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, 2003
Commission File Number: 000-33243
HUNTINGTON PREFERRED CAPITAL, INC.
OHIO 31-1356967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of October 31, 2003, 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
Consolidated Balance Sheets -
September 30, 2003 and 2002, and December 31, 2002 3
Consolidated Statements of Income -
For the three and nine months ended September 30, 2003 and 2002 4
Consolidated Statements of Changes in Shareholders' Equity -
For the nine months ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 2003 and 2002 6
Notes to Unaudited 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 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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PART I. FINANCIAL INFORMATION
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(in thousands of dollars, except share data) 2003 2002 2002
---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from The Huntington National Bank $ 39,932 $ 534,254 $ 59,063
Interest bearing deposits with The Huntington National Bank 459,623 --- 960,993
Due from Huntington Preferred Capital Holdings, Inc. and The
Huntington National Bank 12,920 7,440 63,033
Loan participation interests
Commercial 194,712 344,858 426,482
Commercial real estate 4,195,813 3,922,467 3,921,836
Consumer 577,319 612,357 651,825
Residential real estate 305,797 153,808 182,032
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Total loan participation interest 5,273,641 5,033,490 5,182,175
Less allowance for loan losses 94,738 140,353 167,015
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Net loan participation interests 5,178,903 4,893,137 5,015,160
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Premises and equipment 33,531 38,088 39,526
Accrued income and other assets 18,046 44,102 44,269
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TOTAL ASSETS $5,742,955 $5,517,021 $6,182,044
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable and other liabilities $ 4,422 $ 670 $ 9,878
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Total Liabilities 4,422 670 9,878
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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 value, 10,000,000 shares
authorized; no shares issued or outstanding --- --- ---
Common stock - without par value; 14,000,000 shares authorized,
issued and outstanding 4,715,351 4,715,351 5,082,511
Retained earnings 222,182 --- 288,655
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Total Shareholders' Equity 5,738,533 5,516,351 6,172,166
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,742,955 $5,517,021 $6,182,044
=================================================================================================================================
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See notes to unaudited consolidated financial statements.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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(in thousands of dollars) 2003 2002 2003 2002
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest and fee income
Interest on loan participation interests
Commercial $ 1,917 $ 5,421 $ 8,850 $ 19,170
Commercial real estate 46,593 53,512 139,429 161,682
Consumer 11,729 18,198 37,497 57,124
Residential real estate 4,689 3,403 9,940 11,814
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Total loan participation interest income 64,928 80,534 195,716 249,790
Fees from loan participation interests 1,566 2,135 6,908 7,313
Interest on deposits with The Huntington
National Bank 1,193 4,033 5,062 9,195
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TOTAL INTEREST AND FEE INCOME 67,687 86,702 207,686 266,298
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Provision (credit) for loan losses (18,918) --- (33,918) 19,839
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INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES 86,605 86,702 241,604 246,459
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Non-interest income
Rental income 1,458 1,530 4,727 4,598
Collateral fees 212 191 519 464
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TOTAL NON-INTEREST INCOME 1,670 1,721 5,246 5,062
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Non-interest expense
Servicing fees 2,101 1,623 5,427 5,068
Depreciation and amortization 1,378 1,428 4,162 4,329
Loss on sale of fixed assets --- 29 325 436
Other 181 72 332 215
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TOTAL NON-INTEREST EXPENSE 3,660 3,152 10,246 10,048
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INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) 84,615 85,271 236,604 241,473
Income tax expense (benefit) 24 22 73 (70)
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NET INCOME BEFORE PREFERRED DIVIDENDS 84,591 85,249 236,531 241,543
DIVIDENDS DECLARED ON PREFERRED SECURITIES 4,488 5,892 14,349 18,105
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NET INCOME APPLICABLE TO COMMON SHARES $ 80,103 $ 79,357 $ 222,182 $ 223,438
============================================================================================================================
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See notes to unaudited consolidated financial statements.
PREFERRED, CLASS A PREFERRED, CLASS B PREFERRED, CLASS C
------------------- ------------------- -------------------
(in thousands) SHARES SECURITIES SHARES SECURITIES SHARES SECURITIES
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Nine Months Ended September 30, 2002:
Balance, beginning of period 1 $ 1,000 400 $400,000 2,000 $ 50,000
Comprehensive Income:
Net income
Total comprehensive income
Dividends declared on Class A preferred securities
Dividends declared on Class B preferred securities
Dividends declared on Class C preferred securities
Dividends declared on Class D preferred securities
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Balance, end of period (Unaudited) 1 $ 1,000 400 $400,000 2,000 $ 50,000
===================================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2003:
BALANCE, BEGINNING OF PERIOD 1 $ 1,000 400 $400,000 2,000 $ 50,000
COMPREHENSIVE INCOME:
NET INCOME
TOTAL COMPREHENSIVE INCOME
DIVIDENDS DECLARED ON CLASS A PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS B PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS C PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS D PREFERRED SECURITIES
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BALANCE, END OF PERIOD (UNAUDITED) 1 $ 1,000 400 $400,000 2,000 $ 50,000
===================================================================================================================================
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PREFERRED, CLASS D PREFERRED COMMON
------------------- ------------------ -------------------
(in thousands) SHARES SECURITIES SHARES SECURITIES SHARES SECURITIES
-----------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2002:
Balance, beginning of period 14,000 $350,000 --- $ --- 14,000 $ 5,082,511
Comprehensive Income:
Net income
Total comprehensive income
Dividends declared on Class A preferred securities
Dividends declared on Class B preferred securities
Dividends declared on Class C preferred securities
Dividends declared on Class D preferred securities
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Balance, end of period (Unaudited) 14,000 $350,000 --- $ --- 14,000 $ 5,082,511
=================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2003:
BALANCE, BEGINNING OF PERIOD 14,000 $350,000 --- $ --- 14,000 $ 4,715,351
COMPREHENSIVE INCOME:
NET INCOME
TOTAL COMPREHENSIVE INCOME
DIVIDENDS DECLARED ON CLASS A PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS B PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS C PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS D PREFERRED SECURITIES
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BALANCE, END OF PERIOD (UNAUDITED) 14,000 $350,000 --- $ --- 14,000 $ 4,715,351
=================================================================================================================
RETAINED
(in thousands) EARNINGS TOTAL
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Nine Months Ended September 30, 2002:
Balance, beginning of period $ 65,217 $ 5,948,728
Comprehensive Income:
Net income 241,543 241,543
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Total comprehensive income 241,543
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Dividends declared on Class A preferred securities (80) (80)
Dividends declared on Class B preferred securities (5,764) (5,764)
Dividends declared on Class C preferred securities (2,954) (2,954)
Dividends declared on Class D preferred securities (9,307) (9,307)
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Balance, end of period (Unaudited) $288,655 $ 6,172,166
==============================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2003:
BALANCE, BEGINNING OF PERIOD $ --- $ 5,516,351
COMPREHENSIVE INCOME:
NET INCOME 236,531 236,531
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TOTAL COMPREHENSIVE INCOME 236,531
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DIVIDENDS DECLARED ON CLASS A PREFERRED SECURITIES (80) (80)
DIVIDENDS DECLARED ON CLASS B PREFERRED SECURITIES (3,760) (3,760)
DIVIDENDS DECLARED ON CLASS C PREFERRED SECURITIES (2,953) (2,953)
DIVIDENDS DECLARED ON CLASS D PREFERRED SECURITIES (7,556) (7,556)
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BALANCE, END OF PERIOD (UNAUDITED) $222,182 $ 5,738,533
==============================================================================
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See notes to unaudited consolidated financial statements.
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------------
(in thousands of dollars) 2003 2002
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(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income before preferred dividends $ 236,531 $ 241,543
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision (credit) for loan losses (33,918) 19,839
Depreciation and amortization 4,162 4,329
Loss on disposal of fixed assets 325 436
Decrease in accrued income and other assets 20,200 1,405
(Increase) decrease in due from/to Huntington
Preferred Capital Holdings, Inc. and The
Huntington National Bank (5,480) 230,776
Decrease in other liabilities (88) (31)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 221,732 498,297
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INVESTING ACTIVITIES
Participation interests acquired (4,438,760) (3,313,460)
Sales and repayments on loans underlying
participation interests 4,192,767 3,478,231
Proceeds from the sale of fixed assets 71 303
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NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (245,922) 165,074
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FINANCING ACTIVITIES
Dividends paid on preferred stock (10,509) (8,227)
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NET CASH USED FOR FINANCING ACTIVITIES (10,509) (8,227)
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CHANGE IN CASH AND CASH EQUIVALENTS (34,699) 655,144
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 534,254 364,912
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AT END OF PERIOD $ 499,555 $ 1,020,056
==================================================================================================
Supplemental information:
Income taxes paid $ 161 $ ---
Interest paid --- ---
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See notes to unaudited consolidated financial statements.
NOTES TO THE UNAUDITED 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. HPCI's common stock is owned by three related parties, HPC Holdings-III, Inc. (HPCH-III), a Nevada corporation; Huntington Preferred Capital II, Inc. (HPCII), also a REIT and an Ohio corporation; and Huntington Bancshares Incorporated (Huntington), a Maryland corporation headquartered in Columbus, Ohio. HPCI and HPCII are subsidiaries of HPCH-III, which is a subsidiary of Huntington Preferred Capital Holdings, Inc. (Holdings), an Indiana corporation. Holdings is a subsidiary of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and also headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of 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).
NOTE 2 - BASIS OF PRESENTATION AND NEW ACCOUNTING PRONOUNCEMENTS
The unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and/or recurring accruals, which were, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). As permitted by the Securities and Exchange Commission, certain information and footnote disclosures normally included in annual financial statements have been omitted. The Notes to the Consolidated Financial Statements appearing in HPCI's 2002 Annual Report on Form 10-K (2002 Annual Report), which include descriptions of significant accounting policies, should be read in conjunction with these interim financial statements.
In preparing financial statements in conformity with GAAP, management of HPCI is required to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenue and expenses during the reporting period. An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements of HPCI if a different amount within a range of estimates were used or if estimates changed from period to period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.
Cash and cash equivalents used in the Statement of Cash Flows are defined as the sum of "Cash and due from The Huntington National Bank" and "Interest bearing deposits with The Huntington National Bank".
Statement of Financial Accounting Standards (SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases, addresses the timing of recognition of loan and lease origination fees and certain expenses. The statement requires that such fees and costs, if material, be deferred and amortized over the estimated life of the asset. HPCI receives origination fees related to certain participations it purchases. Prior to July 1, 2003, HPCI did not defer origination fees and recognized the amounts in the period of origination. HPCI began to defer origination fees prospectively for all loans purchased after June 30, 2003. For the third quarter, HPCI deferred $1.4 million in fees. The decision to defer fees from purchased loans only impacts the timing, not the total amount, of net revenue recognized over the life of the asset. If HPCI had previously deferred these fees, the impacts on the prior period financial statements presented in this document would have been immaterial. Additionally, the decision to prospectively defer these fees will not materially impact HPCI's future results of operations and will have no impact on its ability to pay operating expenses and dividends.
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics for Both Liabilities and Equity. This Statement establishes standards for how an issuer such as Huntington classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is (a) in the form of mandatorily redeemable shares; (b) that, at inception, embodies an obligation to repurchase equity shares; and (c) that embodies an unconditional obligation that the issuer must or may settle by issuing a variable number of equity shares. This Statement was adopted as of July 1, 2003. The adoption of Statement No. 150 did not have a material impact on HPCI.
HPCI has elected to be treated as a REIT for federal income tax purposes and intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, is not subject to federal income taxes. HPCI's subsidiary,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 consolidated financial statements.
All of HPCI's common stock is owned by Huntington, HPCII, and HPCH-III and, therefore, earnings per common share information is not presented.
NOTE 3 - LOAN PARTICIPATION INTERESTS
Participation interests are categorized based on the collateral underlying the loan. Loan participation interests were comprised of the following:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(in thousands of dollars) 2003 2002 2002
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Commercial $ 194,712 $ 344,858 $ 426,482
Commercial real estate 4,195,813 3,922,467 3,921,836
Consumer 577,319 612,357 651,825
Residential real estate 305,797 153,808 182,032
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TOTAL LOAN PARTICIPATIONS $ 5,273,641 $ 5,033,490 $ 5,182,175
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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 and were made to borrowers in the four states of Ohio, Michigan, Indiana, and Kentucky, which comprise 93.9% and 95.1% of the portfolio at September 30, 2003 and 2002, respectively.
PARTICIPATIONS IN NON-PERFORMING LOANS AND PAST DUE LOANS
The participations in loans on non-accrual status and loans past due 90 days or more and still accruing interest, were as follows:
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SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(in thousands of dollars) 2003 2002 2002
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Commercial $ 11,677 $ 57,112 $ 92,427
Commercial real estate 25,302 32,979 42,653
Consumer --- --- ---
Residential real estate 4,795 6,455 6,150
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TOTAL PARTICIPATIONS IN NON-ACCRUAL LOANS $ 41,774 $ 96,546 $ 141,230
==============================================================================================
PARTICIPATIONS IN ACCRUING LOANS
PAST DUE 90 DAYS OR MORE $ 17,252 $ 26,060 $ 20,118
==============================================================================================
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NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses (ALL) follows for the periods indicated;
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
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BALANCE, BEGINNING OF PERIOD $ 110,127 $ 163,359 $ 140,353 $ 175,690
Allowance of loan participations acquired 11,610 13,546 35,007 30,807
Net loan losses (8,081) (9,890) (46,704) (59,321)
Provision (credit) for loan losses (18,918) --- (33,918) 19,839
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BALANCE, END OF PERIOD $ 94,738 $ 167,015 $ 94,738 $ 167,015
=================================================================================================================
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During the first quarter of 2003, a total of $12.2 million of interest receivables were determined to be uncollectable and charged off against the ALL. These interest receivables related to loans that were previously charged off.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DIVIDENDS
Holders of Class A preferred securities, a majority of which are currently held by HPCH-III and the remainder by current and past employees of the Bank and Huntington, are entitled to receive, if, when, and as declared by the Board of Directors of HPCI out of funds legally available, dividends at a fixed rate of $80.00 per share per annum. Dividends on the Class A preferred securities, if declared, are payable annually in December to holders of record on the record date fixed for such purpose by the Board of Directors in advance of payment.
The holder of the Class B preferred securities, HPC Holdings-II, Inc., a direct non-bank subsidiary of Huntington, is entitled to receive, if, when, and as declared by the Board of Directors of HPCI out of funds legally available, dividends at a variable rate equal to the three month LIBOR published on the first day of each calendar quarter times par value. Dividends on the Class B preferred securities, which are declared quarterly, are payable annually 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, currently HPCH-III, 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 follows for the periods indicated:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
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Class A preferred securities $ --- $ --- $ 80 $ 80
Class B preferred securities 1,110 1,860 3,760 5,764
Class C preferred securities 984 984 2,953 2,954
Class D preferred securities 2,393 3,048 7,556 9,307
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TOTAL DIVIDENDS DECLARED $ 4,487 $ 5,892 $ 14,349 $ 18,105
=============================================================================================
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As of September 30, 2003 and 2002, declared and unpaid dividends totaled $3.8 million and $9.9 million, respectively. For 2003 and 2002, dividends payable represents dividends declared but unpaid on HPCI's Class A and B preferred securities. In addition, dividends that were declared on the Class C and D preferred securities for the third quarter of 2002 were not paid until October 1, 2002, and thus were included in dividends payable as of September 30, 2002. Dividends payable is reflected as a component of dividends payable and other liabilities in the consolidated balance sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - RELATED PARTY TRANSACTIONS
HPCI is a party to an Amended and Restated Loan Subparticipation Agreement with Holdings, a Loan Subparticipation Agreement with HPCH-III, and a Loan Participation Agreement with the Bank. Under these agreements, HPCI holds a 100% participation interest and a subparticipation interest in Holdings' 99% participation interest in loans originated by the Bank and its subsidiaries. The participation and subparticipation interests were in commercial, commercial real estate, residential real estate, and consumer loans that were either directly underwritten by the Bank and its subsidiaries or acquired by the Bank. On May 12, 2003, the amendments to and new participation and subparticipation agreements were approved by the Board of Directors to allow HPCI to acquire interests in loans directly from the Bank. Prior to this date, participation interests in loans were acquired from the Bank only through Holdings at the Bank's carrying value, which is the principal amount outstanding plus accrued interest, net of unearned income, if any, less an ALL. The amended and new agreements also allow for HPCI to acquire up to a 100% participation interest in such loans. HPCI expects to continue to purchase such interests, net of ALL, in the future from the Bank or its affiliates.
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. As of June 1, 2003, the annual servicing fee the Bank charges was 0.125% of the outstanding principal balances of the underlying commercial and commercial real estate loans, 0.320% of the outstanding principal balances of the underlying consumer loans, and 0.2997% of the outstanding principal balances of the underlying residential real estate loans. Prior to June 1, 2003, the servicing fee the Bank charged, on an annual basis, was 0.125% with respect to the underlying commercial real estate, commercial, and consumer loan balances and 2.35% of the interest income collected on residential real estate loans. In its capacity as servicer, the Bank collects and holds the loan payments received on behalf of HPCI until the end of each month. At month end, the payments are transferred to HPCI and, accordingly, HPCI does not reflect any receivables for payments from the Bank in the accompanying consolidated financial statements. Servicing fee expense paid to the Bank totaled $2.1 million for the three months ended September 30, 2003, and $1.6 million for the same period in 2002. In addition, servicing fee expense paid to the Bank totaled $5.4 million and $5.1 million for the nine months ended September 30, 2003 and 2002, respectively.
Huntington and the Bank's personnel handle day-to-day operations of HPCI such as financial analysis and reporting, accounting, tax reporting, and other administrative functions. On a monthly basis, HPCI reimburses the Bank and Huntington for the cost related to the time spent by employees for performing these functions. These personnel costs totaled $92,000 and $40,000 respectively, for each of the three-month periods ended September 30, 2003 and 2002, and $190,000 and $121,000, respectively, for each of the nine month periods ended September 30, 2003 and 2002.
In February 2001, Huntington purchased 18,667 shares of the 14 million outstanding common shares of HPCI from Holdings (after adjusting for the April 2001 18,666.67-for-1 stock split). Prior to February 2001, Holdings was the owner of 100% of the outstanding common stock of HPCI. On July 1, 2002, Holdings exchanged 4.55 million common shares of HPCI and certain other assets for two classes of HPC II's preferred stock. On December 27, 2002, Holdings contributed its ownership in HPCI's Class A and Class D preferred securities and its remaining common stock to HPCH-III. The following table represents the current ownership of HPCI's common and preferred securities:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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NUMBER OF NUMBER OF PREFERRED SECURITIES
COMMON -----------------------------------------------------------------
OWNER AT SEPTEMBER 30, 2003: SHARES CLASS A CLASS B CLASS C CLASS D
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HPC II 4,550,000 --- --- --- ---
HPCH-III 9,431,333 893 --- --- 14,000,000
HPC Holdings II, Inc. --- --- 400,000 --- ---
Huntington 18,667 --- --- --- ---
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Total held by related parties 14,000,000 893 400,000 --- 14,000,000
========================================================================================================================
Other shareholders --- 107 --- 2,000,000 ---
========================================================================================================================
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As of September 30, 2003, 10.7% of the Class A preferred securities were owned by current and past employees of Huntington and its subsidiaries in addition to the 89.3% owned by HPCH-III. 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, 2003, a total of 7,100 shares, or 0.355%, were beneficially owned by HPCI board members and executive officers in the aggregate. All of the Class D preferred securities owned by HPCH-III are being held for possible sale to the public in the future. Dividends paid to the Class C and D shareholders in the third quarter of 2003 were $984,000 and $2,393,000, respectively, and were paid on September 30, 2003.
Both the Class C and D preferred securities are entitled to one-tenth of one vote per share on all matters submitted to HPCI shareholders. The Class C and D preferred securities are exchangeable, without shareholder approval or any action of shareholders, for preferred securities of the Bank with substantially equivalent terms as to dividends, liquidation preference, and redemption if the Office of the Comptroller of the Currency (OCC) so directs only under the following circumstances where the Bank becomes or may in the near term become undercapitalized, or the Bank is placed in conservatorship or receivership. The Class C and Class D preferred securities are redeemable at HPCI's option on or after December 31, 2021, and December 31, 2006, respectively, with prior consent of the OCC.
HPCI's premises and equipment were acquired from the Bank through Holdings. Leasehold improvements were subsequently contributed to HPCLI for its common shares in the fourth quarter of 2001. HPCLI charges rent to the Bank for use of applicable facilities by the Bank. During each of the quarters ended September 30, 2003 and 2002, HPCLI received $1.5 million of rental income, and during the nine months ended September 30, 2003 and 2002, HPCLI received $4.7 million and $4.6 million, respectively. Rental income was reflected as a component of non-interest income in the consolidated statements of income.
HPCI has a non-interest bearing receivable from Holdings of $12.9 million at September 30, 2003, and $63.0 million at September 30, 2002. At December 31, 2002, there were $7.4 million of non-interest bearing receivables from Holdings. These balances represent unsettled cash transactions involving its participation interests that occur in the ordinary course of business.
The Bank is eligible to obtain advances from various federal and government-sponsored agencies such as the Federal Home Loan Bank of Cincinnati. 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. See Note 7 for further information regarding the pledging of HPCI's assets in association with the Bank's advances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPCI maintains and transacts all of its cash activities through a non-interest bearing demand deposit account with the Bank. In addition, to the extent that it does not jeopardize qualification as a REIT, HPCI invests available funds in Eurodollar deposits with the Bank for a term of not more than 30 days. The following amounts were on deposit with the Bank:
------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
(in thousands of dollars) 2003 2002 2002
------------------------------------------------------------------------------------------
Non-interest bearing $ 39,932 $ 534,254 $ 59,063
Interest bearing 459,623 --- 960,993
------------------------------------------------------------------------------------------
Total deposits with the Bank $ 499,555 $ 534,254 $ 1,020,056
==========================================================================================
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NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Bank is eligible to obtain advances from various federal and government-sponsored agencies such as the Federal Home Loan Bank of Cincinnati (FHLBC). 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 federal or government-sponsored agencies 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.
The Bank is currently eligible to obtain one or more advances from the FHLBC based upon the amount of FHLBC capital stock owned by the Bank. As of September 30, 2003, the Bank's total borrowing capacity under this facility was capped at $1.38 billion. As of this same date, the Bank had borrowings of $1.29 billion under this facility. In addition, the FHLBC issued a standby letter of credit for the account of a customer of Huntington totaling $18.2 million which was secured by loans which have been participated to HPCI.
HPCI has entered into an agreement with the Bank with respect to the pledge of HPCI's assets to collateralize the Bank's borrowings from the FHLBC. The agreement provides, among other things, that the Bank will not place at risk HPCI's assets in excess of an aggregate amount or percentage of such assets established from time to time by HPCI's board of directors, including a majority of HPCI's independent directors. HPCI's board has set this limit at $1.0 billion, which limit may be changed in the future by the board of directors, including a majority of HPCI's independent directors. As of September 30, 2003, HPCI's pledged collateral was limited to HPCI's interest in 1-4 family residential mortgages and second mortgage loans, totalling $668 million. The agreement also provides that the Bank will pay HPCI a monthly fee based upon the pledged collateral held by HPCI. For the three and nine month periods ended September 30, 2003, the Bank paid a total of $212,000 and $519,000, respectively, to HPCI, representing twelve basis points per year on the collateral pledged, as compensation for making such assets available to the Bank as collateral. For both the three and nine month periods ended September 30, 2002, the Bank paid a total of $191,000 and $464,000, respectively, to HPCI. HPCI began receiving these fees after the first quarter of last year.
NOTE 8 - 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.
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Huntington Preferred Capital, Inc. (HPCI) is an Ohio corporation operating as a real estate investment trust (REIT) for federal income tax purposes. HPCI's principal business objective is to acquire, hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to its shareholders.
HPCI was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. HPCI's common stock is owned by three related parties, HPC Holdings-III, Inc. (HPCH-III), a Nevada corporation; Huntington Preferred Capital II, Inc. (HPCII), also a REIT and an Ohio corporation; and Huntington Bancshares Incorporated (Huntington), a Maryland corporation headquartered in Columbus, Ohio. HPCI and HPCII are subsidiaries of HPCH-III, which is a subsidiary of Huntington Preferred Capital Holdings, Inc. (Holdings), an Indiana corporation. Holdings is a subsidiary of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and also headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of 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).
HPCI is a party to an Amended and Restated Loan Subparticipation Agreement with Holdings, a Loan Subparticipation Agreement with HPCH-III, and a Loan Participation Agreement with the Bank. The Bank is required, through its 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. HPCI, however, has retained the right to elect to foreclose on mortgaged properties and the Bank has agreed to follow any such direction from HPCI in this regard. The Bank also collects and remits principal and interest payments, maintains perfected collateral positions, and submits and pursues insurance claims. In addition, the Bank provides to HPCI accounting and reporting services as required. The Bank is required to pay all expenses related to the performance of its duties under the participation and subparticipation agreements. All of these participation interests to date were acquired directly or indirectly from the Bank.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of financial condition and results of operations contains forward-looking statements about HPCI, including descriptions of products or services, plans, or objectives of its management for future operations, and forecasts of its revenues, earnings, or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors, including, but not limited to, those set forth under the heading "Business Risks" included in Item 1 of HPCI's 2002 Annual Report on Form 10-K (2002 Annual Report) and other factors described from time to time in HPCI's other filings with the Securities and Exchange Commission, could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements.
Forward-looking statements speak only as of the date they are made. HPCI assumes no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
The following discussion and analysis provides investors and others with information that HPCI's management believes to be necessary for an understanding of its financial condition, changes in financial condition, and results of operations, and should be read in conjunction with the financial statements, notes, and other information contained in this document.
CRITICAL ACCOUNTING POLICIES
Note 1 to HPCI's consolidated financial statements included in its 2002
Annual Report lists critical accounting policies used in the development and
presentation of its financial statements. This discussion and analysis, the
critical 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 HPCI, its financial
position, results of operations, and cash flows.
Statement of Financial Accounting Standards (SFAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases, addresses the timing of recognition of loan and lease origination fees and certain expenses. The statement requires that such fees and costs, if material, be deferred and amortized over the estimated life of the asset. HPCI receives origination fees related to certain participations it purchases. Prior to July 1, 2003, HPCI did not defer origination fees and recognized the amounts in the period of origination. HPCI began to defer origination fees prospectively for all loans purchased after June 30, 2003. For the third quarter, HPCI deferred $1.4 million in fees. The decision to defer fees from purchased loans only impacts the timing, not the total amount, of net revenue recognized over the life of the asset. If HPCI had previously deferred these fees, the impacts on the prior period financial statements presented in this document would have been immaterial. Additionally, the decision to prospectively defer these fees will not materially impact HPCI's future results of operations and will have no impact on its ability to pay operating expenses and dividends.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires HPCI's management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements of HPCI if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.
OVERVIEW
HPCI's income was primarily derived from its participation interests in loans acquired directly or indirectly from the Bank. Income varies based on the level of these assets and interest rates earned on these assets. The cash flows from these assets are used to satisfy HPCI's preferred dividend obligations. The preferred securities are considered equity and therefore, the dividends are not reflected as interest expense.
HPCI's net income before preferred dividends was $84.6 million and $85.2 million, respectively, for the three months ended September 30, 2003 and 2002, while net income available to common shareholders was $80.1 million and $79.4 million, respectively, for the same three month periods. For the nine months ended September 30, 2003 and 2002, HPCI's net income before preferred dividends was $236.5 million and $241.5 million, respectively, while net income available to common shareholders was $222.2 million and $223.4 million, respectively, for the same nine month periods.
HPCI had total assets and total equity of $5.7 billion at September 30, 2003, up slightly from $5.5 billion at December 31, 2002, but down from $6.2 billion at September 30, 2002. At September 30, 2003 and 2002, assets, in the amount of $5.3 billion and $5.2 billion, respectively, consisted of participation interests in loans. Participation interests in specific underlying loans were as follows:
------------------------------------------------------------------------------------------------------------------------------
TABLE 1 - LOAN PARTICIPATION INTERESTS
------------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF
SEPTEMBER 30, TOTAL DECEMBER 31, TOTAL SEPTEMBER 30, TOTAL
2003 ASSETS 2002 ASSETS 2002 ASSETS
------------------------------------------------------------------------------------------------------------------------------
Commercial $ 194,712 3.4 $ 344,858 6.3 $ 426,482 6.9
Commercial real estate 4,195,813 73.1 3,922,467 71.1 3,921,836 63.4
Consumer 577,319 10.1 612,357 11.1 651,825 10.5
Residential real estate 305,797 5.3 153,808 2.8 182,032 2.9
------------------------------------------------------------------------------------------------------------------------------
Total $5,273,641 91.8 $5,033,490 91.2 $5,182,175 83.8
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Participation interests in commercial loans at September 30, 2003 declined 54% from a year ago, while residential real estate loans increased 68% over the same period. HPCI has not acquired additional participation interests in commercial loans over the past several quarters, but did acquire participation interests in $269.8 million of residential real estate loans in June 2003. Participation interests in commercial real estate loans at September 30, 2003 increased 7% over levels at the end of the same period in 2002. Participation interests in consumer loans
decreased 11% for the same comparable periods as scheduled payment and prepayment activity in this portfolio outpaced the investment in new participation interests. Participation interests in consumer loans were comprised largely of interests in home equity loans secured by first and second mortgages.
Interest-bearing and non-interest bearing cash balances on deposit with the Bank were $499.6 million at September 30, 2003, down from $534.3 million at December 31, 2002, and down from $1.0 billion at September 30, 2002. These declines were due largely to the acquisition of participation interests. Typically, cash was invested with the Bank in an interest bearing account. These interest-bearing balances are invested overnight or in Eurodollar deposits with the Bank for a term of not more than 30 days.
At September 30, 2003, amounts due from Holdings and the Bank were $12.9 million, down from $63.0 million at September 30, 2002. These represent amounts due from or due to Holdings and/or the Bank that arise in the ordinary course of business for unsettled transactions involving participation interests, fees, and other related costs.
Dividends payable and other liabilities were $4.4 million at September 30, 2003, down from $9.9 million at September 30, 2002, but up from $0.7 million at December 31, 2002. This decline since September 30, 2002 was due to the timing of the payment of dividends paid on the Class C and D preferred securities and reduced LIBOR rates. All preferred dividends declared in 2002 were paid by December 31, 2002.
Shareholders' equity was $5.7 billion at September 30, 2003, down from $6.2 billion at September 30, 2002, but up from $5.5 billion at December 31, 2002. The $0.5 billion decline since September 30, 2002 largely reflected the impact of the return of capital on December 31, 2002 and the declaration and payment of common and preferred dividends in the fourth quarter of 2002.
Qualification as a REIT involves application of specific provisions of
the Internal Revenue Code relating to various asset tests. A REIT must satisfy
six asset tests quarterly: (1) 75% of the value of the REIT's total assets must
consist of real estate assets, cash and cash items, and government securities;
(2) not more than 25% of the value of the REIT's total assets may consist of
securities, other than those includible under the 75% test; (3) not more than 5%
of the value of its total assets may consist of securities of any one issuer,
other than those securities includible under the 75% test or securities of
taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power
of any one issuer may be held, other than those securities includible under the
75% test or securities of taxable REIT subsidiaries; (5) not more than 10% of
the total value of the outstanding securities of any one issuer may be held,
other than those securities includible under the 75% test or securities of
taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more
taxable REIT subsidiaries which comprise more than 20% of its total assets. At
September 30, 2003, HPCI had met all of the quarterly asset tests.
Also, a REIT must annually satisfy two gross income tests: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test plus dividends, interest and gains from the sale of securities. In addition, a REIT must distribute 90% of the REIT's taxable income for the taxable year, excluding any net capital gains, to maintain its non-taxable status for federal income tax purposes. As of December 31, 2002, HPCI had met all annual income and distribution tests.
HPCI operates in a manner that will not cause it to be deemed an investment company under the Investment Company Act. The Investment Company Act exempts from registration as an investment company an entity that is primarily engaged in the business of "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (Qualifying Interests). Under positions taken by the SEC staff in no-action letters, in order to qualify for this exemption, HPCI must invest at least 55% of its assets in Qualifying Interests and an additional 25% of its assets in real estate-related assets, although this percentage may be reduced to the extent that more than 55% of its assets are invested in Qualifying Interests. The assets in which HPCI may invest under the Internal Revenue Code therefore may be further limited by the provisions of the Investment Company Act and positions taken by the SEC staff. At September 30, 2003, HPCI is exempt from registration as an investment company under the Investment Company Act and intends to operate its business in a manner that will maintain this exemption.
RESULTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
TABLE 2 - QUARTERLY STATEMENTS OF INCOME
------------------------------------------------------------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
(in thousands of dollars) THIRD SECOND FIRST FOURTH THIRD SECOND
------------------------------------------------------------------------------------------------------------------------------------
Interest and fee income
Interest on loan participation interests
Commercial $ 1,917 $ 2,979 $ 3,955 $ 5,734 $ 5,421 $ 6,440
Commercial real estate 46,593 45,879 46,957 50,951 53,512 54,290
Consumer 11,729 12,388 13,379 16,838 18,198 18,882
Residential real estate 4,689 3,000 2,251 2,807 3,403 3,851
------------------------------------------------------------------------------------------------------------------------------------
Total loan participation interest income 64,928 64,246 66,542 76,330 80,534 83,463
Fees from loan participation interests 1,566 2,609 2,733 1,988 2,135 2,737
Interest on deposits with The Huntington
National Bank 1,193 2,015 1,854 3,138 4,033 3,284
------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST AND FEE INCOME 67,687 68,870 71,129 81,456 86,702 89,484
------------------------------------------------------------------------------------------------------------------------------------
Provision (credit) for loan losses (18,918) (15,000) (20,000) --- --- 3,000
------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR LOAN LOSSES 86,605 83,870 71,129 101,456 86,702 86,484
------------------------------------------------------------------------------------------------------------------------------------
Non-interest income
Rental income 1,458 1,463 1,806 1,520 1,530 1,533
Collateral fees 212 146 160 177 191 273
------------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,670 1,609 1,966 1,697 1,721 1,806
------------------------------------------------------------------------------------------------------------------------------------
Non-interest expense
Servicing fees 2,101 1,750 1,575 1,647 1,623 1,715
Depreciation and amortization 1,378 1,383 1,401 1,437 1,428 1,450
Loss on disposal of fixed assets --- --- 325 --- 29 ---
Other 181 95 57 150 72 92
------------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 3,660 3,228 3,358 3,234 3,152 3,257
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 84,615 82,251 69,737 99,919 85,271 85,033
Income taxes 24 24 24 25 22 25
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE PREFERRED DIVIDENDS 99,894 85,249 84,591 82,227 69,713 85,008
DIVIDENDS DECLARED ON PREFERRED SECURITIES 4,488 4,787 5,074 5,709 5,892 6,231
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 80,103 $ 77,440 $ 64,639 $ 94,185 $ 79,357 $ 78,777
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INTEREST AND FEE INCOME
HPCI's primary source of revenue was interest and fee income on its participation interests in loans. At September 30, 2003 and 2002, HPCI did not have any interest-bearing liabilities or related interest expense. HPCI's capital structure and continued operating cash flows provide funding for the acquisition of participation interests. Interest income was impacted by changes in the level of interest rates and earning assets. The yield on earning assets was the percentage of interest income to average earning assets. For the three and nine month periods ended September 30, 2003 and 2002, HPCI's average balances, interest and fee income, and yields are presented below:
----------------------------------------------------------------------------------------------------------------------------
TABLE 3 - QUARTERLY AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
2003 2002
----------------------------------------- -------------------------------------------
AVERAGE AVERAGE
(in millions of dollars) BALANCE INCOME YIELD BALANCE INCOME YIELD
----------------------------------------------------------------------------------------------------------------------------
Loan participation interests:
Commercial $ 220.6 $ 1.9 3.40% $ 473.5 $ 5.4 4.54%
Commercial real estate 4,134.0 46.6 4.41 3,873.7 53.5 5.48
Consumer 541.9 11.7 8.59 679.2 18.2 10.63
Residential real estate 352.3 4.7 5.32 195.6 3.4 6.96
----------------------------------------------------------------------------------------------------------------------------
Total loan participations 5,248.8 64.9 4.86 5,222.0 80.5 6.12
----------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits
in banks 465.8 1.2 1.02 908.8 4.0 1.76
Fees from loan participation
interests 1.6 2.1
----------------------------------------------------------------------------------------------------------------------------
Total $ 5,714.6 $ 67.7 4.66% $ 6,130.8 $ 86.7 5.61%
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----------------------------------------------------------------------------------------------------------------------------
TABLE 4 - NINE-MONTH AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
2003 2002
----------------------------------------- ------------------------------------------
AVERAGE AVERAGE
(in millions of dollars) BALANCE INCOME YIELD BALANCE INCOME YIELD
----------------------------------------------------------------------------------------------------------------------------
Loan participation interests:
Commercial $ 271.1 $ 8.9 4.30% $ 537.7 $ 19.2 4.77%
Commercial real estate 4,011.9 139.4 4.58 3,817.4 161.7 5.66
Consumer 567.3 37.5 8.84 718.1 57.1 10.64
Residential real estate 238.6 9.9 5.56 224.6 11.8 7.01
----------------------------------------------------------------------------------------------------------------------------
Total loan participations 5,088.9 195.7 5.09 5,297.8 249.8 6.30
----------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits
in banks 573.1 5.1 1.18 694.8 9.2 1.77
Fees from loan participation
interests 6.9 7.3
----------------------------------------------------------------------------------------------------------------------------
Total $ 5,662.0 $ 207.7 4.86% $ 5,992.6 $ 266.3 5.94%
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For the three months ended September 30, 2003, interest and fee income was $67.7 million, compared with $86.7 million for the same quarter in 2002. As shown in Table 5, the decline in interest and fee income was largely due to the lower interest rate environment, while average participation balances remained relatively unchanged. Approximately three-quarters of the loan participation portfolio was variable in nature with respect to interest rate. As shown in the table above, the yield on HPCI's participation interests declined from 6.12% in the third quarter a year ago to 4.86% for the recent three-month period.
On a nine month basis, interest and fee income was $207.7 million for 2003, compared with $266.3 million for the same period in 2002. The yield on HPCI's participation interests declined from 6.30% for the nine months ended September 30, 2002 to 5.09% for the same period in 2003. As shown in Table 6, the decline in interest and fee income was due to the lower interest rate environment, with the remaining decrease due to declining average participation balances.
HPCI began prospectively applying deferral accounting related to origination fees associated with purchased loan participations in the third quarter of 2003. As discussed in note 2, the decision to defer these fees only impacts the timing, not the total amount, of revenue recognized over the life of the assets.
The table below shows changes in interest and fee income for the three and nine-month periods ended September 30, 2003 and 2002 due to volume and rate for each category of earning assets. The change in interest and fees not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in volume and rate.
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TABLE 5 - QUARTERLY CHANGE IN INTEREST AND FEE INCOME
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
2003 COMPARED TO 2002 2002 COMPARED TO 2001
---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
FROM PREVIOUS FROM PREVIOUS
YEAR DUE TO: YEAR DUE TO:
---------------------------------------------------------------------------------------------------------------------
(in millions of dollars) VOLUME YIELD TOTAL VOLUME YIELD TOTAL
---------------------------------------------------------------------------------------------------------------------
Interest bearing deposits in banks $ (1.5) $ (1.3) $ (2.8) $ 1.8 $ (3.9) $ (2.1)
Loan participations purchased:
Commercial (2.5) (1.1) (3.6) (0.6) (3.0) (3.6)
Commercial real estate 3.5 (10.8) (7.3) (5.4) (17.9) (23.3)
Consumer (3.4) (3.2) (6.6) (9.9) 2.7 (7.2)
Residential real estate 2.3 (1.0) 1.3 (6.7) (0.5) (7.2)
---------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS (1.6) (17.4) (19.0) (20.8) (22.6) (43.4)
---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES --- --- --- --- --- ---
---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST AND FEE INCOME $ (1.6) $(17.4) $(19.0) $(20.8) $(22.6) $(43.4)
=====================================================================================================================
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TABLE 6 - NINE-MONTH CHANGE IN INTEREST AND FEE INCOME
---------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
2003 COMPARED TO 2002 2002 COMPARED TO 2001
---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
FROM PREVIOUS FROM PREVIOUS
YEAR DUE TO: YEAR DUE TO:
---------------------------------------------------------------------------------------------------------------------
(in millions of dollars) VOLUME YIELD TOTAL VOLUME YIELD TOTAL
---------------------------------------------------------------------------------------------------------------------
Interest bearing deposits in banks $ (1.4) $ (2.7) $ (4.1) $ 0.6 $(14.8) $(14.2)
Loan participations purchased:
Commercial (9.3) (1.4) (10.7) (1.1) (10.8) (11.9)
Commercial real estate 8.2 (30.4) (22.2) (15.6) (59.5) (75.1)
Consumer (11.1) (8.7) (19.8) (24.4) 8.7 (15.7)
Residential real estate 0.7 (2.6) (1.9) (18.9) (1.7) (20.6)
---------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS (12.9) (45.8) (58.7) (59.4) (78.1) (137.5)
---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES --- --- --- --- --- ---
---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST AND FEE INCOME $(12.9) $(45.8) $(58.7) $(59.4) $(78.1) $(137.5)
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PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES (ALL)
The provision for loan losses is the charge to earnings necessary to maintain the ALL at a level adequate to absorb management's estimate of inherent losses in the loan portfolio. For the three month period ended September 30, 2003, credits of $18.9 million were recorded to the provision for loan losses, while for the same period in 2002, there was no provision expense recorded. There were credits of $33.9 million recorded to the provision for loan losses in the nine month period ended September 30, 2003, while provision expense was $19.8 million for the same period in 2002. The overall decline in provision expense in 2003 from 2002 was indicative of the significantly lower level of non-performing loans underlying HPCI's participation interests and lower losses on loan participations.
The ALL was $94.7 million at September 30, 2003, down from $140.4 million at December 31, 2002, and $167.0 million at September 30, 2002. This represented 1.80%, 2.79%, and 3.22% of total loan participations at the end of each respective period. The ALL decreased from September and December of last year because of the factors described above related to provision expense. The ALL covered 227% of the participations in non-
performing loans September 30, 2003, compared to 145% and 118% at December 31, 2002 and September 30, 2002, respectively. In management's judgment, the ALL was adequate at September 30, 2003 to cover losses inherent in the loan participation portfolio. Additional information regarding the ALL and asset quality appears in the "Credit Quality" section. The following table shows the activity in HPCI's ALL for the periods indicated:
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TABLE 7 - THREE AND NINE MONTHS ALLOWANCE FOR LOAN LOSS ACTIVITY
------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 110,127 $ 163,359 $ 140,353 $ 175,690
Allowance of loan participations acquired, net 11,610 13,546 35,007 30,807
Net loan losses
Commercial (1,265) (1,945) (17,595) (28,206)
Commercial real estate (4,538) (3,512) (5,889) (13,915)
Consumer (2,075) (4,433) (20,762) (17,200)
Residential real estate (203) --- (2,457) ---
------------------------------------------------------------------------------------------------------------------
Total net loan losses (8,081) (9,890) (46,704) (59,321)
------------------------------------------------------------------------------------------------------------------
Provision (credit) for loan losses (18,918) --- (33,918) 19,839
------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 94,738 $ 167,015 $ 94,738 $ 167,015
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Total net charge-offs for the quarter ended September 30, 2003, were $8.1 million, or 0.61%, of average participation interests, down from the $9.9 million, or 0.75%, recorded in the same quarterly period in 2002. For the nine months ended September 30, 2003, total net charge-offs were $46.7 million, or 1.23%, of average participation interests, down from $59.3 million, or 1.50%, recorded in the same period in 2002. The nine months ended September 30, 2003 includes $12.2 million of interest receivables that were determined to be uncollectible and charged off against the allowance for loan losses in the first quarter of this year. These interest receivables related to loans that were previously charged off.
It is HPCI's policy to rely on the Bank's detailed analysis as of the end of each period to estimate the required level of the ALL. HPCI, through reliance on methods utilized by Huntington, allocates the ALL to each loan participation category. For the commercial and commercial real estate loan participations, expected loss factors are assigned by credit grade at the individual underlying loan level at the time the loan was originated by the Bank. On a periodic basis, management reevaluates these credit grades. Huntington implemented a revised internal risk grading methodology for commercial and commercial real estate credits in the first quarter of this year. This new methodology incorporates a dual risk grading system that separately measures the (a) probability of default and (b) loss in the event of default to provide Huntington with more specificity in the risk assessment process. The aggregation of these factors represents management's estimate of the inherent loss. The portion of the allowance allocated to the more homogeneous underlying consumer and residential real estate loan participations was determined by developing expected loss ratios based on the risk characteristics of the various portfolio segments and giving consideration to existing economic conditions and trends.
Expected loss ratios also incorporate factors such as trends in past due and non-accrual amounts, recent underlying loan loss experience, current economic conditions, risk characteristics, and concentrations of various underlying loan categories. Actual loss ratios experienced in the future could vary from those expected, as performance is a function of factors unique to each customer as well as general economic conditions. Management believes that the current reserve of 1.80% of the total participation interests at September 30, 2003, is appropriate given the composition of the loans underlying HPCI's participation interests, which were predominantly commercial real estate, commercial loans, and lower quality consumer loans. In the second quarter of 2003, HPCI changed its methodology of determining its ALL to eliminate any unallocated ALL. While amounts are allocated to various portfolio segments, the total ALL, excluding impairment reserves prescribed under provisions of SFAS No. 114, was available to absorb losses from any segment of the loan participation portfolio. Management will continue to assess the level of the reserve on a quarterly basis.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
For both three months ended September 30, 2003 and 2002, non-interest income was $1.7 million. For the nine month periods, non-interest income was $5.2 million and $5.1 million, respectively. This income largely represents rents received from the Bank related to land, buildings, and leasehold improvements owned by HPCLI. In addition, non-interest income includes fees from the Bank for use of its assets as collateral for the Bank's advances from the Federal Home Loan Bank of Cincinnati (FHLBC). These fees totaled $212,000 and $519,000, respectively, for the three and nine months ended September 30, 2003. For both the three and nine months ended September 30, 2002, these fees totaled $191,000 and $464,000, respectively. HPCI began receiving these fees after the second quarter last year. See Note 7 to the unaudited consolidated financial statements for more information regarding use of HPCI's assets as collateral for the Bank's advances from the FHLBC.
Non-interest expense for the three months ended September 30, 2003, was $3.7 million compared with $3.2 million for the same period last year. For the nine months ended September 30, 2003 and 2002, non-interest expense was $10.2 million and $10.0 million, respectively. The predominant components of HPCI's non-interest expense were the fees paid to the Bank for servicing the loans underlying the participation interests and depreciation and amortization on its premises and equipment. Servicing fees amounted to $2.1 million and $1.6 million, respectively, for the three months ended September 30, 2003 and 2002. For the nine months ended September 30, 2003, these servicing fees totaled $5.4 million versus $5.1 million a year ago. As of June 1, 2003, the service fee with respect to the underlying commercial real estate and commercial loans was equal to the outstanding principal balance of each loan multiplied by a fee of 0.125% on an annual basis, 0.320% on underlying consumer loan balances, and 0.2997% on underlying residential real estate loans. Prior to June 1, 2003, the servicing fee was 0.125% annually with respect to the underlying commercial real estate, commercial, and consumer loan balances and 2.35% of the interest income collected on residential real estate loans. Depreciation on premises and equipment was $1.4 million for both three months ended September 30, 2003 and 2002. For the nine month period, depreciation expense totaled $4.2 million for 2003 and $4.3 million for 2002. See Note 6 to the unaudited consolidated financial statements for further information regarding these servicing fees paid to the Bank as part of the related subparticipation agreements.
PROVISION FOR INCOME TAXES
HPCI has elected to be treated as a REIT for federal income tax purposes and intends to maintain compliance with the applicable provisions of the Internal Revenue Code and, therefore, 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 was included in the accompanying unaudited consolidated financial statements. Income taxes for the recent three months were $24,000, up slightly from $22,000 a year ago. For the first nine months of 2003, income taxes were $73,000 compared with a tax benefit of $70,000 for the prior year period. The year-to-date tax benefit recognized in 2002 was due to a loss in HPCI before income taxes of $200 thousand. The tax benefit was calculated at 35% of the loss before income taxes.
INTEREST RATE RISK MANAGEMENT
HPCI's income consists primarily of interest and fee income on participation interests in commercial, consumer, residential real estate, and commercial real estate loans. If there is a decline in market interest rates, HPCI may experience a reduction in interest income on its participation interests and a corresponding decrease in funds available to be distributed to shareholders. The reduction in interest income may result from downward adjustments of the indices upon which the interest rates on underlying variable rate loans are based and from prepayments of underlying loans with fixed interest rates as well as reinvestment in lower-earning assets. HPCI has no interest bearing liabilities and, therefore, no offsetting reduction in interest expense if market interest rates decline.
Huntington conducts its interest rate risk management on a centralized basis and does not manage HPCI's interest rate risk seperately. A key element used in Huntington's interest rate risk management is an income simulation model, which includes, among other things, assumptions for loan prepayments on the existing portfolio and new loan volumes. Using that model for HPCI as of September 30, 2003, and assuming no new loan participation volumes, interest income for the next 12 month period would be expected to increase by 9.1% if rates rose 200 basis points gradually and with a parallel shift of the yield curve above the forward rates implied in the September 30, 2003 yield curve. The model was not used to estimate the impact of a 200 basis point decline in rates due to the overall low level of current rates, however, management believes further declines in market rates would put downward pressure on net interest income.
CREDIT QUALITY
HPCI's exposure to credit risk is managed by personnel of the Bank through its use of consistent underwriting standards that emphasize "in-market" lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Bank's credit administration function employs risk management techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. These procedures provide executive management of the Bank and HPCI with the information necessary to implement policy adjustments where necessary, and to take corrective actions on a proactive basis. These procedures also include evaluating the adequacy of the ALL, which includes an analysis of specific credits and the application of relevant reserve factors that represent relative risk, based on portfolio trends, current and historic loss experience, and prevailing economic conditions, to specific portfolio segments. In the first quarter of 2003, the Bank revised and implemented an internal risk grading system for commercial and commercial real estate credits. The Bank migrated from a single grading, to a dual risk grading system that separately measures the probability of default and loss in event of default and provides the Bank with more specificity in the risk assessment process.
Concentration of credit risk generally arises with respect to participation interests when a number of underlying loans have borrowers engaged in similar business activities or in the same geographical region. Concentration of credit risk indicates the relative sensitivity of performance to both positive and negative developments affecting a particular industry. Borrowers obligated in loans underlying HPCI's participation interests do not represent a particular concentration of similar business activity. Underlying loans are, however, primarily collateralized by commercial real estate. HPCI's balance sheet exposure to geographic concentrations directly affects the credit risk of the loans underlying the participation interests. The majority of the loans underlying the participation interests are collateralized by real estate and were made to borrowers in Ohio, Michigan, Indiana, and Kentucky. At September 30, 2003, 93.9% of the underlying participation interests consisted of loans located in these four states. Consequently, the portfolio may experience a higher default rate in the event of adverse economic, political, or business developments or natural hazards in these states to the extent such factors effect the ability of borrowers to make payments of principal and interest on the underlying loans.
An underlying loan originated by the Bank, and thus the participation interest acquired by HPCI, is considered impaired when, based on current information and events, it is probable that it will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower. This includes the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loan impairment was measured on a loan-by-loan basis by comparing the recorded investment in the loan to the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan was collateral dependent.
Non-performing assets (NPAs) consist of participation interests in underlying loans that are no longer accruing interest. Underlying commercial and commercial real estate loans are placed on non-accrual status and stop accruing interest when collection of principal or interest is in doubt or generally when the underlying loan is 90 days past due. Underlying residential real estate loans are generally placed on non-accrual status within 180 days past due as to principal and 210 days past due as to interest. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. Consumer loans are not placed on non-accrual status; rather they are charged off in accordance with regulatory statutes governing the Bank, which is generally no more than 120 days. The following table shows non-performing assets at the end of the most recent five quarters:
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TABLE 8 - QUARTERLY NON PERFORMING ASSETS
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2003 2002
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(in thousands of dollars) THIRD SECOND FIRST FOURTH THIRD
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Participation interests in non-accrual loans
Commercial $ 11,677 $ 16,537 $ 33,367 $ 57,112 $ 92,427
Commercial Real Estate 25,302 27,376 27,041 32,979 42,653
Residential Real Estate 4,795 6,316 5,499 6,455 6,150
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TOTAL NON-PERFORMING ASSETS $ 41,774 $ 50,229 $ 65,907 $ 96,546 $141,230
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PARTICIPATIONS IN ACCRUING LOANS
PAST DUE 90 DAYS OR MORE $ 17,252 $ 13,513 $ 15,575 $ 26,060 $ 20,118
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NON-PERFORMING ASSETS AS A % OF TOTAL
PARTICIPATION INTERESTS 0.79% 0.96% 1.33% 1.92% 2.73%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A % OF
NON-PERFORMING ASSETS 227% 219% 191% 145% 118%
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The change in non-performing assets during the recent quarter included participation interests in underlying loans transferred to nonaccrual status of $9.2 million, offset by chargeoffs of $6.7 million, and payments received of $11.0 million.
Under the participation and subparticipation agreements, HPCI may direct the Bank to dispose of any underlying loan that becomes classified, is placed in a non-performing status, or is renegotiated due to the financial deterioration of the borrower. The Bank may institute foreclosure proceedings at the discretion of HPCI, exercise any power of sale contained in any mortgage or deed of trust, obtain a deed in lieu of foreclosure, or otherwise acquire title to a property underlying a mortgage loan by operation of law or otherwise in accordance with the terms of the participation and subparticipation agreement. Any participation interest in a loan is sold to the Bank at fair market value where the security is either repossessed or goes into foreclosure proceedings. The Bank then incurs all costs associated with repossession and foreclosure.
LIQUIDITY AND CAPITAL RESOURCES
The objective of HPCI's liquidity management is to ensure the availability of sufficient cash flows to meet all of its financial commitments. In managing liquidity, management takes into account various legal limitations placed on a REIT.
HPCI's principal liquidity needs are to pay operating expenses and dividends and acquire additional participation interests as the underlying loans in its portfolio paydown or mature. Operating expenses and dividends are expected to be funded through cash generated by operations, while the acquisition of additional participation interests in loans is intended to be funded with the proceeds obtained from repayment of principal balances by individual borrowers and new capital contributions. HPCI intends to pay dividends on its preferred securities and common stock in amounts necessary to continue to preserve its status as a REIT under the Internal Revenue Code.
At September 30, 2003 and 2002, HPCI maintained interest bearing and non-interest bearing cash balances with the Bank totaling $499.6 million and $1.0 billion, respectively. HPCI maintains and transacts all of its cash activity with the Bank and invests available funds in Eurodollar deposits with the Bank for a term of not more than 30 days.
To the extent that the board of directors determines that additional funding is required, management may raise such funds through additional capital contributions, debt financings, or retention of cash flow, or a combination of these methods. However, any cash flow retention must be consistent with the provisions of the Internal Revenue Code requiring the distribution by a REIT of at least 90% of its REIT taxable income, excluding capital gains, and must take into account taxes that would be imposed on undistributed income. Management does not anticipate that additional funding will be required for at least the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures for the current period are found on pages 20-22 of this report, which includes changes in market risk exposures from disclosures presented in HPCI's 2002 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
HPCI's management, with the participation of its President (chief executive officer) and Vice President (chief financial officer), has 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 on 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 fiscal quarter 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 6. Exhibits and Reports on Form 8-K
(a)
3(i) Amended and Restated Articles of Incorporation
(previously filed as Exhibit 3(a)(ii) to Amendment No. 4
to Registration Statement of Form S-11 (File No.
333-61182), filed with the Securities and Exchange
Commission on October 12, 2001, and incorporated herein
by reference.)
3(ii) 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 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 Certification - Principal Executive Officer
31.2 Certification - Principal Financial Officer
32.1 Section 1350 Certification - Principal Executive Officer
32.2 Section 1350 Certification - Principal Financial Officer
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(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements 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.
Huntington Preferred Capital, Inc.
(Registrant)
Date: November 13, 2003 /s/ Michael J. McMennamin
-------------------------
Michael J. McMennamin
President
(principal executive officer)
Date: November 13, 2003 /s/ John D. Van Fleet
-------------------------
John D. Van Fleet
Vice President
(principal financial officer)
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EXHIBIT 31.1
CERTIFICATION
I, Michael J. McMennamin, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Huntington Preferred Capital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant defic