of the site is http://www.huntington.com. Except as specifically incorporated by reference into this Quarterly Report on Form 10-Q, information on those web sites is not part of this report. Reports, proxy statements, and other information about HPCI can also be inspected at the offices of the NASDAQ National Market at 33 Whitehall Street, New York, New York.

3.1.

Second Amended and Restated Articles of Incorporation (previously filed as Exhibit 3.1 to Current Report on Form 8-K (File No. 000-33243), filed with the Securities and Exchange Commission on November 2, 2010, 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.

31.1.

Rule 13a – 14(a) Certification – President (chief executive officer).

31.2.

Rule 13a – 14(a) Certification – Vice President (chief financial officer).

32.1.

Section 1350 Certification – President (chief executive officer).

32.2.

Section 1350 Certification – Vice President (chief financial officer).

99.1.

Unaudited Condensed Consolidated Financial Statements of Huntington Bancshares Incorporated as of and for the nine-month periods ended September 30, 2013 and 2012.

101**

The following material from HPCI’s Form 10-Q Report for the quarterly period ended September 30, 2013, formatted in XBRL: (i) Unaudited Condensed Balance Sheets, (ii) Unaudited Condensed Statements of Comprehensive Income, (iii) Unaudited Condensed Statements of Changes in Shareholders’ Equity, (iv) Unaudited Condensed Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Financial Statements.

Furnished, not filed.

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 12th day of November, 2013.

HUNTINGTON PREFERRED CAPITAL, INC.

(Registrant)

By:	/s/ David S. Anderson	By:	/s/ Joseph D. Canfield
	David S. Anderson		Joseph D. Canfield
	President and Director		Vice President and Director
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)

HUNTINGTON PREFERRED CAPITAL INC 10-Q