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, 2007
Commission File Number: 000-33243
Huntington Preferred Capital, Inc.
     
Ohio   31-1356967
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]                     Accelerated filer [ ]                      Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ]Yes     [X]No
As of October 31, 2007, 14,000,000 shares of common stock without par value were outstanding, all of which were held by affiliates of the registrant.

 

HUNTINGTON PREFERRED CAPITAL, INC.
INDEX
             
Part I.   Financial Information        
   
 
       
Item 1.          
   
 
       
        3  
   
 
       
        4  
   
 
       
        5  
   
 
       
        6  
   
 
       
        7  
   
 
       
Item 2.       14  
   
 
       
Item 3.       24  
   
 
       
Item 4.       24  
   
 
       
Item 4T.       24  
   
 
       
Part II. Other Information        
   
 
       
Item 6.       24  
   
 
       
Signatures     26  
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2
  EX-99.1

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Part I. Financial Information
Item 1. Financial Statements
Huntington Preferred Capital, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
                         
    September 30,     December 31,     September 30,  
(in thousands, except share data)   2007     2006     2006  
 
 
Assets
                       
Cash and interest bearing deposits with The Huntington National Bank
  $ 139,353     $ 726,154     $ 529,129  
Due from The Huntington National Bank
    76,476       134,815       45,910  
Loan participation interests:
                       
Commercial
    23,690       31,049       35,041  
Commercial real estate
    3,236,118       3,108,533       3,287,901  
Consumer
    1,179,479       845,272       888,603  
Residential real estate
    91,747       112,355       121,262  
 
Total loan participation interests
    4,531,034       4,097,209       4,332,807  
Allowance for loan participation losses
    (56,255 )     (48,703 )     (51,729 )
 
Net loan participation interests
    4,474,779       4,048,506       4,281,078  
 
Premises and equipment
    14,980       17,711       18,658  
Accrued income and other assets
    23,910       22,550       22,516  
 
 
                       
Total assets
  $ 4,729,498     $ 4,949,736     $ 4,897,291  
 
 
                       
Liabilities and shareholders’ equity
                       
Liabilities
                       
Allowance for unfunded loan participation commitments
  $ 4,125     $ 3,804     $ 4,658  
Dividends and distributions payable
    23,246       450,000       22,306  
Other liabilities
    55       179       123  
 
Total liabilities
    27,426       453,983       27,087  
 
 
                       
Shareholders’ Equity
                       
Preferred securities, Class A, 8.000% noncumulative, non- exchangeable; $1,000 par and liquidation value per share; 1,000 shares authorized, issued and outstanding
    1,000       1,000       1,000  
Preferred securities, Class B, variable-rate noncumulative and conditionally exchangeable; $1,000 par and liquidation value per share; authorized 500,000 shares; 400,000 shares issued and outstanding
    400,000       400,000       400,000  
Preferred securities, Class C, 7.875% noncumulative and conditionally exchangeable; $25 par and liquidation value; 2,000,000 shares authorized, issued, and outstanding
    50,000       50,000       50,000  
Preferred securities, Class D, variable-rate noncumulative and conditionally exchangeable; $25 par and liquidation value; 14,000,000 shares authorized, issued, and outstanding
    350,000       350,000       350,000  
Preferred securities, $25 par, 10,000,000 shares authorized; no shares issued or outstanding
    ---       ---       ---  
Common stock — without par value; 14,000,000 shares authorized, issued and outstanding
    3,694,753       3,694,753       3,848,460  
Retained earnings
    206,319       ---       220,744  
 
Total shareholders’ equity
    4,702,072       4,495,753       4,870,204  
 
 
                       
Total liabilities and shareholders’ equity
  $ 4,729,498     $ 4,949,736     $ 4,897,291  
 
See notes to unaudited condensed consolidated financial statements.

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Huntington Preferred Capital, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
 
(in thousands of dollars)   2007     2006     2007     2006  
 
Interest and fee income
                               
Interest on loan participation interests:
                               
Commercial
  $   487     $   772     $   1,542     $   2,410  
Commercial real estate
    60,350       61,475       173,214       177,098  
Consumer
    19,706       15,338       51,646       48,105  
Residential real estate
    1,423       1,880       4,580       6,119  
 
Total loan participation interest income
    81,966       79,465       230,982       233,732  
Fees from loan participation interests
    216       227       617       799  
Interest on deposits with The Huntington National Bank
    1,961       6,129       12,682       10,910  
 
Total interest and fee income
    84,143       85,821       244,281       245,441  
 
 
                               
Reduction in allowances for credit losses
    (5,175 )     (3,255 )     (6,777 )     (17,641 )
 
 
                               
Interest income after allowances for credit losses
    89,318       89,076       251,058       263,082  
 
 
                               
Non-interest income:
                               
Rental income
    1,710       1,591       5,130       4,773  
Collateral fees
    81       108       259       941  
 
Total non-interest income
    1,791       1,699       5,389       5,714  
 
 
                               
Non-interest expense:
                               
Servicing costs
    2,971       2,611       8,125       8,114  
Depreciation and amortization
    892       984       2,714       3,000  
(Gain) loss on disposal of premises and equipment
    ---       ---       17       (31 )
Other
    196       201       603       573  
 
Total non-interest expense
    4,059       3,796       11,459       11,656  
 
 
                               
Income before provision for income taxes
    87,050       86,979       244,988       257,140  
Provision for income taxes
    428       332       1,239       927  
 
Net income
  $   86,622     $   86,647     $   243,749     $   256,213  
 
 
                               
Dividends declared on preferred securities
    (12,456 )     (12,681 )     (37,430 )     (35,469 )
 
 
                               
Net income applicable to common shares
  $   74,166     $   73,966     $   206,319     $   220,744  
 
See notes to unaudited condensed consolidated financial statements.

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Huntington Preferred Capital, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
                                                                 
    Preferred, Class A     Preferred, Class B     Preferred, Class C                  
(in thousands)   Shares     Amount     Shares     Amount     Shares     Amount                  
 
 
                                                               
Nine Months Ended September 30, 2006:
                                                               
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
    1     $ 1,000       400     $ 400,000       2,000     $ 50,000                  
 
 
                                                               
Nine Months Ended September 30, 2007 :
                                                               
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
    1     $ 1,000       400     $ 400,000       2,000     $ 50,000                  
 
                                                                 
    Preferred, Class D     Preferred     Common     Retained        
(in thousands)   Shares     Amount     Shares     Amount     Shares     Amount     Earnings     Total  
 
 
                                                               
Nine Months Ended September 30, 2006 :
                                                               
Balance, beginning of period
    14,000     $ 350,000       ---     $ ---       14,000     $ 3,848,460     $ ---     $ 4,649,460  
Comprehensive Income:
                                                               
Net income
                                                    256,213       256,213  
 
                                                             
Total comprehensive income
                                                            256,213  
 
                                                             
Dividends declared on Class A preferred securities
                                                    (80 )     (80 )
Dividends declared on Class B preferred securities
                                                    (15,024 )     (15,024 )
Dividends declared on Class C preferred securities
                                                    (2,953 )     (2,953 )
Dividends declared on Class D preferred securities
                                                    (17,412 )     (17,412 )
 
                                                               
 
Balance, end of period
    14,000     $ 350,000       ---     $ ---       14,000     $ 3,848,460     $ 220,744     $ 4,870,204  
 
 
                                                               
Nine Months Ended September 30, 2007 :
                                                               
Balance, beginning of period
    14,000     $ 350,000       ---     $ ---       14,000     $ 3,694,753     $ ---     $ 4,495,753  
Comprehensive Income:
                                                               
Net income
                                                    243,749       243,749  
 
                                                             
Total comprehensive income
                                                            243,749  
 
                                                             
Dividends declared on Class A preferred securities
                                                    (80 )     (80 )
Dividends declared on Class B preferred securities
                                                    (16,070 )     (16,070 )
Dividends declared on Class C preferred securities
                                                    (2,953 )     (2,953 )
Dividends declared on Class D preferred securities
                                                    (18,327 )     (18,327 )
 
                                                               
 
Balance, end of period
    14,000     $ 350,000       ---     $ ---       14,000     $ 3,694,753     $ 206,319     $ 4,702,072  
 
See notes to unaudited condensed consolidated financial statements.

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Huntington Preferred Capital, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
                 
    Nine Months Ended  
    September 30,  
 

(in thousands)

  2007     2006  
 
 
Operating activities
               
Net income
  $ 243,749     $ 256,213  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Reduction of allowances for credit losses
    (6,777 )     (17,641 )
Depreciation and amortization
    2,714       3,000  
Deferred income tax benefit
    (389 )     (515 )
Increase in due from The Huntington National Bank
    (1,236 )     (3,318 )
Decrease in other liabilities
    (124 )     (167 )
Other, net
    1,125       219  
 
Net cash provided by operating activities
    239,062       237,791  
 
 
               
Investing activities
               
Participation interests acquired
    (2,420,052 )     (2,090,195 )
Sales and repayments of loans underlying participation interests
    2,058,373       2,284,538  
Proceeds from the sale of premises and equipment
    ---       56  
 
Net cash (used in) provided by investing activities
    (361,679 )     194,399  
 
 
Financing activities
               
Dividends paid on preferred securities
    (14,184 )     (13,163 )
Dividends paid on common stock
    (296,292 )     (279,684 )
Return of capital to common shareholders
    (153,708 )     (420,316 )
 
Net cash used for financing activities
    (464,184 )     (713,163 )
 
 
               
Change in cash and cash equivalents
    (586,801 )     (280,973 )
Cash and cash equivalents at beginning of year
    726,154       810,102  
 
Cash and cash equivalents at end of period
  $ 139,353     $ 529,129  
 
 
Supplemental information:
               
Income taxes paid
  $ 1,693     $ 1,577  
Dividends and distributions declared, not paid
    23,246       22,306  
Non-cash change in loan participation activity with The Huntington National Bank
    (59,575 )     (3,729 )
See notes to unaudited condensed consolidated financial statements.

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Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 - Organization
     Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law in 1992 and designated as a real estate investment trust (REIT) in 1998. Four related parties own HPCI’s common stock: Huntington Capital Financing LLC (HCF); Huntington Preferred Capital II, Inc. (HPCII); Huntington Preferred Capital Holdings, Inc. (Holdings); and Huntington Bancshares Incorporated (Huntington). HPCI has one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of holding certain assets (primarily leasehold improvements). HCF, HPCII, and Holdings are direct and indirect subsidiaries of The Huntington National Bank (the Bank), a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized under Maryland law and headquartered in Columbus, Ohio. At September 30, 2007, the Bank, on a consolidated basis with its subsidiaries, accounted for 99% of Huntington’s consolidated total assets and, for the nine months ended September 30, 2007, accounted for 91% of Huntington’s consolidated net income. Thus, for the purpose of presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington to be substantially the same for these periods.
     Certain amounts in the prior year’s financial statements have been reclassified to conform to the 2007 presentation.
Note 2 - Basis of Presentation and New Accounting Pronouncements
     The accompanying unaudited condensed consolidated financial statements of HPCI reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in HPCI’s 2006 Annual Report on Form 10-K (Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.
     HPCI has elected to be treated as a REIT for federal income tax purposes. Management intends to maintain compliance with the provisions of the Internal Revenue Code and, therefore, HPCI is not subject to federal income taxes. HPCI’s subsidiary, HPCLI, has elected to be treated as a taxable REIT subsidiary and, therefore, a separate provision related to its income taxes is included in the accompanying unaudited condensed consolidated financial statements.
     All of HPCI’s common stock is owned by affiliates; therefore, net income per common share information is not presented.
     Cash and cash equivalents used in the Statement of Cash Flows is defined as “Cash and interest bearing deposits with The Huntington National Bank.”
Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes – In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes . This Interpretation of FASB Statement No. 109, Accounting for Income Taxes , contains guidance on the recognition and measurement of uncertain tax positions. HPCI adopted FIN 48 on January 1, 2007. HPCI recognizes the impact of a tax position if it is more likely than not that it will be sustained upon examination, based upon the technical merits of the position. The adoption of this new pronouncement did not impact HPCI’s financial condition, results of operations, or cash flows (See Note 9).

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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
FASB Statement No. 157, Fair Value Measurements (Statement No. 157) – In September 2006, the FASB issued Statement No. 157. This Statement establishes a common definition for fair value to be applied to GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The impact of this new pronouncement is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilitie s (Statement No. 159) – In February 2007, the FASB issued Statement No. 159. This Statement permits entities to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. This Statement is effective for fiscal years beginning after November 15, 2007. The impact of this new pronouncement is not expected to be material to HPCI’s financial condition, results of operations, or cash flows.
Note 3 - Lending Concentrations and Participations in Non-Performing Assets and Past Due Loans
     There were no underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries, or business activity. Underlying loans were, however, generally collateralized by real estate. Loans made to borrowers in the four states of Ohio, Indiana, Kentucky, and Michigan comprised 93.3%, 94.6%, and 95.1% of the portfolio at September 30, 2007, December 31, 2006, and September 30, 2006, respectively.
     Participations in loans on non-accrual status and loans past due 90 days or more and still accruing interest were as follows:
                         
    September 30,     December 31,     September 30,  
(in thousands)   2007     2006     2006  
 
 
Commercial
  $ 240     $ 687     $ 143  
Commercial real estate
    49,151       19,966       16,784  
Consumer
    3,250       3,490       3,375  
Residential real estate
    1,239       1,159       1,598  
 
Total participations in non-performing assets
  $ 53,880     $ 25,302     $ 21,900  
 
 
                       
Participations in accruing loans past due 90 days or more
  $ 3,178     $ 5,393     $ 6,124  
 
Note 4 - Allowances for Credit Losses (ACL)
     The allowances for credit losses (ACL) are comprised of the allowance for loan participation losses (ALPL) and the allowance for unfunded loan participation commitments (AULPC). Loan participations are acquired net of related ALPL. As a result, this ALPL is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than HPCI having to record a provision expense for ALPL. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. Over time as loan participations mature, refinance, or other such actions occur, their allowance, not absorbed by loan losses, is released through the reduction in ALPL.

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Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)
     The following table reflects activity in the ACL for the three and nine months ended September 30, 2007 and 2006:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands)   2007     2006     2007     2006  
     
ALPL balance, beginning of period
  $   57,074     $   51,466       $   48,703       $   57,530  
ALPL for loan participations acquired
    6,906       5,055       21,880       16,689  
Net loan losses
    (2,778 )     (881 )     (7,230 )     (4,326 )
Reduction in ALPL
    (4,947 )     (3,911 )     (7,098 )     (18,164