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, 2007
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. [X] Yes [  ] 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 [  ]           Accelerated filer [  ]           Non-accelerated filer [X]
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 July 31, 2007, 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        
 
 
           
  Financial Statements (Unaudited)        
 
           
 
  Condensed Consolidated Balance Sheets -
At June 30, 2007, December 31, 2006, and June 30, 2006 		    3  
 
           
 
  Condensed Consolidated Statements of Income -
For the three-months and six-months ended June 30, 2007 and 2006 		    4  
 
           
 
  Condensed Consolidated Statements of Changes in Shareholders’ Equity -
For the six-months ended June 30, 2007 and 2006 		    5  
 
           
 
  Condensed Consolidated Statements of Cash Flows -
For the six-months ended June 30, 2007 and 2006 		    6  
 
           
 
  Notes to the Unaudited Condensed Consolidated Financial Statements     7  
 
           
  Management’s Discussion and Analysis of
Financial Condition and Results of Operations 		    13  
 
           
  Quantitative and Qualitative Disclosures about Market Risk     24  
 
           
  Controls and Procedures     24  
 
           
  Controls and Procedures     24  
 
           
Part II. Other Information        
 
           
  Submission of Matters to a Vote of Security Holders     24  
 
           
  Exhibits     24  
 
           
Signatures     26  
  EX-10.1
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2
  EX-99.1

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Part I. Financial Information
Item 1. Financial Statements
Huntington Preferred Capital, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
                         
    June 30,     December 31,     June 30,  
(in thousands, except share data)   2007     2006     2006  
 
 
                       
Assets
                       
Cash and interest bearing deposits with The Huntington National Bank
  $ 324,182     $ 726,154     $ 308,796  
Due from The Huntington National Bank
    —       134,815       96,616  
Loan participation interests:
                       
Commercial
    27,239       31,049       39,182  
Commercial real estate
    3,222,321       3,108,533       3,312,787  
Consumer
    1,121,128       845,272       933,111  
Residential real estate
    95,120       112,355       130,569  
 
Total loan participation interests
    4,465,808       4,097,209       4,415,649  
Allowance for loan participation losses
    (57,074 )     (48,703 )     (51,466 )
 
 
                       
Net loan participation interests
    4,408,734       4,048,506       4,364,183  
 
Premises and equipment
    15,872       17,711       19,642  
Accrued income and other assets
    22,741       22,550       20,733  
 
 
                       
Total assets
  $    4,771,529     $ 4,949,736     $   4,809,970  
 
 
                       
Liabilities and shareholders’ equity
                       
Liabilities
                       
Allowance for unfunded loan participation commitments
  $ 4,353     $ 3,804     $ 4,002  
Dividends and distributions payable
    17,878       450,000       9,624  
Due to The Huntington National Bank
    121,227       ---       ---  
Other liabilities
    165       179       106  
 
Total liabilities
    143,623       453,983       13,732  
 
 
                       
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
    3,694,753       3,694,753       3,848,460  
Retained earnings
    132,153       ---       146,778  
 
Total shareholders’ equity
    4,627,906       4,495,753       4,796,238  
 
 
                       
Total liabilities and shareholders’ equity
  $ 4,771,529     $ 4,949,736     $ 4,809,970  
 
See notes to unaudited condensed consolidated financial statements.

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Huntington Preferred Capital, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
 
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
 
(in thousands of dollars)   2007     2006     2007     2006  
 
Interest and fee income
                               
Interest on loan participation interests:
                               
Commercial
  $ 514     $ 792     $ 1,055     $ 1,638  
Commercial real estate
    56,419       59,841       112,864       115,623  
Consumer
    17,475       16,067       31,940       32,767  
Residential real estate
    1,540       2,007       3,157       4,239  
 
Total loan participation interest income
    75,948       78,707       149,016       154,267  
Fees from loan participation interests
    203       279       401       572  
Interest on deposits with The Huntington National Bank
    5,113       3,290       10,721       4,781  
 
Total interest and fee income
    81,264       82,276       160,138       159,620  
 
 
                               
Provision for (reduction in) allowances for credit losses
    1,091       (5,203 )     (1,602 )     (14,386 )
 
 
                               
Interest income after allowances for credit losses
    80,173       87,479       161,740       174,006  
 
 
                               
Non-interest income:
                               
Rental income
    1,710       1,591       3,420       3,182  
Collateral fees
    86       115       178       833  
 
Total non-interest income
    1,796       1,706       3,598       4,015  
 
 
                               
Non-interest expense:
                               
Servicing costs
    2,704       2,720       5,154       5,503  
Depreciation and amortization
    903       999       1,822       2,016  
(Gain) loss on disposal of premises and equipment
    —       ---       17       (31 )
Other
    213       202       407       372  
 
Total non-interest expense
    3,820       3,921       7,400       7,860  
 
 
                               
Income before provision for income taxes
    78,149       85,264       157,938       170,161  
Provision for income taxes
    418       310       811       595  
 
Net income
  $ 77,731     $ 84,954     $ 157,127     $ 169,566  
 
 
                               
Dividends declared on preferred securities
       (12,438 )     (11,781 )     (24,974 )     (22,788 )
 
 
                               
Net income applicable to common shares
  $ 65,293     $ 73,173     $    132,153     $   146,778  
 
See notes to unaudited condensed consolidated financial statements.

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Huntington Preferred Capital, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
                                                                 
    Preferred, Class A     Preferred, Class B     Preferred, Class C                  
(in thousands)   Shares     Securities     Shares     Securities     Shares     Securities                  
             
 
                                                               
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                  
 
 
                                                               
Six Months Ended June 30, 2007 ( 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, 2006 :
                                                               
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
    14,000     $ 350,000       ---     $ ---       14,000     $ 3,848,460     $ 146,778     $ 4,796,238  
 
 
                                                               
Six Months Ended June 30, 2007 :
                                                               
Balance, beginning of period
    14,000     $ 350,000       —     $ —       14,000     $ 3,694,753     $ —     $ 4,495,753  
Comprehensive Income:
                                                               
Net income
                                                    157,127       157,127  
 
                                                             
Total comprehensive income
                                                            157,127  
 
                                                             
Dividends declared on Class A preferred securities
                                                    (80 )     (80 )
Dividends declared on Class B preferred securities
                                                    (10,710 )     (10,710 )
Dividends declared on Class C preferred securities
                                                    (1,969 )     (1,969 )
Dividends declared on Class D preferred securities
                                                    (12,215 )     (12,215 )
 
                                                               
 
Balance, end of period
    14,000     $ 350,000       —     $ —       14,000     $ 3,694,753     $ 132,153     $ 4,627,906  
 
See notes to unaudited condensed consolidated financial statements.

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Huntington Preferred Capital, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
                 
    Six Months Ended  
    June 30  
(in thousands)   2007     2006  
 
 
               
Operating activities
               
Net income
  $ 157,127     $ 169,566  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Reduction of allowances for credit losses
    (1,602 )     (14,386 )
Depreciation and amortization
    1,822       2,016  
Change in due to/from The Huntington National Bank
    (227 )     (3,377 )
Other, net
    1,227       851  
 
Net cash provided by operating activities
    158,347       154,670  
 
 
               
Investing activities
               
Participation interests acquired
    (1,446,448 )     (1,439,604 )
Sales and repayments of loans underlying participation interests
    1,343,225       1,496,736  
Proceeds from the sale of premises and equipment
    —       56  
 
Net cash (used in) provided by investing activities
    (103,223 )     57,188  
 
 
               
Financing activities
               
Dividends paid on preferred securities
    (7,096 )     (13,164 )
Dividends paid on common stock
    (296,292 )     (279,684 )
Return of capital to common shareholders
    (153,708 )     (420,316 )
 
Net cash used in financing activities
    (457,096 )     (713,164 )
 
 
               
Change in cash and cash equivalents
    (401,972 )     (501,306 )
 
               
Cash and cash equivalents at beginning of year
    726,154       810,102  
 
Cash and cash equivalents at end of period
  $ 324,182     $ 308,796  
 
 
               
Supplemental information:
               
Income taxes paid
  $ 1,128     $ 677  
Dividends and distributions declared, not paid
    17,878       9,624  
Change in loan participation activity with The Huntington National Bank
    (256,269 )     46,918  
      See notes to unaudited condensed consolidated financial statements.

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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, 2007, the Bank, on a consolidated basis with its subsidiaries, accounted for 99% of Huntington’s consolidated total assets and, for the six months ended June 30, 2007, accounted for 88% of Huntington’s consolidated net income. Thus, for the purpose of presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington to be substantially the same for these periods.
     Certain amounts in the prior year’s financial statements have been reclassified to conform to the 2007 presentation.
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 2006 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 has elected to be treated as a REIT for federal income tax purposes. Management intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, HPCI is not subject to federal income taxes. HPCI’s subsidiary, HPCLI has 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) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes – In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes . This Interpretation of FASB Statement No. 109, Accounting for Income Taxes , contains guidance on the recognition and measurement of uncertain tax positions. HPCI adopted FIN 48 on January 1, 2007. HPCI recognizes the impact of a tax position if it is more likely than not that it will be sustained upon examination, based upon the technical merits of the position. The adoption of this new pronouncement did not impact HPCI’s financial condition, results of operations, or cash flows (See Note 9).

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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
FASB Statement No. 157, Fair Value Measurements (Statement No. 157) – In September 2006, the FASB issued Statement No. 157. This Statement establishes a common definition for fair value to be applied to GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The impact of this new pronouncement is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilitie s (Statement No. 159) – In February 2007, the FASB issued Statement No. 159. This Statement permits entities to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. The impact of this new pronouncement is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.
Note 3 – Lending Concentrations and Participations in Non-Performing Assets and Past Due Loans
     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 94.4%, 94.6%, and 94.7% of the portfolio at June 30, 2007, December 31, 2006, and June 30, 2006, respectively.
     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)   2007     2006     2006  
 
 
                       
Commercial
  $ 391     $ 687     $ 108  
Commercial real estate
    43,263       19,966       16,834  
Consumer
    3,106       3,490       3,545  
Residential real estate
    1,163       1,159       1,687  
 
Total participations in non-performing assets
  $ 47,923     $ 25,302     $ 22,174  
 
 
                       
Participations in accruing loans past due 90 days or more
  $ 3,640     $ 5,392     $ 6,079  
 
Note 4 - Allowances for Credit Losses (ACL)
     The allowances for credit losses (ACL) are comprised of the allowance for loan participation losses (ALPL) and the allowance for unfunded loan participation commitments (AULPC). 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 HPCI having to record a provision expense for ALPL. 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. Over time as loan participations mature, refinance, or other such actions occur, their allowance, not absorbed by loan losses, is released through the reduction in ALPL.

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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
     The following table reflects activity in the ACL for the three and six months ended June 30, 2007 and 2006:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands)