UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2005
Commission File Number: 000-33243
HUNTINGTON PREFERRED CAPITAL, INC.
|
Ohio
(State or other jurisdiction of incorporation or organization) |
31-1356967
(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.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of April 30, 2005, 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
2
| March 31, | December 31, | March 31, | ||||||||||
| (in thousands of dollars, except share data) | 2005 | 2004 | 2004 | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
|
Assets
|
||||||||||||
|
Cash with The Huntington National Bank
|
$ | 54,662 | $ | 48,253 | $ | 4,576 | ||||||
|
Interest bearing deposits with The Huntington National Bank
|
273,596 | 752,000 | 82,289 | |||||||||
|
Due from affiliates
|
1,075 | 175 | 14,675 | |||||||||
|
Loan participation interests:
|
||||||||||||
|
Commercial
|
98,291 | 106,179 | 198,950 | |||||||||
|
Commercial real estate
|
3,681,594 | 3,738,930 | 4,264,002 | |||||||||
|
Consumer
|
839,421 | 819,250 | 662,908 | |||||||||
|
Residential real estate
|
208,176 | 224,914 | 275,284 | |||||||||
|
Total loan participation interests
|
4,827,482 | 4,889,273 | 5,401,144 | |||||||||
|
Allowance for loan participation losses
|
(62,461 | ) | (61,146 | ) | (79,842 | ) | ||||||
|
Net loan participation interests
|
4,765,021 | 4,828,127 | 5,321,302 | |||||||||
|
Premises and equipment
|
25,352 | 26,635 | 30,736 | |||||||||
|
Accrued income and other assets
|
18,928 | 18,401 | 17,351 | |||||||||
|
|
||||||||||||
|
Total Assets
|
$ | 5,138,634 | $ | 5,673,591 | $ | 5,470,929 | ||||||
|
|
||||||||||||
|
Liabilities
|
||||||||||||
|
Allowance for unfunded loan participation commitments
|
$ | 3,658 | $ | 3,765 | $ | 4,325 | ||||||
|
Dividends and distributions payable
|
2,650 | 600,000 | 1,230 | |||||||||
|
Other liabilities
|
71 | 50 | 13 | |||||||||
|
Total Liabilities
|
6,379 | 603,815 | 5,568 | |||||||||
|
|
||||||||||||
|
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 | 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 | 400,000 | |||||||||
|
Preferred securities, Class C, 7.875% noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 2,000,000 shares authorized, issued, and outstanding
|
50,000 | 50,000 | 50,000 | |||||||||
|
Preferred securities, Class D, variable-rate noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 14,000,000 shares authorized, issued, and outstanding
|
350,000 | 350,000 | 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
|
4,268,776 | 4,268,776 | 4,604,978 | |||||||||
|
Retained earnings
|
62,479 | — | 59,383 | |||||||||
|
Total Shareholders’ Equity
|
5,132,255 | 5,069,776 | 5,465,361 | |||||||||
|
|
||||||||||||
|
Total Liabilities and Shareholders’ Equity
|
$ | 5,138,634 | $ | 5,673,591 | $ | 5,470,929 | ||||||
See notes to unaudited condensed consolidated financial statements.
3
Huntington Preferred Capital, Inc.
See notes to unaudited condensed consolidated financial statements.
4
Huntington Preferred Capital, Inc.
See notes to unaudited condensed consolidated financial statements.
5
Huntington Preferred Capital, Inc.
See notes to unaudited condensed consolidated financial statements.
6
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 — Organization
Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in 1992 and
designated as a real estate investment trust (REIT) in 1998. At December 31, 2004, three related
parties owned HPCI’s common stock: HPC Holdings-III, Inc. (HPCH-III), 67.37%; Huntington Preferred
Capital II, Inc. (HPCII), 32.5%; and Huntington Bancshares Incorporated (Huntington), 0.13%.
Effective February 18, 2005, Holdings transferred 34% of its ownership in HPCH-III to Huntington
Capital Financing LLC (HCF). Holdings and HCF are subsidiaries of The Huntington National Bank (the
Bank), a national banking association organized under the laws of the United States and
headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. On March
31, 2005, HPCH-III liquidated into Holdings and HCF. As a result of the liquidation, as of March
31, 2005, four related parties own HPCI’s common stock: HCF, 47%; HPCII, 32.5%; Holdings, 20.37%;
and Huntington, 0.13%. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary
formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements).
The following chart outlines the relationship among affiliates at March 31, 2005.
7
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Note 2 — Basis of Presentation and New Accounting Pronouncements
The accompanying unaudited condensed consolidated 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 consolidated financial position, the results of
operations, and cash flows for the periods presented. These unaudited condensed consolidated
financial statements have been prepared according to the rules and regulations of the Securities
and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally
accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial
Statements appearing in HPCI’s 2004 Annual Report on Form 10-K (Form 10-K), which include
descriptions of significant accounting policies, as updated by the information contained in this
report, should be read in conjunction with these interim financial statements.
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, is not subject to
federal income taxes. HPCI’s subsidiary, HPCLI, elected to be treated as a taxable REIT subsidiary
and, therefore, a separate provision related to its income taxes is included in the accompanying
unaudited condensed consolidated financial statements.
All of HPCI’s common stock is owned by Huntington, HPCII, HCF, and Holdings, therefore, net
income per common share information is not presented.
Cash and cash equivalents used in the Statement of Cash Flows is defined as the sum of “Cash
with The Huntington National Bank”, “Interest bearing deposits
with The Huntington National Bank”, and end of month settlements.
AICPA Statement of Position No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer
(SOP 03-3):
In December 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 03-3, to address accounting for differences
between the contractual cash flows of certain loans and debt securities and the cash flows expected
to be collected when loans or debt securities are acquired in a transfer and those cash flow
differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to
such loans and debt securities purchased or acquired in purchase business combinations and does not
apply to originated loans. The application of SOP 03-3 limits the interest income, including
accretion of purchase price discounts, that may be recognized for certain loans and debt securities
prior to the receipt of cash. Additionally, SOP 03-3 requires that the excess of contractual cash
flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an
adjustment of yield or valuation allowance, such as the allowance for loan losses. Subsequent to
the initial investment, increases in expected cash flows generally should be recognized
prospectively through adjustment of the yield on the loan or debt security over its remaining life.
Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for
loans and debt securities acquired in fiscal years beginning after December 15, 2004. In the normal
course of business, HPCI does not purchase loan participation interests in loans that have
exhibited a deterioration in credit quality since origination. Therefore, the impact of this new
pronouncement was not material to HPCI’s financial condition, results of operations, or cash flows.
FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47)
–
In
March 2005, the FASB issued FIN 47, which clarifies that the term “conditional asset retirement
obligation” as used in FASB Statement No. 143,
Accounting for Asset Retirement Obligations
, refers
to a legal obligation to perform an asset retirement activity in which the timing and (or) method
of settlement are conditional on a future event that may or may not be within the control of the
entity. An entity is required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47
becomes effective for fiscal years ending after December 15, 2005. The impact of this new
pronouncement is not expected to be material to HPCI’s financial condition, results of
operations, or cash flows.
8
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
Note 3 — Participations in Non-Performing Loans and Past Due Loans
Participations in loans in non-accrual status and loans past due 90 days or more and still
accruing interest, were as follows:
There were no underlying loans outstanding that would be considered a concentration of
lending in any particular industry, group of industries, or business activity. Underlying loans
were, however, generally collateralized by real estate. Loans made to borrowers in the four states
of Ohio, Michigan, Indiana, and Kentucky comprised 96.3%, 96.6%, and 93.4%, of the portfolio at
Note 4 — Allowances for Credit Losses (ACL)
An allowance for credit losses (ACL) is transferred to HPCI from the Bank on loans
underlying the participations at the time the participations are acquired. The ACL is comprised of
the allowance for loan participation losses (ALL) and the allowance for unfunded loan participation
commitments (AULPC). The following tables reflect activity in the ACL for the three-month periods
ended March 31, 2005 and 2004:
Note 5 – Preferred Dividends
Holders of Class A preferred securities, a majority of which are held by Holdings and the
remainder by current and past employees of the Bank, are entitled to receive, if, when, and as
declared by the Board of Directors of HPCI out of funds legally available, dividends at a fixed
rate of $80.00 per share per annum. Dividends on the Class A
9
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
preferred securities, if declared,
are payable annually in December to holders of record on the record date fixed for such purpose by
the Board of Directors in advance of payment.
The holder of the Class B preferred securities, HPC Holdings-II, Inc., a direct non-bank
subsidiary of Huntington, is entitled to receive, if, when, and as declared by the Board of
Directors of HPCI out of funds legally available, dividends at a variable rate equal to the
three-month LIBOR published on the first day of each calendar quarter times par value. Dividends
on the Class B preferred securities, which are declared quarterly, are payable annually and are
non-cumulative. No dividend, except payable in common shares, may be declared or paid upon Class B
preferred securities unless dividend obligations are satisfied on the Class A, Class C, and Class D
preferred securities.
Holders of Class C preferred securities are entitled to receive, if, when, and as declared by
the Board of Directors of HPCI out of funds legally available, dividends at a fixed rate of 7.875%
per annum, of the initial liquidation preference of $25.00 per share, payable quarterly. Dividends
accrue in each quarterly period from the first day of each period, whether or not dividends are
paid with respect to the preceding period. Dividends are not cumulative and if no dividend is paid
on the Class C preferred securities for a quarterly dividend period, the payment of dividends on
HPCI’s common stock and other HPCI-issued securities ranking junior to the Class C preferred
securities (
i.e.
, Class B preferred securities) will be prohibited for that period and at least the
following three quarterly dividend periods.
The holder of Class D preferred securities, Holdings, is entitled to receive, if, when, and as
declared by the Board of Directors of HPCI out of funds legally available, dividends at a variable
rate established at the beginning of each calendar quarter equal to three-month LIBOR published on
the first day of each calendar quarter, plus 1.625% times par value, payable quarterly. Dividends
accrue in each quarterly period from the first day of each period, whether or not dividends are
paid with respect to the preceding period. Dividends are not cumulative and if no dividend is paid
on the Class D preferred securities for a quarterly dividend period, the payment of dividends on
HPCI’s common stock and other HPCI-issued securities ranking junior to the Class D preferred
securities (
i.e.
, Class B preferred securities) will be prohibited for that period and at least the
following three quarterly dividend periods.
A summary of dividends declared by each class of preferred securities, which is considered a
distribution of ordinary income, follows for the periods indicated:
Note 6 — Related Party Transactions
HPCI is a party to a Third Amended and Restated Loan Subparticipation Agreement with
Holdings and a Second Amended and Restated Loan Participation Agreement with the Bank. The Bank is
required, under the participation and/or subparticipation agreements, to service HPCI’s loan
portfolio in a manner substantially the same as for similar work for transactions on its own
behalf. The Bank collects and remits principal and interest payments, maintains perfected
collateral positions, and submits and pursues insurance claims. In addition, the Bank provides
accounting and reporting services to HPCI. The Bank is required to adhere to HPCI’s policies
relating to the relationship between HPCI and the Bank and to pay all expenses related to the
performance of the Bank’s duties under the participation and subparticipation agreements. All of
these participation interests to date were acquired directly or indirectly from the Bank.
10
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
The Bank performs the servicing of the commercial, commercial real estate, residential
real estate, and consumer loans underlying the participations held by HPCI in accordance with
normal industry practice under the amended participation agreements and subparticipation
agreements. In its capacity as servicer, the Bank collects and holds the loan payments received on
behalf of HPCI until the end of each month. Servicing costs paid to the Bank totaled $2.9 million
and $2.1 million for the three-month periods ended March 31, 2005 and 2004, respectively.
Beginning July 1, 2004, the annual servicing rates the Bank charged with respect to
outstanding principal balances were:
Three Months Ended
March 31,
(in thousands of dollars)
2005
2004
$
1,380
$
2,094
48,753
45,060
13,925
12,013
2,896
3,683
66,954
62,850
629
611
1,473
289
69,056
63,750
(3,441
)
(2,263
)
72,497
66,013
1,591
1,469
181
197
1,772
1,666
2,864
2,135
1,137
1,353
145
37
241
106
4,387
3,631
69,882
64,048
98
23
$
69,784
$
64,025
(7,305
)
(4,642
)
$
62,479
$
59,383
Preferred, Class A
Preferred, Class B
Preferred, Class C
(in thousands)
Shares
Securities
Shares
Securities
Shares
Securities
1
$
1,000
400
$
400,000
2,000
$
50,000
1
$
1,000
400
$
400,000
2,000
$
50,000
1
$
1,000
400
$
400,000
2,000
$
50,000
1
$
1,000
400
$
400,000
2,000
$
50,000
Preferred, Class D
Preferred
Common
Retained
(in thousands)
Shares
Securities
Shares
Securities
Shares
Stock
Earnings
Total
14,000
$
350,000
—
$
—
14,000
$
4,604,978
$
—
$
5,405,978
64,025
64,025
64,025
(80
)
(80
)
(1,150
)
(1,150
)
(984
)
(984
)
(2,428
)
(2,428
)
14,000
$
350,000
—
$
—
14,000
$
4,604,978
$
59,383
$
5,465,361
14,000
$
350,000
—
$
—
14,000
$
4,268,776
$
—
$
5,069,776
69,784
69,784
69,784
(80
)
(80
)
(2,570
)
(2,570
)
(984
)
(984
)
(3,671
)
(3,671
)
14,000
$
350,000
—
$
—
14,000
$
4,268,776
$
62,479
$
5,132,255
Three Months Ended
March 31,
(in thousands of dollars)
2005
2004
$
69,784
$
64,025
(3,441
)
(2,263
)
1,137
1,353
367
(239
)
145
37
(540
)
1,204
(900
)
(1,023
)
21
13
66,573
63,107
(764,978
)
(1,263,208
)
831,065
1,166,293
66,087
(96,915
)
(4,655
)
(3,412
)
(263,798
)
—
(336,202
)
—
(604,655
)
(3,412
)
(471,995
)
(37,220
)
800,253
124,085
$
328,258
$
86,865
$
—
$
440
2,650
1,230
March 31,
December 31,
March 31,
(in thousands of dollars)
2005
2004
2004
$
373
$
425
$
5,881
10,641
6,990
10,820
2,178
2,692
—
4,068
4,205
5,335
$
17,260
$
14,312
$
22,036
$
14,178
$
11,686
$
14,923
Three Months Ended
March 31,
(in thousands of dollars)
2005
2004
$
61,146
$
84,532
5,641
5,577
(992
)
(3,679
)
(3,334
)
(6,588
)
$
62,461
$
79,842
$
3,765
$
—
(107
)
4,325
$
3,658
$
4,325
$
66,119
$
84,167
•
0.125% of the underlying commercial and commercial real estate loans,