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, 2005

Commission File Number: 000-33243

HUNTINGTON PREFERRED CAPITAL, INC.

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

41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number (614) 480-8300

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Yes þ            No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o            No þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o            No þ

As of October 31, 2005, 14,000,000 shares of common stock without par value were outstanding, all of which were held by affiliates of the registrant.

 

 

HUNTINGTON PREFERRED CAPITAL, INC.

INDEX

Part I. Financial Information
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets - At September 30, 2005, December 31, 2004, and September 30, 2004			3
		Condensed Consolidated Statements of Income - For the three-months and nine-months ended September 30, 2005 and 2004			4
		Condensed Consolidated Statements of Changes in Shareholders’ Equity - For the nine-months ended September 30, 2005 and 2004			5
		Condensed Consolidated Statements of Cash Flows - For the nine-months ended September 30, 2005 and 2004			6
		Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			25
Item 4.		Controls and Procedures			25
Part II. Other Information
Item 5.		Other Information			26
Item 6.		Exhibits			27
Signatures					28
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. Financial Information

Item 1. Financial Statements

Huntington Preferred Capital, Inc.

Condensed Consolidated Balance Sheets

		September 30,				December 31,				September 30,
(in thousands of dollars, except share data)		2005				2004				2004
		(Unaudited)								(Unaudited)
Assets
Cash and interest bearing deposits with The Huntington National Bank		$	590,733			$	800,253			$	788,149
Due from The Huntington National Bank			93,597				175				1,323
Loan participation interests:
Commercial			57,350				106,179				151,787
Commercial real estate			3,455,398				3,738,930				3,746,356
Consumer			935,139				819,250				698,652
Residential real estate			170,422				224,914				239,547
Total loan participation interests			4,618,309				4,889,273				4,836,342
Allowance for loan losses			(56,866	)			(61,146	)			(67,668	)
Net loan participation interests			4,561,443				4,828,127				4,768,674
Premises and equipment			22,732				26,635				28,025
Accrued income and other assets			19,222				18,401				17,146
Total assets		$	5,287,727			$	5,673,591			$	5,603,317
Liabilities and shareholders’ equity
Liabilities
Allowance for unfunded loan participation commitments		$	3,565			$	3,765			$	3,151
Dividends and distributions payable			9,299				600,000				3,940
Other liabilities			174				50				38
Total liabilities			13,038				603,815				7,129
Shareholders’ Equity
Preferred securities, Class A, 8.000% noncumulative, non- exchangeable; $1,000 par and liquidation value per share; 1,000 shares authorized, issued and outstanding			1,000				1,000				1,000
Preferred securities, Class B, variable-rate noncumulative and conditionally exchangeable; $1,000 par and liquidation value per share; authorized 500,000 shares; 400,000 shares issued and outstanding			400,000				400,000				400,000
Preferred securities, Class C, 7.875% noncumulative and conditionally exchangeable; $25 par and liquidation value; 2,000,000 shares authorized, issued, and outstanding			50,000				50,000				50,000
Preferred securities, Class D, variable-rate noncumulative and conditionally exchangeable; $25 par and liquidation value; 14,000,000 shares authorized, issued, and outstanding			350,000				350,000				350,000
Preferred securities, $25 par, 10,000,000 shares authorized; no shares issued or outstanding			—				—				—
Common stock — without par value; 14,000,000 shares authorized, issued and outstanding			4,268,776				4,268,776				4,604,978
Retained earnings			204,913				—				190,210
Total shareholders’ equity			5,274,689				5,069,776				5,596,188
Total liabilities and shareholders’ equity		$	5,287,727			$	5,673,591			$	5,603,317

See notes to unaudited condensed consolidated financial statements.

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

		Preferred, Class A								Preferred, Class B								Preferred, Class C
(in thousands)		Shares				Securities				Shares				Securities				Shares				Securities
Nine Months Ended September 30, 2004 ( Unaudited ):
Balance, beginning of period			1			$	1,000				400			$	400,000				2,000			$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of period (Unaudited)			1			$	1,000				400			$	400,000				2,000			$	50,000
Nine Months Ended September 30, 2005 ( Unaudited ):
Balance, beginning of period			1			$	1,000				400			$	400,000				2,000			$	50,000
Comprehensive Income:
Net income
Total comprehensive income
Balance, end of period (Unaudited)			1			$	1,000				400			$	400,000				2,000			$	50,000

		Preferred, Class D								Preferred								Common								Retained
(in thousands)		Shares				Securities				Shares				Securities				Shares				Stock				Earnings				Total
Nine Months Ended September 30, 2004 ( Unaudited ):
Balance, beginning of period			14,000			$	350,000				—			$	—				14,000			$	4,604,978			$	—			$	5,405,978
Comprehensive Income:
Net income																											204,746				204,746
Total comprehensive income																															204,746
Dividends declared on Class A preferred securities																											(80	)			(80	)
Dividends declared on Class B preferred securities																											(3,860	)			(3,860	)
Dividends declared on Class C preferred securities																											(2,953	)			(2,953	)
Dividends declared on Class D preferred securities																											(7,643	)			(7,643	)
Balance, end of period (Unaudited)			14,000			$	350,000				—			$	—				14,000			$	4,604,978			$	190,210			$	5,596,188
Nine Months Ended September 30, 2005 ( Unaudited ):
Balance, beginning of period			14,000			$	350,000				—			$	—				14,000			$	4,268,776			$	—			$	5,069,776
Comprehensive Income:
Net income																											229,497				229,497
Total comprehensive income																															229,497
Dividends declared on Class A preferred securities																											(80	)			(80	)
Dividends declared on Class B preferred securities																											(9,219	)			(9,219	)
Dividends declared on Class C preferred securities																											(2,953	)			(2,953	)
Dividends declared on Class D preferred securities																											(12,332	)			(12,332	)
Balance, end of period (Unaudited)			14,000			$	350,000				—			$	—				14,000			$	4,268,776			$	204,913			$	5,274,689

See notes to unaudited condensed consolidated financial statements.

Huntington Preferred Capital, Inc.

Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended
		September 30,
(in thousands of dollars)		2005				2004
Operating activities
Net Income		$	229,497			$	204,746
Adjustments to reconcile net income to net cash provided by operating activities:
Reduction of allowances for credit losses			(15,387	)			(18,438	)
Depreciation and amortization			3,325				4,038
Deferred income tax expense (benefit)			53				(812	)
Loss on disposal of fixed assets			578				63
(Increase) decrease in due from The Huntington National Bank			(26,716	)			12,329
Increase in other liabilities			124				38
Other, net operating activities			315				2,777
Net cash provided by operating activities			191,789				204,741
Investing activities
Participation interests acquired			(2,137,775	)			(3,184,804	)
Sales and repayments of loans underlying participation interests			2,351,751				3,654,723
Net cash provided by investing activities			213,976				469,919
Financing activities
Dividends paid on preferred securities			(15,285	)			(10,596	)
Dividends paid on common stock			(263,798	)			—
Return of capital to common shareholders			(336,202	)			—
Net cash used for financing activities			(615,285	)			(10,596)
Change in cash and cash equivalents			(209,520	)			664,064
Cash and cash equivalents at beginning of year			800,253				124,085
Cash and cash equivalents at end of period		$	590,733			$	788,149
Supplemental information:
Income taxes paid		$	—			$	1,496
Dividends declared, not paid			9,299				3,940
Loan participation activity settled to due from Huntington National Bank			91,046				—

See notes to unaudited condensed consolidated financial statements.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 1 — Organization

     Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. At December 31, 2004, three related parties owned HPCI’s common stock: HPC Holdings-III, Inc. (HPCH-III), 67.37%; Huntington Preferred Capital II, Inc. (HPCII), 32.5%; and Huntington Bancshares Incorporated (Huntington), 0.13%. Effective February 18, 2005, Huntington Preferred Capital Holdings, Inc. (Holdings) transferred 34% of its ownership in HPCH-III to Huntington Capital Financing LLC (HCF). Holdings and HCF are subsidiaries of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At September 30, 2005, the Bank, on a consolidated basis with its subsidiaries, accounted for 99% of Huntington’s (on a consolidated basis) total assets and for the nine months ended September 30, 2005, accounted for 95% of Huntington’s net income. Thus, consolidated financial statements for the Bank and for Huntington were substantially the same for these periods. On March 31, 2005, HPCH-III liquidated into Holdings and HCF. As a result of liquidation, since March 31, 2005, four related parties own HPCI’s common stock: HCF, 47%; HPCII, 32.5%; Holdings, 20.37%; and Huntington, 0.13%. HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). The following chart outlines the relationship among affiliates at September 30, 2005.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Note 2 — Basis of Presentation and New Accounting Pronouncements

     The accompanying unaudited condensed consolidated financial statements of HPCI reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in HPCI’s Form 10-K for the year ended December 31, 2004 (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. Certain amounts relating to cash and interest bearing deposits and other liabilities in the prior-year’s financial statements have been reclassified to conform to the 2005 presentation.

     HPCI elected to be treated as a REIT for federal income tax purposes and intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, is not subject to federal income taxes. HPCI’s subsidiary, HPCLI, elected to be treated as a taxable REIT subsidiary and, therefore, a separate provision related to its income taxes is included in the accompanying unaudited condensed consolidated financial statements.

     All of HPCI’s common stock is owned by affiliates; therefore, net income per common share information is not presented.

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

AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3): In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt securities purchased or acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities prior to the receipt of cash. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for loan losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004. In the normal course of business, HPCI does not purchase loan participation interests in loans that have exhibited a deterioration in credit quality since origination. Therefore, the impact of this new pronouncement was not material to HPCI’s financial condition, results of operations, or cash flows.

FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47) – In March 2005, the FASB issued FIN 47, which clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations , refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 becomes effective for fiscal years ending after December 15, 2005. Management has performed an analysis of FIN 47 and believes the impact is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

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

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

		September 30,				December 31,				September 30,
(in thousands of dollars)		2005				2004				2004
Commercial		$	746			$	425			$	973
Commercial real estate			17,735				6,990				10,460
Consumer			2,028				2,692				2,692
Residential real estate			3,695				4,205				4,749
Total participations in non-performing assets		$	24,204			$	14,312			$	18,874
Participations in accruing loans past due 90 days or more		$	3,382			$	11,686			$	8,466

     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 96.2%, 96.6%, and 96.3% of the portfolio at September 30, 2005, December 31, 2004, and September 30, 2004, respectively.

Note 4 — Allowances for Credit Losses (ACL)

     An allowance for credit losses (ACL) is transferred to HPCI from the Bank on loans underlying the participations at the time the participations are acquired. The ACL is comprised of the allowance for loan participation losses (ALL) and the allowance for unfunded loan participation commitments (AULPC). The following tables reflect activity in the ACL for the three-month and nine-month periods ended September 30, 2005 and 2004:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands of dollars)		2005				2004				2005				2004
ALL balance, beginning of period		$	60,987			$	72,524			$	61,146			$	84,532
Allowance for loan participations acquired			5,875				2,738				18,396				11,916
Net loan losses			(2,975	)			(1,461	)			(7,489	)			(7,191	)
Reduction in ALL			(7,021	)			(6,133	)			(14,249	)			(21,589	)
Economic reserve transfer to AULPC			—				—				(938	)			—
ALL balance, end of period		$	56,866			$	67,668			$	56,866			$