UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED
September 30, 2004
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.) |
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of October 31, 2004, 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
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Part I. Financial Information
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Item 1. Financial Statements
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Condensed Consolidated Balance
Sheets - At September 30, 2004, December 31, 2003, and
September 30, 2003
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3 | |||||||
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Condensed Consolidated Statements
of Income - For the three-months and nine-months ended September 30,
2004 and 2003
|
4 | |||||||
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Condensed Consolidated Statements
of Changes in Shareholders’ Equity - For the nine-months ended
September 30, 2004 and 2003
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5 | |||||||
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Condensed Consolidated Statements
of Cash Flows - For the nine-months ended September 30, 2004
and 2003
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6 | |||||||
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Notes to Unaudited Condensed
Consolidated Financial Statements
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7 | |||||||
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Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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12 | |||||||
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Item 3. Quantitative and
Qualitative Disclosures about Market Risk
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22 | |||||||
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Item 4. Controls and Procedures
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22 | |||||||
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Part II. Other Information
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Item 6. Exhibits and Reports
on Form 8-K
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23 | |||||||
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Signatures
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24 | |||||||
| Exhibit 10(B) | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
2
Part I. Financial Information
| September 30, | December 31, | September 30, | ||||||||||
|
(in thousands of dollars, except share data)
|
2004
|
2003
|
2003
|
|||||||||
| (Unaudited) | (Unaudited) | |||||||||||
|
Assets
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||||||||||||
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Cash with The Huntington National Bank
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$ | 102,123 | $ | 124,085 | $ | 39,932 | ||||||
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Interest bearing deposits with The Huntington National Bank
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686,026 | — | 459,623 | |||||||||
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Due from affiliates
|
1,323 | 13,652 | 12,920 | |||||||||
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Loan participation interests:
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||||||||||||
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Commercial
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151,787 | 147,211 | 194,712 | |||||||||
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Commercial real estate
|
3,746,356 | 4,245,092 | 4,195,813 | |||||||||
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Consumer
|
698,652 | 622,575 | 577,319 | |||||||||
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Residential real estate
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239,547 | 288,190 | 305,797 | |||||||||
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|
|
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|||||||||
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Total loan participation interests
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4,836,342 | 5,303,068 | 5,273,641 | |||||||||
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Allowance for loan losses
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(67,668 | ) | (84,532 | ) | (94,738 | ) | ||||||
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|||||||||
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Net loan participation interests
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4,768,674 | 5,218,536 | 5,178,903 | |||||||||
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|
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|||||||||
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Premises and equipment
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28,025 | 32,126 | 33,531 | |||||||||
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Accrued income and other assets
|
17,146 | 17,579 | 18,046 | |||||||||
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|
|
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|||||||||
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Total Assets
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$ | 5,603,317 | $ | 5,405,978 | $ | 5,742,955 | ||||||
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|
|
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|||||||||
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Liabilities
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||||||||||||
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Allowance for unfunded loan participation commitments
|
$ | 3,151 | $ | — | $ | — | ||||||
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Dividends payable and other liabilities
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3,978 | — | 4,422 | |||||||||
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|
|
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|||||||||
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Total Liabilities
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7,129 | — | 4,422 | |||||||||
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|||||||||
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Shareholders’ Equity
|
||||||||||||
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Preferred securities, Class A, 8.000% noncumulative, non-
exchangeable; $1,000 par and liquidation value per share;
1,000 shares authorized, issued and outstanding
|
1,000 | 1,000 | 1,000 | |||||||||
|
Preferred securities, Class B, variable-rate noncumulative and
conditionally exchangeable; $1,000 par and liquidation
value per share; authorized 500,000 shares; 400,000
shares issued and outstanding
|
400,000 | 400,000 | 400,000 | |||||||||
|
Preferred securities, Class C, 7.875% noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 2,000,000 shares authorized, issued, and outstanding
|
50,000 | 50,000 | 50,000 | |||||||||
|
Preferred securities, Class D, variable-rate noncumulative and
conditionally exchangeable; $25 par and liquidation
value; 14,000,000 shares authorized, issued, and outstanding
|
350,000 | 350,000 | 350,000 | |||||||||
|
Preferred securities, $25 par, 10,000,000 shares
authorized; no shares issued or outstanding
|
— | — | — | |||||||||
|
Common stock — without par value; 14,000,000 shares authorized,
issued and outstanding
|
4,604,978 | 4,604,978 | 4,715,351 | |||||||||
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Retained earnings
|
190,210 | — | 222,182 | |||||||||
|
|
|
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|||||||||
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Total Shareholders’ Equity
|
5,596,188 | 5,405,978 | 5,738,533 | |||||||||
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|
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Total Liabilities and Shareholders’ Equity
|
$ | 5,603,317 | $ | 5,405,978 | $ | 5,742,955 | ||||||
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|
|
|
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See notes to unaudited condensed consolidated financial statements.
3
See notes to unaudited condensed consolidated financial statements.
4
See notes to unaudited condensed consolidated financial statements.
5
Huntington Preferred Capital, Inc.
See notes to unaudited condensed consolidated financial statements.
6
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 — Organization
Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in
1992 and designated as a real estate investment trust (REIT) in 1998. Three
related parties own HPCI’s common stock: HPC Holdings-III, Inc. (HPCH-III),
Huntington Preferred Capital II, Inc. (HPCII), and Huntington Bancshares
Incorporated (Huntington). HPCI and HPCII are subsidiaries of HPCH-III, which
is a subsidiary of Huntington Preferred Capital Holdings, Inc. (Holdings).
Holdings is a subsidiary of The Huntington National Bank (the Bank), a national
banking association organized under the laws of the United States and
headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of
Huntington. 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 accompanying unaudited condensed consolidated financial statements of
HPCI reflect all adjustments consisting of normal recurring accruals, which
are, in the opinion of Management, necessary for a fair presentation of the
consolidated financial position, the results of operations, and cash flows for
the periods presented. These unaudited condensed consolidated financial
statements have been prepared according to the rules and regulations of the
Securities and Exchange Commission (SEC) and, therefore, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) have been omitted. The Notes to the Consolidated Financial Statements
appearing in HPCI’s 2003 Annual Report on Form 10-K (Form 10-K), which include
descriptions of significant accounting policies, as updated by the information
contained in this report, should be read in conjunction with these interim
financial statements.
HPCI elected to be treated as a REIT for federal income tax purposes and
intends to maintain compliance with the provisions of the Internal Revenue Code
and, therefore, is not subject to federal income taxes. HPCI’s subsidiary,
HPCLI, elected to be treated as a taxable REIT subsidiary and, therefore, a
separate provision related to its income taxes is included in the accompanying
unaudited condensed consolidated financial statements.
All of HPCI’s common stock is owned by Huntington, HPCII, and HPCH-III
and, therefore, net income per common share information is not presented.
Cash and cash equivalents used in the Statement of Cash Flows is defined
as the sum of “Cash” and “Interest bearing deposits with The Huntington
National Bank”.
AICPA Statement of Position No. 03-3,
Accounting for Certain Loans or Debt
Securities Acquired in a Transfer
(SOP 03-3):
In December 2003, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued SOP 03-3, to address accounting for differences between the
contractual cash flows of certain loans and debt securities and the cash flows
expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to such loans and debt securities
purchased or acquired in purchase business combinations and does not apply to
originated loans. The application of SOP 03-3 limits the interest income,
including accretion of purchase price discounts, that may be recognized for
certain loans and debt securities prior to the receipt of cash. Additionally,
SOP 03-3 requires that the excess of contractual cash flows over cash flows
expected to be collected (nonaccretable difference) not be recognized as an
adjustment of yield or valuation allowance, such as the allowance for loan
losses. Subsequent to the initial investment, increases in expected cash flows
generally should be recognized prospectively through adjustment of the yield on
the loan or debt security over its remaining life. Decreases in expected cash
flows should be recognized as impairment. SOP 03-3 is effective for loans and
debt securities acquired in fiscal years beginning after December 15, 2004,
with early application encouraged. The impact of this new pronouncement is not
expected to be material to HPCI’s financial condition, results of operations,
or cash flows.
Note 3 — Participations in Non-Performing Loans and Past Due Loans
Participations in loans in non-accrual status and loans past due 90 days
or more and still accruing interest, were as follows:
7
Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
(1)
At September 30, 2004, HPCI adopted a new policy of placing consumer home equity loan participations on
non-accrual status when they exceed 180 days past due. Prior practice was to continue to accrue interest until
collection or resolution of the loan participations. Such loan participations were previously classified as
accruing loans past due 90 days or more.
There were no underlying loans outstanding that would be considered a
concentration of lending in any particular industry, group of industries, or
business activity. Underlying loans were, however, generally collateralized by
real estate. Loans made to borrowers in the four states of Ohio, Michigan,
Indiana, and Kentucky comprised 96.3%, 94.8%, and 93.9%, of the portfolio at
Note 4 — Allowances for Credit Losses (ACL)
The ACL is comprised of the allowance for loan losses (ALL) and the
allowance for unfunded loan participation commitments (AULPC). The following
tables reflect activity in the ACL for the three-month and nine-month periods
ended September 30, 2004 and 2003:
Effective March 31, 2004, HPCI reclassified $4.3 million of its ALL to a
separate liability on the balance sheet titled AULPC. The AULPC is based on
expected loss derived from historical experience. HPCI believes that this
reclassification better reflects the nature of this reserve and represents
improved financial statement disclosure. Prior period financial statements
have not been revised due to immateriality. For the third quarter 2004, AULPC
was reduced by $741 thousand due to lower unfunded loan participation
commitment balances. Since March 31, 2004, AULPC has declined by $1.2 million.
Note 5 — Dividends
Holders of Class A preferred securities, a majority of which are held by
HPCH-III and the remainder by current and past employees of the Bank, are
entitled to receive, if, when, and as declared by the Board of Directors of
HPCI out of funds legally available, dividends at a fixed rate of $80.00 per
share per annum. Dividends on the Class A 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.
8
Notes to the Unaudit
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands of dollars)
2004
2003
2004
2003
$
2,136
$
1,917
$
6,131
$
8,850
45,305
46,593
135,116
139,429
12,353
11,729
37,335
37,497
3,247
4,689
10,405
9,940
63,041
64,928
188,987
195,716
469
1,566
1,732
6,908
1,781
1,193
2,268
5,062
65,291
67,687
192,987
207,686
(6,874
)
(18,918
)
(18,438
)
(33,918
)
72,165
86,605
211,425
241,604
1,590
1,458
4,912
4,727
180
212
569
519
1,770
1,670
5,481
5,246
2,854
2,101
7,188
5,427
1,339
1,378
4,038
4,162
—
—
63
325
196
181
676
332
4,389
3,660
11,965
10,246
69,546
84,615
204,941
236,604
88
24
195
73
$
69,458
$
84,591
$
204,746
$
236,531
(5,406
)
(4,488
)
(14,536
)
(14,349
)
$
64,052
$
80,103
$
190,210
$
222,182
Preferred, Class A
Preferred, Class B
Preferred, Class C
(in thousands)
Shares
Securities
Shares
Securities
Shares
Securities
1
$
1,000
400
$
400,000
2,000
$
50,000
1
$
1,000
400
$
400,000
2,000
$
50,000
1
$
1,000
400
$
400,000
2,000
$
50,000
1
$
1,000
400
$
400,000
2,000
$
50,000
Nine Months Ended
September 30
(in thousands of dollars)
2004
2003
$
204,746
$
236,531
(18,438
)
(33,918
)
4,038
4,162
(812
)
(434
)
63
325
2,777
20,634
12,329
(5,480
)
38
(88
)
204,741
221,732
(3,184,804
)
(4,438,760
)
3,654,723
4,192,767
—
71
469,919
(245,922
)
(10,596
)
(10,509
)
(10,596
)
(10,509
)
664,064
(34,699
)
124,085
534,254
$
788,149
$
499,555
$
1,496
$
161
September 30,
December 31,
September 30,
(in thousands of dollars)
2004
2003
2003
$
973
$
5,176
$
11,677
10,460
12,987
25,302
2,692
—
—
4,749
4,157
4,795
$
18,874
$
22,320
$
41,774
$
8,466
$
13,363
$
17,252
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands of dollars)
2004
2003
2004
2003
$
72,524
$
110,127
$
84,532
$
140,353
2,738
11,610
11,916
35,007
(1,461
)
(8,081
)
(7,191
)
(46,704
)
(6,874
)
(18,918
)
(18,438
)
(33,918
)
741
—
(3,151
)
—
$
67,668
$
94,738
$
67,668
$
94,738
$
3,892
$
—
$
—
$
—
(741
)
—
3,151
—
$
3,151
$
—
$
3,151
$
—