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 June 30, 2006

Huntington Preferred Capital, Inc.

Ohio		31-1356967
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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.  þ  Yes     o  No

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

Large accelerated filer  o     Accelerated filero     Non-accelerated filer  þ

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

As of July 31, 2006, 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 I. Financial Information
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets — At June 30, 2006, December 31, 2005, and June 30, 2005			3
		Condensed Consolidated Statements of Income — For the three-months and six-months ended June 30, 2006 and 2005			4
		Condensed Consolidated Statements of Changes in Shareholders’ Equity — For the six-months ended June 30, 2006 and 2005			5
		Condensed Consolidated Statements of Cash Flows — For the six-months ended June 30, 2006 and 2005			6
		Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			23
Item 4.		Controls and Procedures			23
Part II. Other Information
Item 4.		Submission of Matters to a Vote of Shareholders			23
Item 6.		Exhibits			23
Signatures					25
EX-31(A)
EX-31(B)
EX-32(A)
EX-32(B)
EX-99(A)

Part I. Financial Information

Item 1. Financial Statements

Huntington Preferred Capital, Inc.

Condensed Consolidated Balance Sheets

		June 30,				December 31,				June 30,
(in thousands, except share data)		2006				2005				2005
		(Unaudited)								(Unaudited)
Assets
Cash and interest bearing deposits with The Huntington National Bank		$	308,796			$	810,102			$	458,480
Due from The Huntington National Bank			96,616				46,321				1,812
Loan participation interests:
Commercial			39,182				46,559				72,310
Commercial real estate			3,312,787				3,311,275				3,614,633
Consumer			933,111				997,094				896,201
Residential real estate			130,569				157,397				188,407
Total loan participation interests			4,415,649				4,512,325				4,771,551
Allowance for loan losses			(51,466	)			(57,530	)			(60,987	)
Net loan participation interests			4,364,183				4,454,795				4,710,564
Premises and equipment			19,642				21,683				23,862
Accrued income and other assets			20,733				20,984				19,573
Total assets		$	4,809,970			$	5,353,885			$	5,214,291
Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments		$	4,002			$	4,135			$	4,650
Dividends and distributions payable			9,624				700,000				9,922
Other liabilities			106				290				265
Total liabilities			13,732				704,425				14,837
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			3,848,460				3,848,460				4,268,776
Retained earnings			146,778				—				129,678
Total shareholders’ equity			4,796,238				4,649,460				5,199,454
Total liabilities and shareholders’ equity		$	4,809,970			$	5,353,885			$	5,214,291

See notes to unaudited condensed consolidated financial statements.

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Income

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
Interest and fee income
Interest on loan participation interests:
Commercial		$	792			$	1,264			$	1,638			$	2,644
Commercial real estate			59,841				51,982				115,623				100,737
Consumer			16,067				14,687				32,767				28,612
Residential real estate			2,007				2,647				4,239				5,543
Total loan participation interest income			78,707				70,580				154,267				137,536
Fees from loan participation interests			279				491				572				1,119
Interest on deposits with The Huntington National Bank			3,290				2,570				4,781				4,043
Total interest and fee income			82,276				73,641				159,620				142,698
Reduction in allowances for credit losses			(5,203	)			(3,840	)			(14,386	)			(7,281	)
Interest income after reduction in allowances for credit losses			87,479				77,481				174,006				149,979
Non-interest income:
Rental income			1,591				1,591				3,182				3,181
Collateral fees			115				965				833				1,146
Total non-interest income			1,706				2,556				4,015				4,327
Non-interest expense:
Servicing costs			2,720				2,899				5,503				5,762
Depreciation and amortization			999				1,102				2,016				2,239
(Gain) loss on disposal of premises and equipment			—				388				(31	)			533
Other			202				169				372				409
Total non-interest expense			3,921				4,558				7,860				8,943
Income before provision for income taxes			85,264				75,479				170,161				145,363
Provision for income taxes			310				25				595				124
Net income		$	84,954			$	75,454			$	169,566			$	145,239
Dividends declared on preferred securities			(11,781	)			(8,256	)			(22,788	)			(15,561	)
Net income applicable to common shares		$	73,173			$	67,198			$	146,778			$	129,678

See notes to unaudited condensed consolidated financial statements.

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

		Preferred, Class A								Preferred, Class B								Preferred, Class C
(in thousands)		Shares				Securities				Shares				Securities				Shares				Securities
Six Months Ended June 30, 2005 (Unaudited):
Balance, beginning of period			1			$	1,000				400			$	400,000				2,000			$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of period (Unaudited)			1			$	1,000				400			$	400,000				2,000			$	50,000
Six Months Ended June 30, 2006 (Unaudited):
Balance, beginning of period			1			$	1,000				400			$	400,000				2,000			$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of period (Unaudited)			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
Six Months Ended June 30, 2005 (Unaudited):
Balance, beginning of period			14,000			$	350,000				—			$	—				14,000			$	4,268,776			$	—			$	5,069,776
Comprehensive Income:
Net income																											145,239				145,239
Total comprehensive income																															145,239
Dividends declared on Class A preferred securities																											(80	)			(80	)
Dividends declared on Class B preferred securities																											(5,690	)			(5,690	)
Dividends declared on Class C preferred securities																											(1,969	)			(1,969	)
Dividends declared on Class D preferred securities																											(7,822	)			(7,822	)
Balance, end of period (Unaudited)			14,000			$	350,000				—			$	—				14,000			$	4,268,776			$	129,678			$	5,199,454
Six Months Ended June 30, 2006 (Unaudited):
Balance, beginning of period			14,000			$	350,000				—			$	—				14,000			$	3,848,460			$	—			$	4,649,460
Comprehensive Income:
Net income																											169,566				169,566
Total comprehensive income																															169,566
Dividends declared on Class A preferred securities																											(80	)			(80	)
Dividends declared on Class B preferred securities																											(9,544	)			(9,544	)
Dividends declared on Class C preferred securities																											(1,969	)			(1,969	)
Dividends declared on Class D preferred securities																											(11,195	)			(11,195	)
Balance, end of period (Unaudited)			14,000			$	350,000				—			$	—				14,000			$	3,848,460			$	146,778			$	4,796,238

See notes to unaudited condensed consolidated financial statements.

Huntington Preferred Capital, Inc.

		Six Months Ended
		June 30,
(in thousands)		2006				2005
Operating activities
Net income		$	169,566			$	145,239
Adjustments to reconcile net income to net cash provided by operating activities:
Reduction of allowances for credit losses			(14,386	)			(7,281	)
Depreciation and amortization			2,016				2,239
Deferred income tax expense (benefit)			65				(216	)
(Gain) loss on disposal of premises and equipment			(31	)			533
Increase in due from The Huntington National Bank			(3,377	)			(1,637	)
(Decrease) increase in other liabilities			(184	)			215
Other, net			1,001				(176	)
Net cash provided by operating activities			154,670				138,916
Investing activities
Participation interests acquired			(1,439,604	)			(1,599,095	)
Sales and repayments of loans underlying participation interests			1,496,736				1,724,045
Proceeds from the sale of premises and equipment			56				—
Net cash provided by investing activities			57,188				124,950
Financing activities
Dividends paid on preferred securities			(13,164	)			(5,639	)
Dividends paid on common stock			(279,684	)			(263,798	)
Return of capital to common shareholders			(420,316	)			(336,202	)
Net cash used for financing activities			(713,164	)			(605,639	)
Change in cash and cash equivalents			(501,306	)			(341,773	)
Cash and cash equivalents at beginning of year			810,102				800,253
Cash and cash equivalents at end of period		$	308,796			$	458,480
Supplemental information:
Income taxes paid		$	677			$	—
Dividends and distributions declared, not paid			9,624				9,922
Change in loan participation activity due from The Huntington National Bank			46,918				—

See notes to unaudited condensed consolidated financial statements.

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. Four related parties own HPCI’s common stock: Huntington Capital Financing LLC (HCF); Huntington Preferred Capital II, Inc. (HPCII); Huntington Preferred Capital Holdings, Inc. (Holdings); and Huntington Bancshares Incorporated (Huntington). HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). HCF, HPCII, and Holdings are direct and indirect subsidiaries of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At June 30, 2006, the Bank, on a consolidated basis with its subsidiaries, accounted for 99% of Huntington’s (on a consolidated basis) total assets and for the six months ended June 30, 2006, accounted for 95% of Huntington’s net income. Thus, consolidated financial statements for the Bank and for Huntington were substantially the same for these periods.

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 2005 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 affiliates; therefore, net income per common share information is not presented.

     Cash and cash equivalents used in the Statement of Cash Flows is defined as “Cash and Interest bearing deposits with The Huntington National Bank.”

Financial Accounting Standards Board (FASB) Statement No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154) – In May 2005, the FASB issued Statement No. 154, which replaces APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this new pronouncement had no impact on HPCI’s financial condition, results of operations, or cash flows

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 3 — Participations in Non-Performing Assets and Past Due Loans

     Participations in loans on non-accrual status and loans past due 90 days or more and still accruing interest, were as follows:

		June 30,				December 31,				June 30,
(in thousands)		2006				2005				2005
Commercial		$	108			$	147			$	1,069
Commercial real estate			16,834				20,746				17,965
Consumer			3,545				2,799				2,252
Residential real estate			1,687				2,923				4,652
Total participations in non-performing assets		$	22,174			$	26,615			$	25,938
Participations in accruing loans past due 90 days or more		$	6,079			$	3,188			$	12,036

     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 94.7%, 95.9%, and 96.2% of the portfolio at June 30, 2006, December 31, 2005, and June 30, 2005, respectively.

Note 4 — Allowances for Credit Losses (ACL)

     An allowance for loan participation losses (ALL) is transferred to HPCI from the Bank on loans underlying the participations at the time the participations are acquired. The allowances for credit losses (ACL) are comprised of the ALL and the allowance for unfunded loan participation commitments (AULPC). The following table reflects activity in the ACL for the three-month and six-month periods ended June 30, 2006 and 2005:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
ALL balance, beginning of period		$	53,586			$	62,461			$	57,530			$	61,146
Allowance for loan participations acquired			5,172				6,880				11,634				12,521
Net loan losses			(2,272	)			(3,522	)			(3,445	)			(4,514	)
Reduction in ALL			(5,020	)			(3,894	)			(14,253	)			(7,228	)
Economic reserve transfer to AULPC			—				(938	)			—				(938	)
ALL balance, end of period		$	51,466			$	60,987			$	51,466			$	60,987
AULPC balance, beginning of period		$	4,185			$	3,658			$	4,135