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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| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| 12 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 23 | ||||||||
| 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 |
||||||||||||
Cash with The Huntington National Bank |
$ | 102,123 | $ | 124,085 | $ | 39,932 | ||||||
Interest bearing deposits with The Huntington National Bank |
686,026 | — | 459,623 | |||||||||
Due from affiliates |
1,323 | 13,652 | 12,920 | |||||||||
Loan participation interests: |
||||||||||||
Commercial |
151,787 | 147,211 | 194,712 | |||||||||
Commercial real estate |
3,746,356 | 4,245,092 | 4,195,813 | |||||||||
Consumer |
698,652 | 622,575 | 577,319 | |||||||||
Residential real estate |
239,547 | 288,190 | 305,797 | |||||||||
Total loan participation interests |
4,836,342 | 5,303,068 | 5,273,641 | |||||||||
Allowance for loan losses |
(67,668 | ) | (84,532 | ) | (94,738 | ) | ||||||
Net loan participation interests |
4,768,674 | 5,218,536 | 5,178,903 | |||||||||
Premises and equipment |
28,025 | 32,126 | 33,531 | |||||||||
Accrued income and other assets |
17,146 | 17,579 | 18,046 | |||||||||
Total Assets |
$ | 5,603,317 | $ | 5,405,978 | $ | 5,742,955 | ||||||
Liabilities |
||||||||||||
Allowance for unfunded loan participation commitments |
$ | 3,151 | $ | — | $ | — | ||||||
Dividends payable and other liabilities |
3,978 | — | 4,422 | |||||||||
Total Liabilities |
7,129 | — | 4,422 | |||||||||
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 |
4,604,978 | 4,604,978 | 4,715,351 | |||||||||
Retained earnings |
190,210 | — | 222,182 | |||||||||
Total Shareholders’ Equity |
5,596,188 | 5,405,978 | 5,738,533 | |||||||||
Total Liabilities and Shareholders’ Equity |
$ | 5,603,317 | $ | 5,405,978 | $ | 5,742,955 | ||||||
See notes to unaudited condensed consolidated financial statements.
3
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| (in thousands of dollars) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Interest and fee income |
||||||||||||||||
Interest on loan participation interests: |
||||||||||||||||
Commercial |
$ | 2,136 | $ | 1,917 | $ | 6,131 | $ | 8,850 | ||||||||
Commercial real estate |
45,305 | 46,593 | 135,116 | 139,429 | ||||||||||||
Consumer |
12,353 | 11,729 | 37,335 | 37,497 | ||||||||||||
Residential real estate |
3,247 | 4,689 | 10,405 | 9,940 | ||||||||||||
Total loan participation interest income |
63,041 | 64,928 | 188,987 | 195,716 | ||||||||||||
Fees from loan participation interests |
469 | 1,566 | 1,732 | 6,908 | ||||||||||||
Interest on deposits with The Huntington
National Bank |
1,781 | 1,193 | 2,268 | 5,062 | ||||||||||||
Total interest and fee income |
65,291 | 67,687 | 192,987 | 207,686 | ||||||||||||
Reduction of allowances for credit losses |
(6,874 | ) | (18,918 | ) | (18,438 | ) | (33,918 | ) | ||||||||
Interest income after reduction of allowances for credit losses |
72,165 | 86,605 | 211,425 | 241,604 | ||||||||||||
Non-interest income: |
||||||||||||||||
Rental income |
1,590 | 1,458 | 4,912 | 4,727 | ||||||||||||
Collateral fees |
180 | 212 | 569 | 519 | ||||||||||||
Total non-interest income |
1,770 | 1,670 | 5,481 | 5,246 | ||||||||||||
Non-interest expense: |
||||||||||||||||
Servicing costs |
2,854 | 2,101 | 7,188 | 5,427 | ||||||||||||
Depreciation |
1,339 | 1,378 | 4,038 | 4,162 | ||||||||||||
Loss on disposal of fixed assets |
— | — | 63 | 325 | ||||||||||||
Other |
196 | 181 | 676 | 332 | ||||||||||||
Total non-interest expense |
4,389 | 3,660 | 11,965 | 10,246 | ||||||||||||
Income before provision for income taxes |
69,546 | 84,615 | 204,941 | 236,604 | ||||||||||||
Provision for income taxes |
88 | 24 | 195 | 73 | ||||||||||||
Net income |
$ | 69,458 | $ | 84,591 | $ | 204,746 | $ | 236,531 | ||||||||
Dividends declared on preferred securities |
(5,406 | ) | (4,488 | ) | (14,536 | ) | (14,349 | ) | ||||||||
Net income applicable to common shares |
$ | 64,052 | $ | 80,103 | $ | 190,210 | $ | 222,182 | ||||||||
See notes to unaudited condensed consolidated financial statements.
4
| Preferred, Class A |
Preferred, Class B |
Preferred, Class C |
||||||||||||||||||||||
| (in thousands) |
Shares |
Securities |
Shares |
Securities |
Shares |
Securities |
||||||||||||||||||
Nine Months Ended September 30, 2003 (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, 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 | |||||||||||||||
| Preferred, Class D |
Preferred |
Common |
Retained | |||||||||||||||||||||||||||||
| (in thousands) |
Shares |
Securities |
Shares |
Securities |
Shares |
Securities |
Earnings |
Total |
||||||||||||||||||||||||
Nine Months Ended September 30, 2003 (Unaudited): |
||||||||||||||||||||||||||||||||
Balance, beginning of period |
14,000 | $ | 350,000 | — | $ | — | 14,000 | $ | 4,715,351 | $ | — | $ | 5,516,351 | |||||||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||||||||||
Net income |
236,531 | 236,531 | ||||||||||||||||||||||||||||||
Total comprehensive income |
236,531 | |||||||||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||||||||||
Balance, end of period (Unaudited) |
14,000 | $ | 350,000 | — | $ | — | 14,000 | $ | 4,715,351 | $ | 222,182 | $ | 5,738,533 | |||||||||||||||||||
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 | |||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
5
Huntington Preferred Capital, Inc.
| Nine Months Ended | ||||||||
| September 30 |
||||||||
| (in thousands of dollars) |
2004 |
2003 |
||||||
Operating Activities |
||||||||
Net Income |
$ | 204,746 | $ | 236,531 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Reduction of allowances for credit losses |
(18,438 | ) | (33,918 | ) | ||||
Depreciation |
4,038 | 4,162 | ||||||
Deferred income tax benefit |
(812 | ) | (434 | ) | ||||
Loss on disposal of fixed assets |
63 | 325 | ||||||
Decrease in accrued income and other assets |
2,777 | 20,634 | ||||||
Decrease (increase) in due from affiliates |
12,329 | (5,480 | ) | |||||
Increase (decrease) in other liabilities |
38 | (88 | ) | |||||
Net Cash Provided by Operating Activities |
204,741 | 221,732 | ||||||
Investing Activities |
||||||||
Participation interests acquired |
(3,184,804 | ) | (4,438,760 | ) | ||||
Sales and repayments on loans underlying
participation interests |
3,654,723 | 4,192,767 | ||||||
Proceeds from the sale of fixed assets |
— | 71 | ||||||
Net Cash Provided by (Used for) Investing Activities |
469,919 | (245,922 | ) | |||||
Financing Activities |
||||||||
Dividends paid on preferred stock |
(10,596 | ) | (10,509 | ) | ||||
Net Cash Used for Financing Activities |
(10,596 | ) | (10,509 | ) | ||||
Change in Cash and Cash Equivalents |
664,064 | (34,699 | ) | |||||
Cash and Cash Equivalents: |
||||||||
at Beginning of Period |
124,085 | 534,254 | ||||||
at End of Period |
$ | 788,149 | $ | 499,555 | ||||
Supplemental information: |
||||||||
Income taxes paid |
$ | 1,496 | $ | 161 | ||||
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)
| September 30, | December 31, | September 30, | ||||||||||
| (in thousands of dollars) |
2004 |
2003 |
2003 |
|||||||||
Commercial |
$ | 973 | $ | 5,176 | $ | 11,677 | ||||||
Commercial real estate |
10,460 | 12,987 | 25,302 | |||||||||
Consumer(1) |
2,692 | — | — | |||||||||
Residential real estate |
4,749 | 4,157 | 4,795 | |||||||||
Total Participations in Non-Accrual Loans |
$ | 18,874 | $ | 22,320 | $ | 41,774 | ||||||
Participations in Accruing Loans Past
Due 90 Days or More |
$ | 8,466 | $ | 13,363 | $ | 17,252 | ||||||
(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 September 30, 2004, December 31, 2003, and September 30, 2003, respectively.
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:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| (in thousands of dollars) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
ALL balance, beginning of period |
$ | 72,524 | $ | 110,127 | $ | 84,532 | $ | 140,353 | ||||||||
Allowance for loan participations acquired |
2,738 | 11,610 | 11,916 | 35,007 | ||||||||||||
Net loan losses |
(1,461 | ) | (8,081 | ) | (7,191 | ) | (46,704 | ) | ||||||||
Reduction of allowances for credit losses |
(6,874 | ) | (18,918 | ) | (18,438 | ) | (33,918 | ) | ||||||||
Net change in AULPC |
741 | — | (3,151 | ) | — | |||||||||||