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As filed with the Securities and Exchange Commission on October 12, 2001
Registration No. 333-61182
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 4 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HUNTINGTON PREFERRED CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Huntington Center
41 South High Street
Columbus, Ohio 43287
(614) 480-8300
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
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Richard A. Cheap, Secretary
Huntington Preferred Capital, Inc.
41 South High Street
Columbus, Ohio 43287
(614) 480-4647
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
KENNETH L. BACHMAN, ESQ.
MARY BETH M. CLARY, ESQ. MICHAEL A. MAZZUCHI, ESQ.
PORTER, WRIGHT, MORRIS & ARTHUR LLP CLEARY, GOTTLIEB, STEEN & HAMILTON
5801 PELICAN BAY BLVD. AND 2000 PENNSYLVANIA AVENUE, N.W.
SUITE 300 SUITE 500
NAPLES, FLORIDA 34108-2709 WASHINGTON, D.C. 20006-1801
(941) 593-2959 (202) 974-1500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, preliminary prospectus dated October 11, 2001
2,000,000 PREFERRED SECURITIES
HUNTINGTON PREFERRED CAPITAL, INC.
_____% NONCUMULATIVE EXCHANGEABLE PERPETUAL PREFERRED SECURITIES, CLASS C
(LIQUIDATION AMOUNT $25.00 EACH)
EXCHANGEABLE IN SPECIFIED CIRCUMSTANCES INTO PREFERRED SECURITIES OF
THE HUNTINGTON NATIONAL BANK
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Terms of the Class C preferred securities include:
- Dividends are:
- payable quarterly only if declared, and
- noncumulative, which means that you will not receive them if they are
not declared.
- Exchangeable, without your approval or any action on your part, for
preferred securities with substantially equivalent terms as to dividends,
liquidation preference, and redemption of The Huntington National Bank, or
the Bank, our indirect parent, if the Office of the Comptroller of the
Currency, or the OCC, so directs only under the following circumstances:
- the Bank becomes or may in the near term become undercapitalized, or
- the Bank is placed in conservatorship or receivership.
- Redeemable at our option on or after [_____], 2021, with the prior consent
of the OCC.
- Senior to our common shares and Class B preferred securities, but on a
parity with our Class A preferred securities and Class D preferred
securities.
- Junior to our obligations to creditors, including any borrowings that we
may incur in the future and any obligations which we may have for the
Bank's advances from the Federal Home Loan Bank of Cincinnati or others. We
have no borrowings and are not so obligated as of the date of this
prospectus, however, up to 25% of our assets may be pledged to secure
advances made to the Bank prior to the end of 2001.
- Entitled to 1/10th of one vote per share on all matters submitted to
holders of our common shares.
Prior to this offering, there has been no public market for the Class C
preferred securities. We have applied for quotation of the Class C preferred
securities on The Nasdaq National Market under the symbol "HPCC."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DESCRIPTION OF RISK FACTORS
YOU SHOULD CONSIDER BEFORE YOU INVEST IN THESE SECURITIES INCLUDING THE MOST
SIGNIFICANT ADVERSE RISKS WHICH ARE:
- The potential exchange, without your approval or any action on your part,
of the Class C preferred securities for Class C preferred securities of the
Bank.
- Bank regulatory restrictions on our operations and dividends.
- Dividends are payable only if declared and are noncumulative.
- We are entirely dependent on the Bank for our day-to-day operations and we
pay the Bank substantial servicing fees.
- The potential conflicts of interest among the Bank, Huntington Preferred
Capital Holdings, Inc., or Holdings, which is our parent company, and us,
including those conflicts involving the current and future acquisition of
all of our investments from Holdings, who acquired all of them from the
Bank.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OCC, THE OHIO STATE
DIVISION OF SECURITIES, NOR ANY OTHER FEDERAL AGENCY OR STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Per Preferred Security Total
Public offering price........................................................... $25.00 $50,000,000
Underwriting discounts and commissions(1)....................................... $0.00 $0
Our Proceeds.................................................................... $25.00 $50,000,000
(1) All expenses and underwriting discounts and commissions will be paid by
Holdings. Holdings intends to purchase all of the Class C preferred securities
and subsequently sell them to the public. Holdings will not use the proceeds to
purchase additional assets for contribution to us.
Although a statutory underwriter in connection with this offering, Holdings will
not sell the securities directly to the public.
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SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC. PRUDENTIAL SECURITIES
RAYMOND JAMES HUNTINGTON CAPITAL CORP.
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Prospectus dated [_____ __], 2001
The information in this prospectus is not complete and may be amended. We may
not sell these securities until the registration statement filed with the SEC is
effective. This prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
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The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
TABLE OF CONTENTS
Page
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Prospectus Summary......................................................3
Risk Factors...........................................................12
Forward-Looking Statements And Cautionary Factors......................20
Where You Can Find More Information....................................20
Our Background And Corporate Structure.................................21
Benefits To The Bank...................................................22
How We Intend To Use The Proceeds......................................23
Capitalization.........................................................24
Business ..............................................................25
Selected Financial Data................................................45
Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.........................................46
Beneficial Ownership Of Our Stock......................................53
Management.............................................................54
Description Of The Class C Preferred Securities........................58
Description Of Capital Stock...........................................66
Federal Income Tax Considerations......................................73
Erisa Considerations...................................................83
Certain Information Regarding The Bank.................................84
Underwriting...........................................................84
Experts ..............................................................87
Legal Matters..........................................................87
Glossary ..............................................................87
Huntington Preferred Capital, Inc. Index To Financial Statements.......90
ANNEX I - Prospectus, dated _________, 2001, of The Huntington National Bank
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PROSPECTUS SUMMARY
Before you decide to invest in the Class C preferred securities, you
should carefully read the following summary, together with the more detailed
information and financial statements and related notes contained elsewhere in
this prospectus, especially the risks of investing in the Class C preferred
securities discussed under "Risk Factors."
Also, please carefully read the information under "Recent Developments."
You should refer to the Glossary on page 87 for the definitions of
certain capitalized terms used in this prospectus.
HUNTINGTON PREFERRED CAPITAL, INC.
GENERAL. We are an Ohio corporation and we were incorporated in July
1992 under the name Airbase Realty, Inc. We changed our name to Huntington
Preferred Capital, Inc. in May 2001. Our principal business objective is to
acquire, hold, and manage mortgage assets and other authorized investments that
will generate net income for distribution to our shareholders. Since May 1998,
we have been operating as a real estate investment trust, or REIT, for federal
income tax purposes. As a REIT, we generally will not be required to pay federal
income tax if we distribute at least 90% of our REIT taxable earnings to our
shareholders and continue to meet a number of other requirements.
Our principal executive offices are located at Huntington Center, 41
South High Street, Columbus, Ohio 43287, and our telephone number is (614)
480-8300.
ASSETS. As of June 30, 2001, our total assets were $7.1 billion,
of which $6.3 billion consisted of 99% participation interests in various loans
acquired from the Bank through Holdings. As of June 30, 2001, our assets
consisted of:
ASSETS PERCENTAGE
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Participation interests in commercial mortgage loans.......................... 58.0%
Participation interests in consumer loans secured by real property........... 14.9
Participation interests in residential mortgage loans......................... 8.3
Participation interests in commercial loans not secured by real estate........ 7.4
Other (net)................................................................... 11.4
The weighted average yield earned on all of the participation interests
for six months ended June 30, 2001, was 7.42%.
DIVIDENDS. We currently expect to pay an aggregate amount of dividends
with respect to the outstanding shares of our capital stock equal to
substantially all of our REIT taxable income, which excludes capital gains. In
order to remain qualified as a REIT, we must distribute annually at least 90% of
our REIT taxable income to shareholders. Dividends will be declared at the
discretion of our board of directors after considering our distributable funds,
financial condition, and capital needs, the impact of current and pending
legislation and regulations, economic conditions, tax considerations, our
continued qualification as a REIT, and other factors. Although there can be no
assurances, we currently expect that both our cash available for distribution
and our REIT taxable income will be in excess of amounts needed to pay dividends
on the Class C preferred securities in the foreseeable future because:
- substantially all of our mortgage assets and other authorized
investments are interest-earning,
- all outstanding Class A, Class B, Class C, and Class D preferred
securities represent in the aggregate only approximately 11% of our
capitalization,
- we do not anticipate incurring any Indebtedness other than Permitted
Indebtedness, which includes acting as a co-borrower or guarantor of
certain obligations of the Bank that we do not anticipate will involve
a pledge of more than 25% of our assets,
- we expect that our interest-earning assets will continue to exceed the
liquidation preference of our preferred securities, and
- we anticipate that, in addition to cash flows from operations,
additional cash will be available from principal payments on our loan
portfolio.
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MANAGEMENT. Our Board of directors is currently composed of six
members, all of whom are affiliated with the Bank and/or Huntington Bancshares.
Prior to the sale of the Class C preferred securities to the public in this
offering, we intend to increase the size of our board to nine members and elect
three additional directors. All three new directors will be Independent
Directors who will not be or become employed or otherwise affiliated with us.
Nor will they be or become officers, directors, or other affiliates of Holdings
or the Bank. We currently have six executive officers and two additional
officers, but have no other employees and we do not anticipate that we will need
additional employees. All of our day-to-day activities and the servicing of the
loans underlying our participation interests are administered by the Bank, which
is our indirect parent company.
CONFLICTS OF INTEREST. Because our day-to-day business affairs are
managed by the Bank, conflicts of interest will arise from time to time between
us and the Bank. These conflicts of interest relate to, among other things, the
amount, type, and price of loan participation interests and other assets
acquired by us in the past, or to be acquired by us in the future, from the Bank
or sold back by us to the Bank; the servicing of the underlying loans,
particularly with respect to loans that are placed on nonaccrual status; the
amount of the service fees paid to the Bank; the treatment of new business
opportunities identified by the Bank; our role as co-borrower or guarantor of,
and/or the pledge of our assets to secure, the Bank's obligations; and the
modification of the loan participation and subparticipation agreements. We have
adopted policies that all financial dealings between the Bank and us will be
fair to all parties and consistent with market terms.
COMPENSATION TO AFFILIATES. We pay substantial servicing fees to the
Bank through Holdings. The Bank received servicing fees of $7,821,000,
$7,762,000, and $4,456,000 for the years ended December 31, 2000, 1999, and
1998, respectively, and $4,083,000 for the six months ended June 30, 2001. In
2001, the annual servicing fee with respect to the commercial mortgage,
commercial, and consumer loans is equal to the outstanding principal balance of
each loan multiplied to a fee of .125% and the annual servicing fee with respect
to residential mortgages is equal to .282% of the interest income collected. We
intend to pay each of our Independent Directors $7,000 per year for their
services. None of our other affiliates receive compensation directly from us.
THE HUNTINGTON NATIONAL BANK
The Bank is an interstate national banking association organized under
the laws of the United States and headquartered in Columbus, Ohio. At June 30,
2001, the Bank and its subsidiaries operated over 500 offices in Florida,
Indiana, Kentucky, Maryland, Michigan, New Jersey, Ohio, and West Virginia. In
addition, the Bank and its subsidiaries offer international banking services
through the Bank's headquarters in Columbus, as well as through its Cayman
Islands office and Hong Kong office. At June 30, 2001, the Bank had total assets
of $27.8 billion, total deposits of $19.2 billion, and total shareholder's
equity of $2.1 billion. At June 30, 2001, the Bank's total risk-based capital
ratio was 10.57%, its Tier 1 risk-based capital ratio was 6.65%, and its
leverage ratio was 6.64%. These ratios are sufficient for the Bank to be
qualified as "well-capitalized" under the OCC's regulations. The Bank is a
wholly owned subsidiary of Huntington Bancshares Incorporated.
The principal executive offices of the Bank are located at Huntington
Center, 41 South High Street, Columbus, Ohio 43287, and its telephone number is
(614) 480-8300.
HUNTINGTON PREFERRED CAPITAL HOLDINGS, INC
Huntington Preferred Capital Holdings, Inc., or Holdings, is an Indiana
corporation and our parent company. Holdings owns 99.87% of our common shares
and 89.9% of our Class A preferred securities. Holdings is expected to acquire
100% of our Class D preferred securities upon issuance. The Bank owns 99.9% of
Holdings and Huntington Bancshares owns the remaining 0.1% of Holdings. Holdings
intends to purchase all of our Class C preferred securities in this offering for
resale to the public through the Underwriters identified on the cover page of
this prospectus.
The principal executive offices of Holdings are located at 201 N.
Illinois, Suite 1800, Indianapolis, Indiana 46204, and its telephone number is
(317) 237-2502
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Huntington Bancshares Incorporated
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|
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| | | |
| 100% Common | | | 100% Common
| | | |
------------------------ | | ----------------------
The Huntington | | HPC Holdings-II,
National Bank | | Inc.
------------------------ | | ----------------------
| | 0.1% | |
| 99.9% Common | Common | | 100% B Preferred
---------------------- | |
---------------------- | | Public Preferred Shareholders
Huntington Preferred | 0.13% Common | |
Capital Holdings, | | | 10.1% A Preferred
Inc. | | | 100% C Preferred
--------------------- | | |
| 99.87% Common | | |
| 89.9% A Preferred | | |
| 100% D Preferred* | | |
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|
---------------------
Huntington Preferred
Capital, Inc.
---------------------
| 100% Common
----------------------
HPCLI, Inc.
----------------------
--------
*Holdings intends to sell to third party investors at some future date.
RECENT DEVELOPMENTS
On July 12, 2001, Huntington Bancshares announced a comprehensive
strategic and financial restructuring plan. Under the plan, Huntington
Bancshares expects to, among other things, divest its Florida retail and
corporate banking business. On September 26, 2001, Huntington Bancshares
announced that it has entered into an agreement to sell its Florida operations
with SunTrust Banks, Inc. Approximately $1.2 billion of loans underlying our
participation interests, representing 18% of our total assets, will included in
this sale.
We will receive cash for the sale of our participation interests. It is our
current intention to distribute that cash to our common shareholders. We do not
anticipate that any proceeds received from the sale of our participation
interests will be distributed to our preferred security holders. The sale of
Huntington Bancshares' Florida operations, which is subject to regulatory
approval and other customary conditions is expected to close in the first
quarter of 2002.
We have included pro forma financial statements beginning on page F-13 of
this prospectus to reflect the sale of Florida loans underlying our
participation interests. In addition, the total number of Florida loans and
their aggregate principal balances that are included in the commercial and
commercial mortgage loans, consumer loans, and residential mortgage loans
underlying our participation interests are provided in the geographic
distribution tables on pages 27, 30, and 33, respectively, of this prospectus.
The characteristics of these Florida loans are substantially consistent with the
characteristics of the total loan portfolio underlying our participation
interests. Thus, other than with respect to the geographic distribution tables,
we anticipate that the information presented as of June 30, 2001, under the
columns "Percentage By Aggregate Principal Balance," "Weighted Average Months to
Maturity," and "Weighted Average Interest Rate" in the tables under the heading
"General Description of Mortgage Assets and Other Authorized Investments;
Investment Policy" on pages 25-35 of this prospectus will remain substantially
consistent after adjusting for the sale of the loans in Florida underlying our
participation interests.
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RISK FACTORS
A purchase of Class C preferred securities is subject to a number of
risks described in more detail under "Risk Factors" commencing on page 12. These
risks include:
- Your Class C preferred securities will be exchanged, without your
approval or any action on your part, for preferred securities of the
Bank if such an exchange is directed by the OCC after the occurrence
of a Supervisory Event. A Supervisory Event will occur if:
- The Bank becomes undercapitalized under prompt corrective action
regulations;
- The Bank is placed in conservatorship or receivership; or
- The OCC, in its sole discretion, anticipates the Bank becoming
undercapitalized in the near term.
- Upon such an exchange, you would have an investment in the Bank and
not in us at a time when the Bank's financial condition is
deteriorating and you likely would receive substantially less than you
would have received if we were liquidated or placed in receivership.
In fact, you may not receive anything for your preferred securities of
the Bank. In addition, the likelihood of dividend payments, as well as
taxation, voting rights, and liquidity of your securities would be
negatively impacted.
- The Bank is eligible to obtain advances from various federal agencies
such as the Federal Home Loan Bank of Cincinnati, or FHLBC. We may in
the future be asked to act as co-borrower or guarantee the Bank's
obligations under such advances and/or pledge all or a portion of our
assets in connection with those advances. Any such borrowing,
guarantee, or pledge would rank senior to the Series C preferred
securities upon liquidation. As of the date of this prospectus, we
have never acted as co-borrower or guarantor of any of the Bank's
obligations under such advances and have never pledged any of our
assets. The Bank, however, intends to obtain a line of credit or one
or more advances, not to exceed at any one time $800 million in the
aggregate, from the FHLBC prior to the end of 2001. We do not yet know
what our exact role will be, but it is expected that up to 25% of our
assets may serve as collateral for such advances. Any such borrowing,
guarantee, and/or pledge will fall within the definition of
Indebtedness; however, it and all other future Indebtedness to the
FHLBC will be deemed to be Permitted Indebtedness and we will not need
to obtain the consent of the holders of our Class C preferred
securities for any such borrowing, guarantee, and/or pledge.
- We are an indirect subsidiary of the Bank. Consequently, federal and
state regulators of the Bank can restrict our ability to (1) transfer
assets, (2) pay dividends to the holders of the Class C preferred
securities, and/or (3) redeem the Class C preferred securities.
- Dividends on the Class C preferred securities will not be cumulative.
Consequently, if our board of directors does not declare a dividend on
the Class C preferred securities for any quarterly period, you will
not be entitled to receive such dividend whether or not funds are or
subsequently become available. Our board of directors may also
determine, in its business judgment, that it would be in our best
interest to pay less than the full amount of the stated dividends on
the Class C preferred securities even if funds are available.
- We are dependent in virtually every phase of our operations, including
the servicing of the loans underlying our participation interests, on
the diligence and skill of the officers and employees of the Bank. We
do not have any employees because we have retained the Bank and its
affiliates to perform all necessary functions under the participation
and subparticipation agreements. All of our officers are also officers
of the Bank or its affiliates. We estimate that these officers devote
less than 5% of their time to managing our business.
- Because of the relationship between us and the Bank, conflicts of
interests will exist between us and the Bank relating to:
- our investment and operating strategies;
- the fact that the participation agreement between Holdings and
the Bank and the subparticipation agreement between Holdings and
us were not the result of arms-length negotiations;
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- the acquisition from or disposition to the Bank through Holdings
of loan participations and other assets;
- our role as co-borrower or guarantor of, and/or the pledge of our
assets to secure, the Bank's obligations; and
- the servicing of our assets by the Bank.
- Our board of directors has broad discretion to revise our
investment and operating strategies without stockholder approval.
The Bank, through its ownership of substantially all of Holdings'
common stock and Holdings ownership of substantially all of our
common stock, controls the election of all of our directors,
including our Independent Directors.
- We have no control over changes in interest rates. A significant
decline in interest rates could negatively impact our financial
condition, results of operations, and ability to pay dividends. Our
participation interests in fixed rate loans may be prepaid as
borrowers refinance their mortgages at lower interest rates and our
participation interests in adjustable rate loans will eventually
adjust to lower rates. These developments will adversely affect our
ability to pay the fixed rate obligations of the Class C preferred
securities.
- Risks associated with participation interests in loans generally,
and particularly the geographic concentration of our portfolio at
June 30, 2001, in Ohio, Michigan, Florida, Indiana, and Kentucky,
could adversely affect our assets and the value of the Class C
preferred securities. The quality of our loan participation
interests depends upon, among other things, the borrowers' ability
to repay, regional economic conditions, and regional real estate
values.
- Nearly two-thirds of our assets consist of participation interests
in commercial mortgage loans which are riskier than other types of
loans.
- Although we believe that we paid fair market value for our assets
acquired from Holdings, the transactions were not the result of
arms-length negotiations and we did not obtain third party
valuation of such assets. We do not intend to obtain third party
valuations in connection with future asset acquisitions and
dispositions and thus we cannot assure you that we will acquire or
dispose of such assets in the future at their fair market value.
- If we fail to maintain our status as a REIT for federal income tax
purposes, we will be subject to corporate income tax, reducing our
earnings available for distribution, and we may be permitted to
redeem our Class C preferred securities if this failure was due to
a Tax Event.
- We have imposed ownership limitations on the Class C preferred
securities which may affect the secondary market for such
securities.
- Environmental liabilities associated with real property securing
the loans underlying our participation interests could reduce the
fair market value of our participation interests.
- We do not have insurance to cover our exposure to borrower defaults
and bankruptcies; delays in liquidating defaulted loans could cause
our business to suffer.
- An active trading market for the Class C preferred securities may
not develop and no trading market is likely to exist for the Bank
Class C preferred securities you would receive if a conditional
exchange occurs because those securities are not, and will not
likely be, listed on any securities exchange or for quotation on
The Nasdaq Stock Market or any other over-the-counter market.
- We may redeem the Class C preferred securities at any time upon
the occurrence of certain Special Events.
- We are not required to limit the types of real estate assets in
which we invest. Consequently, we may invest in assets which
involve new risks and we need not maintain the present amount of
assets we hold relative to the amount of our preferred securities.
CONDITIONAL EXCHANGE OF CLASS C PREFERRED SECURITIES
The Class C preferred securities will be exchanged, without your
approval or any action on your part, for preferred securities of the Bank if
such an exchange is directed by the OCC after the occurrence of any of the
following events:
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- the Bank becomes undercapitalized under prompt corrective action
regulations;
- the Bank is placed into conservatorship or receivership; or
- the OCC, in its sole discretion, anticipates that the Bank may become
undercapitalized in the near term.
We refer to this as a Conditional Exchange. In a Conditional Exchange,
you would receive one Class C preferred security of the Bank with a liquidation
preference of $25.00 per share for each of our Class C preferred securities you
own. The preferred securities which you would receive in the event of a
Conditional Exchange will be noncumulative, perpetual, nonvoting preferred
securities of the Bank ranking equally upon issuance with the most senior
preferred securities of the Bank then outstanding. If a Conditional Exchange
occurs you would own an investment in the Bank and not in us at a time when the
Bank's financial condition is deteriorating or the Bank has been placed into
conservatorship or receivership. Therefore, you should carefully consider the
description of the Bank set forth under "Information Regarding The Huntington
National Bank" and the attached Prospectus for the Bank Class C preferred
securities before investing in our Class C preferred securities.
REASONS FOR THE OFFERING
We are undertaking the offering for the following reasons:
- to increase the Bank's regulatory capital as a result of the proceeds
from the offering of Class C preferred securities being included as
Tier 1 or Tier 2 capital of the Bank under relevant regulatory capital
guidelines;
- to raise additional funds for Holdings, which may be loaned to, or
held on deposit with, the Bank.
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THE OFFERING
Issuer: ................. Huntington Preferred Capital, Inc., an Ohio
corporation that is an indirect subsidiary of The
Huntington National Bank and that operates as a REIT.
Securities Offered: ..... 2,000,000 [___]% Noncumulative Exchangeable Perpetual
Preferred Securities, Class C.
Ranking: ................ With respect to the payment of dividends and
liquidation amounts, the Class C preferred securities
rank equal to our outstanding Class A preferred
securities and our Class D preferred securities. With
respect to the payment of dividends and liquidation
amounts, the Class C preferred securities rank senior
to our common shares and Class B preferred
securities. Additional preferred securities ranking
senior to the Class C preferred securities, which we
refer to as Senior Stock, may not be issued without
the approval of holders of at least two-thirds of the
Class C preferred securities. Additional preferred
securities ranking on a parity with the Class C
preferred securities, which we refer to as Parity
Stock, may not be issued without the approval of a
majority of our Independent Directors. The Class C
preferred securities rank junior to our obligations
to any creditor, including future borrowings or
guarantees of the Bank's obligations.
Dividends: .............. Dividends on the Class C preferred securities are
payable at the rate of [__]% per annum of the
liquidation amount of $25.00 per share, if, when, and
as declared by our board of directors. If declared,
dividends are payable quarterly in arrears on March
31, June 30, September 30, and December 31 of each
year or, if any such day is not a business day, on
the next business day, unless the next business day
falls in a different calendar year, in which case the
dividend will be paid on the preceding business day,
commencing [________] 30, 2001. A business day is any
day other than a Saturday, Sunday, or bank holiday.
Dividends accrue in each quarterly period from the
first day of such period, whether or not dividends
are paid with respect to the preceding period.
Dividends on the Class C preferred securities are not
cumulative and, accordingly, if we do not declare a
dividend or declare less than a full dividend on the
Class C preferred securities for a quarterly dividend
period, holders of the Class C preferred securities
will have no right to receive a dividend or the full
dividend, as the case may be, for that period, and we
will have no obligation to pay a dividend for that
period, whether or not dividends are declared and
paid for any future period with respect to either the
Class C preferred securities or our common shares. If
the full dividend is not paid on the Class C
preferred securities for a quarterly dividend period,
the payment of dividends on our common shares, all of
which are owned by the Bank and its affiliates, will
be prohibited for that period and at least the
following three quarterly dividend periods.
Liquidation Preference: . The liquidation preference for each Class C preferred
security is $25.00, plus an amount equal to any
quarterly accrued and unpaid dividends for the
then-current dividend payment.
Redemption: ............. The Class C preferred securities are not redeemable
prior to [_____], 2021, except upon the occurrence of
a Special Event which may be a Tax Event, an
Investment Company Act Event, or a Regulatory Capital
Event. On and after [_______] 2021, the Class C
preferred securities may be redeemed for cash at our
option, with the prior approval of the OCC, in whole
or in part, at any time and from time to time, at a
redemption price of $25.00 per share, plus accrued
and unpaid dividends for the most recent quarter, if
any. Upon the occurrence of a Special Event, we will
have the right prior to 2021, with the prior approval
of the OCC, to redeem the Class C preferred
securities in whole, but not in part, at a redemption
price of $25.00 per share, plus accrued and unpaid
dividends for the most recent quarter, if any. The
Class C preferred securities will not be subject to
any sinking fund or mandatory redemption and will not
be convertible into any of our other securities.
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Conditional Exchange:......Each Class C preferred security will be exchanged if
such an exchange is directed by the OCC after the
occurrence of a Supervisory Event, without your
approval or any action on your part, for one Bank
Class C preferred security.
Voting Rights:............ Holders of the Class C preferred securities
are entitled to 1/10th of one vote per share on all
matters submitted to a vote of the holders of our
common shares. In addition, without the consent of
holders of two-thirds of the Class C preferred
securities, voting as a separate class, we will not:
- amend our articles of incorporation in a
manner that materially and adversely affects
the holders of the Class C preferred
securities,
- effect a consolidation or merger with or
into another entity other than an entity
controlled by, or under common control with,
the Bank unless certain conditions have been
met, or
- approve the issuance of any Senior Stock.
Holders of the Class C preferred securities, voting
together as a class with the holders of any Parity
Stock with the same voting rights, will also have the
right to elect two independent directors in addition
to the directors then in office if six consecutive
full dividends are missed. The term of such
independent directors will terminate after four
consecutive quarterly dividends have been paid in
full on the Class C preferred securities or, if
earlier, upon the redemption of all Class C preferred
securities or a Conditional Exchange.
Covenants: .............. Our articles of incorporation provide certain
covenants in favor of the holders of the Class C
preferred securities. Specifically we agree to not,
except with the consent or affirmative vote of the
holders of at least two thirds of the Class C
preferred securities, voting as a separate class:
- make or permit to be made any payment to the
Bank or its affiliates relating to our
Indebtedness or beneficial interests in us
when we are precluded, as described under
"Dividends" above, from making payments in
respect of our common shares and all other
stock ranking subordinate to our Class C
preferred securities, which we refer to as
Junior Stock, or make such payment or permit
such payment to be made in anticipation of
any liquidation, dissolution, or winding up;
- at any time incur Indebtedness other than
certain specified Permitted Indebtedness;
- pay dividends on our common shares unless
our funds from operations, or FFO, for the
four prior fiscal quarters equals or exceeds
150% of the amount that would be required to
pay full annual dividends on the Class C
preferred securities as well as any other
Parity Stock, except as may be necessary to
maintain our status as a REIT;
- make any payment of interest or principal
with respect to our Indebtedness to the Bank
or its affiliates unless our FFO for the
four prior fiscal quarters equals or exceeds
150% of the amount that would be required to
pay full annual dividends on the Class C
preferred securities as well as any other
Parity Stock, except as may be necessary to
maintain our status as a REIT;
- amend or otherwise change our policy of
reinvesting the proceeds of our assets in
other interest-earning assets such that our
FFO over any period of four fiscal quarters
will be anticipated to equal or exceed 150%
of the amount that would be required to pay
full annual dividends on the Class C
preferred securities as well as any other
Parity Stock, except as may be necessary to
maintain our status as a REIT;
- issue any additional common shares to anyone
other than the Bank or its affiliates; or
- remove "Huntington" from our name unless the
name of either the Bank or Huntington
Bancshares changes and we need to make a
change to our name to be consistent with the
new group name.
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Ownership Limits: ........ With limited exceptions, our articles of
incorporation provide that no individual or entity is
permitted to own more than 9.2% of the aggregate
initial liquidation value of our issued and
outstanding preferred securities, including the Class
C preferred securities. Assuming the issuance of all
of our Class C and Class D preferred securities, no
person may own more than $73,692,000 of the aggregate
liquidation value of our preferred securities. Any
Class C preferred securities held in violation of
this limit will be automatically transferred to a
trust for the exclusive benefit of a charity to be
named by us. All rights to dividends for those
securities will be held by such trust.
Listing: ................ We applied for quotation of the Class C preferred
securities on the Nasdaq National Market under the
symbol "HPCC."
Use of Proceeds: ........ Holdings intends to pay $25 per Class C preferred
security purchased by it. Holdings' payment for the
Class C preferred securities will be in the form of
additional participation interests in commercial
loans, including commercial real estate loans, and
consumer loans not secured by real estate, including
automobile and equipment loans, as well as
leasehold interests. We intend to hold these
participation interests as long term investments and
transfer the leasehold improvements to our wholly
owned subsidiary, HPCLI, Inc. Assuming Holdings
purchases all 2,000,000 shares offered by this
prospectus, the value of the participation interests
and leasehold improvements paid to us by Holdings
will be $50,000,000. Holdings intends to sell the
Class C preferred securities to the public for cash
consideration of $25 per share. Holdings, our parent,
will pay all expenses of and underwriting discounts
and commissions associated with this offering.
Concurrent with the issuance of the Class C preferred
securities, we intend to issue to Holdings
approximately 14,000,000 Class D preferred
securities. Our Class D preferred securities will be
on a parity with our Class A and Class C preferred
securities, will be noncumulative, and will have a
1/10th vote per share. It is anticipated that we will
receive from Holdings $25 per Class D preferred
security, or $350 million in the aggregate, payable
in the same types of participation interests and
leasehold interests that we expect to receive from
Holdings for the issuance of our Class C preferred
security. The aggregate principal balance of the
participation interests and leasehold interests
acquired by us in connection with the issuance of our
Class C and Class D preferred securities will
represent less than 6.0% of our total assets as of
June 30, 2001. The pro forma information beginning on
page F-13 of this prospectus also reflects, on a pro
forma basis, the assets we expect will be acquired in
connection with the issuance of our Class C and Class
D preferred securities
Tax Consequences: ....... As long as we qualify as a REIT, corporate holders of
the Class C preferred securities will not be entitled
to a dividends-received deduction for any income
recognized from the Class C preferred securities.
Settlement: ............. We expect that delivery of the Class C preferred
securities will be made to Holdings on or about the
date of this prospectus and to investors on or about
[____________], 2001.
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS, IN ADDITION TO THE
RISKS HIGHLIGHTED IN THE ATTACHED PROSPECTUS OF THE BANK BEGINNING ON PAGE BP-6
OF THAT PROSPECTUS, BEFORE PURCHASING THE CLASS C PREFERRED SECURITIES.
A DECLINE IN THE BANK'S CAPITAL LEVELS MAY RESULT IN YOUR CLASS C PREFERRED
SECURITIES BEING SUBJECT TO A CONDITIONAL EXCHANGE INTO BANK PREFERRED
SECURITIES AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING.
CONSEQUENTLY, THE LIKELIHOOD OF DIVIDEND PAYMENTS, AS WELL AS THE LIQUIDATION
PREFERENCE, TAXATION, VOTING RIGHTS, AND LIQUIDITY OF YOUR SECURITIES WOULD BE
NEGATIVELY IMPACTED.
The returns from your investment in the Class C preferred securities
will be dependent to a significant extent on the performance and capital of the
Bank. A decline in the performance and capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could result in the
exchange, if so directed by the OCC, of your Class C preferred securities for
Bank Class C preferred securities, without your approval or any action on your
part. This would represent an investment in the Bank and not in us. Under these
circumstances, there would likely be a significant loss associated with your
investment.
- IT IS UNLIKELY THAT YOU WILL RECEIVE DIVIDENDS ON THE BANK CLASS C
PREFERRED SECURITIES IMMEDIATELY AFTER A CONDITIONAL EXCHANGE. You would
become a preferred shareholder of the Bank at a time when the Bank's
financial condition has deteriorated or when the Bank has been placed into
conservatorship or receivership and, accordingly, it is unlikely that the
Bank would be in a financial position to make any dividend payments on the
Bank preferred securities.
- OTHERS MAY HAVE LIQUIDATION CLAIMS AGAINST THE BANK WHICH ARE SENIOR TO
THOSE OF THE HOLDERS OF THE BANK CLASS C PREFERRED SECURITIES RESULTING IN
THE RECEIPT BY SUCH HOLDERS OF SUBSTANTIALLY LESS THAN SUCH HOLDERS'
INITIAL INVESTMENT. In the event of a liquidation of the Bank, the claims
of depositors and creditors of the Bank would be entitled to priority in
payment over the claims of holders of equity interests such as the Bank
Class C preferred securities, and, therefore, you likely would receive
substantially less than you would have received had the Class C preferred
securities not been exchanged for Bank Class C preferred securities. In
addition, claims of the Bank Class D preferred securities would be treated
on an equal basis with the claims of the holders of the Bank Class C
preferred securities. As a result, you would share any amounts available
for distribution on a pro rate basis with the holders of the Bank Class D
preferred securities.
- YOU MAY HAVE ADVERSE TAX CONSEQUENCES AS A RESULT OF THE CONDITIONAL
EXCHANGE. The exchange of the Class C preferred securities for Bank Class C
preferred securities would most likely be a taxable event to you under the
Internal Revenue Code and, in that event, you would incur a gain or loss,
as the case may be, measured by the difference between your basis in the
Class C preferred securities and the fair market value of the Bank Class C
preferred securities received in the exchange.
- BANK CLASS C PREFERRED SECURITIES HAVE NO VOTING RIGHTS AND WILL NOT BE
LISTED ON ANY EXCHANGE. Although the terms of the Bank Class C preferred
securities are substantially similar to the terms of our Class C preferred
securities, there are differences that you might deem to be important, such
as the Bank Class C preferred securities do not have any voting rights or
any right to elect independent directors if dividends are missed. In
addition, the Bank Class C preferred securities will not be listed on the
Nasdaq National Market or any exchange and a market for them may never
develop.
BANK REGULATORS MAY LIMIT OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN AND MAY
RESTRICT OUR ABILITY TO PAY DIVIDENDS.
Because we are an indirect subsidiary of the Bank, regulatory
authorities will have the right to examine us and our activities and, under
certain circumstances, to impose restrictions on the Bank or us which could
impact our ability to conduct business pursuant to our business plan and which
could adversely effect our financial condition and results of operations.
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- If the OCC, which is the Bank's primary regulator, determines
that the Bank's relationship with us results in an unsafe and
unsound banking practice, the Bank's regulators have the
authority to:
- restrict our ability to transfer assets,
- restrict our ability to make distributions to our
shareholders, including dividends to holders of the Class
C preferred securities,
- restrict our ability to redeem our preferred securities,
or
- require the Bank to sever its relationship with us or
divest its ownership of us.
Certain of these actions by the OCC would likely result in our
failure to qualify as a REIT.
- Payment of dividends on the Class C preferred securities could
also be subject to regulatory limitations if the Bank becomes
"undercapitalized" for purposes of regulations issued by the
OCC. Under these regulations, the Bank will be deemed
"undercapitalized" if it has a total risk-based capital ratio
of less than 8.0%; a Tier 1 risk-based capital ratio of less
than 4.0%; and a leverage ratio of less than 4.0% or less than
3% if the institution has been awarded the highest supervisory
rating. At June 30, 2001, the Bank's total risk-based capital
ratio was 10.57%, its Tier 1 risk-based capital ratio was
6.65%, and its leverage ratio was 6.64%. The Bank currently
intends to maintain its capital ratios in excess of the
"well-capitalized" levels under these regulations. However,
there can be no assurance that the Bank will be able to
maintain its capital in excess of the "well-capitalized"
levels. The exercise of the OCC's power to restrict dividends
on our Class C preferred securities would, however, also have
the effect of restricting the payment of dividends on our
common shares and other classes of preferred securities. The
inability to pay dividends on our common shares would prevent
us from meeting the statutory requirement for a REIT to
distribute 90 percent of its taxable income and, therefore,
would cause us to fail to qualify for the favorable tax
treatment accorded to REITs.
If we had to be treated for tax purposes in the same manner as
the other consolidated subsidiaries of the Bank rather than as
a REIT, our loss of tax benefits would be directly and
immediately felt by the Bank. In addition, because we hold a
substantial part of the Bank's mortgage assets and our
dividend flow is a substantial part of the Bank's total
income, our inability to transmit resources to the Bank by
means of dividends would deprive the Bank of liquidity
necessary for the efficient and profitable management of its
loan and investment portfolios, thus adversely affecting the
Bank's financial condition.
- Legal and regulatory limitations on the payment of dividends
by the Bank could also affect our ability to pay dividends to
unaffiliated third parties, including the holders of our Class
C preferred securities. Regulatory approval is required prior
to the Bank's declaration of any dividends in excess of
available retained earnings. The amount of dividends that may
be declared without regulatory approval is further limited to
the sum of net income for the current year and retained net
income for the preceding two years, less any required
transfers to surplus or common stock. The Bank could, without
regulatory approval, declare dividends in 2001 of
approximately $278.9 million plus an additional amount equal
to its net income through the date of declaration in 2001. We
are members of the Bank's consolidated group. Thus, payment of
common and preferred dividends by the Bank and/or any member
of its consolidated group to unaffiliated third parties,
including our payment of dividends to the holders of our Class
C preferred securities, would require regulatory approval if
aggregate dividends on a consolidated basis exceed these
limitations.
DIVIDENDS ARE NOT CUMULATIVE AND YOU ARE NOT ENTITLED TO RECEIVE DIVIDENDS
UNLESS DECLARED BY OUR BOARD OF DIRECTORS.
Dividends on the Class C preferred securities are not cumulative.
Consequently, if our board of directors does not declare a dividend on the Class
C preferred securities for any quarterly period, including if prevented by bank
regulators, you will not be entitled to receive that dividend whether or not
funds are or subsequently become available. Our board of directors may determine
that it would be in our best interests to pay less than the full amount of the
stated dividends on the Class C preferred securities or no dividends for any
quarter even though funds are available. Factors that would generally be
considered by our board of directors in making this determination are the amount
of our distributable funds, our financial condition and capital needs, the
impact of current and pending
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legislation and regulations, economic conditions, tax considerations, and our
continued qualification as a REIT. If full dividends on the Class C preferred
securities and any Parity Stock have not been paid for six full dividend
periods, the holders of the Class C preferred securities, voting together as a
class with the holders of other Parity Stock with the same voting rights, will
have the right to elect two independent directors in addition to those already
on the board.
WE ARE DEPENDENT IN VIRTUALLY EVERY PHASE OF OUR OPERATIONS ON THE DILIGENCE AND
SKILL OF THE OFFICERS AND EMPLOYEES OF THE BANK, AND OUR RELATIONSHIP WITH THE
BANK MAY CREATE POTENTIAL CONFLICTS OF INTEREST.
The Bank is involved in virtually every aspect of our existence. All of
our officers and all of our current directors are also officers and directors of
the Bank or its affiliates. We estimate that our common officers with the Bank
devote less than 5% of their time to managing our business. Prior to the sale of
our Class C preferred securities to the public, we will elect three additional
directors, all of whom will be Independent Directors. After this offering and
assuming that all Class C and Class D preferred securities are issued and all
Class C preferred securities are sold to the public, the Bank will continue to
control 98.5% of the voting power of our outstanding shares. As a result, the
Bank will have the right to elect all of our directors, including our
Independent Directors, except under limited circumstances if we fail to pay
future dividends. The Bank and its affiliates have interests which are not
identical to ours and, therefore, conflicts of interest have arisen and may
arise in the future with respect to transactions between or among the Bank,
Holdings, and us.
- THE PARTICIPATION AGREEMENT AND SUBPARTICIPATION AGREEMENT ARE
NOT THE RESULT OF ARMS-LENGTH NEGOTIATIONS. The Bank
administers our day-to-day activities under the terms of a
participation agreement between the Bank and Holdings and a
subparticipation agreement between Holdings and us. The
parties to the participation agreement and the
subparticipation agreement are all affiliated. Accordingly,
these agreements were not the result of arms-length
negotiations and may be modified at any time in the future.
Although the modification of the participation agreement or
subparticipation agreement requires the approval of a majority
of our Independent Directors, the Bank, through its ownership
of substantially all of Holdings' common stock and Holdings
ownership of substantially all of our common stock, controls
the election of all of our directors, including our
Independent Directors. We cannot assure you that such
modifications will be on terms as favorable to us as those
that could have been obtained from unaffiliated third parties.
- OUR INVESTMENT GOALS AND STRATEGIES MAY DIFFER. Huntington
Bancshares, the owner of all the Bank's common shares, may
have investment goals and strategies that differ from those of
the holders of the Class C preferred securities. In addition,
neither Huntington Bancshares nor the Bank has a policy
addressing the treatment of new business opportunities. Thus,
new business opportunities identified by Huntington Bancshares
or the Bank may be directed to affiliates other than us. Our
board of directors has broad discretion to revise our
investment and operating strategy without stockholder
approval. The Bank, through its ownership of substantially all
of Holdings' common stock and Holdings ownership of
substantially all of our common stock, controls the election
of all of our directors, including our Independent Directors.
Consequently, our investment and operating strategies will
largely be directed by Huntington Bancshares and the Bank.
- CONFLICTS EXISTED AND MAY IN THE FUTURE EXIST WITH RESPECT TO
THE ACQUISITION OF ASSETS. We are dependent on the diligence
and skill of the officers and employees of the Bank for the
selection and structuring of the loans underlying our
participation interests and our other authorized investments.
The Bank selected the amount, type, and price of loan
participation interests and other assets which we acquired
from the Bank and its affiliates prior to and in connection
with this offering. After the sale of the Class C preferred
securities to the public, we anticipate that we will continue
to acquire all or substantially all of our assets from the
Bank or its affiliates. Although these purchases are made
within our investment policies which are described under the
caption "Business - Management Policies and Programs - Asset
Acquisition and Disposition Policies," neither we nor the Bank
have obtained any third-party valuations, nor do we intend to
do so in the future. Although our board of directors has
adopted certain policies to guide the acquisition and
disposition of assets, these policies may be revised or
exceptions may be approved from time to time at the discretion
of the board of directors without a vote of our stockholders.
Changes in or exceptions made to these policies could permit
us to acquire lower quality assets.
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- THE BANK AND ITS AFFILIATES ARE RESPONSIBLE FOR SERVICING OUR
ASSETS. We are dependent on the Bank and others for monitoring
and servicing the loans underlying our participation
interests. Conflicts may arising as part of such servicing,
particularly with respect to loans that are placed on
nonaccrual status. While we believe that the Bank will
diligently pursue collection of any non-performing assets, we
cannot assure you that this will be the case. Our ability to
make timely payments of dividends on the Class C preferred
securities will depend in part upon the Bank's prompt
collection efforts on our behalf. We pay substantial servicing
fees to the Bank through Holdings. The Bank received servicing
fees of $7,821,000, $7,762,000, and $4,456,000 for the years
ended December 31, 2000, 1999, and 1998, respectively, and
$4,083,000 for the six months ended June 30, 2001. In 2001,
the annual servicing fee with respect to the commercial
mortgage, commercial, and consumer loans is equal to the
outstanding principal balance of each loan multiplied to a fee
of .125% and the annual servicing fee with respect to
residential mortgages is equal to .282% of the interest income
collected.
- CONFLICTS MAY IN THE FUTURE EXIST WITH RESPECT TO THE
DISPOSITIONS OF ASSETS. The Bank may seek to exercise its
influence over our affairs so as to cause the sale of our
assets and their replacement by lesser quality assets
purchased from the Bank or elsewhere. This could adversely
affect our business and our ability to make timely payment of
dividends on the Class C preferred securities.
- CONFLICTS MAY IN THE FUTURE EXIST WITH RESPECT TO OUR
GUARANTEE OF THE BANK'S OBLIGATIONS. The Bank is eligible to
obtain advances from various federal agencies, such as the
FHLBC. We may in the future be asked to act as co-borrower or
guarantee the Bank's obligations under such advances and/or
pledge all or a portion of our assets in connection with those
advances. Any such borrowing, guarantee, or pledge would rank
senior to the Series C preferred securities upon liquidation.
Accordingly, any governmental agencies that make advances to
the Bank where we have acted as co-borrower or guarantor or
have pledged our assets as collateral will have a preference
over the holders of our Class C preferred securities and other
Parity Stock. These holders would receive their liquidation
preference only to the extent there are assets available after
satisfaction of our Indebtedness. As of the date of this
prospectus, we have never acted as co-borrower or guarantor of
any of the Bank's obligations under such advances or otherwise
and have never pledged any of our assets. The Bank, however,
intends to obtain a line of credit or one or more advances,
not to exceed at any one time $800 million in the aggregate,
from the FHLBC prior to the end of 2001. The terms of such
line of credit or advances have not yet been determined. We do
not yet know what our exact role will be, but it is expected
that up to 25% of our assets may serve as collateral for such
advances. Any agreement setting forth our obligations will be
approved by our directors. Any such borrowing, guarantee,
and/or pledge will fall within the definition of Indebtedness;
however, it and all other future Indebtedness relating to the
FHLBC will be deemed to be Permitted Indebtedness and we will
not need to obtain the consent of the holders of our Class C
preferred securities for any such borrowing, guarantee, and/or
pledge. A default by the Bank on its obligations to the FHLBC
could adversely affect our business and our ability to make
timely dividend payments on the Class C preferred securities.
WE HAVE NO CONTROL OVER CHANGES IN INTEREST RATES AND SUCH CHANGES COULD
NEGATIVELY IMPACT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND ABILITY TO
PAY DIVIDENDS.
Our income consists primarily of interest payments on the loans
underlying our participation interests. At June 30, 2001, 38.9% of the loans
underlying our participation interests, as measured by the aggregate outstanding
principal amount, bore interest at fixed rates and the remainder bore interest
at adjustable rates. Adjustable-rate loans decrease the risks to a lender
associated with changes in interest rates but involve other risks. As interest
rates rise, the payment by the borrower rises to the extent permitted by the
terms of the loan, and the increased payment increases the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In a declining interest rate
environment, there may be an increase in prepayments on the loans underlying our
participation interests as the borrowers refinance their mortgages at lower
interest rates. Under these circumstances, we may find it more difficult to
purchase additional participation interests with rates sufficient to support the
payment of the dividends on the Class C preferred securities. Because the rate
at which dividends are required to be paid on the Class C preferred securities
is fixed, there can be no assurance that a declining interest rate environment
would not adversely affect our ability to pay full, or even partial, dividends
on the Class C preferred securities.
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THE LOANS UNDERLYING OUR PARTICIPATION INTERESTS ARE SUBJECT TO LOCAL ECONOMIC
CONDITIONS WHICH COULD NEGATIVELY AFFECT THE VALUE OF THE COLLATERAL SECURING
SUCH LOANS AND/OR THE RESULTS OF OUR OPERATIONS.
The value of the collateral underlying our loans and/or the results of
our operations could be affected by various conditions in the economy, all of
which are beyond our control, such as:
- local and other economic conditions affecting real estate and
other collateral values;
- the continued financial stability of a borrower and the
borrower's ability to make loan principal and interest
payments, which may be adversely affected by job loss,
recession, divorce, illness, or personal bankruptcy;
- the ability of tenants to make lease payments;
- the ability of a property to attract and retain tenants, which
may be affected by conditions such as an oversupply of space
or a reduction in demand for rental space in the area, the
attractiveness of properties to tenants, competition from
other available space, and the ability of the owner to pay
leasing commissions, provide adequate maintenance and
insurance, pay tenant improvement costs, and make other tenant
concessions;
- interest rate levels and the availability of credit to
refinance loans at or prior to maturity; and
- increased operating costs, including energy costs, real estate
taxes, and costs of compliance with environmental controls and
regulations.
THE LOANS UNDERLYING OUR PARTICIPATION INTERESTS ARE CONCENTRATED IN FIVE
STATES, AND ADVERSE CONDITIONS IN THOSE STATES, IN PARTICULAR, COULD NEGATIVELY
IMPACT OUR OPERATIONS.
At June 30, 2001, 97.3% (as a percentage of loan principal
balances) of the properties underlying our loan participation interests were
located in Ohio, Michigan, Florida, Indiana, and Kentucky. Because of the
concentration of our interests in those states, in the event of adverse economic
conditions in those states, we would likely experience higher rates of loss and
delinquency on our loan participation interests than if the underlying loans
were more geographically diversified. Additionally, the loans underlying our
loan participation interests may be subject to a greater risk of default than
other comparable loans in the event of adverse economic, political, or business
developments or natural hazards that may affect Ohio, Michigan, Florida,
Indiana, or Kentucky and the ability of property owners in those states to make
payments of principal and interest on the underlying loans. In the event of any
adverse development or natural disaster, our ability to pay dividends on the
Class C preferred securities could be adversely affected.
OUR ACQUISITION OF PARTICIPATION INTERESTS IN COMMERCIAL MORTGAGE LOANS SUBJECTS
US TO RISKS THAT ARE NOT PRESENT IN PARTICIPATION INTERESTS IN RESIDENTIAL
MORTGAGE LOANS.
As of June 30, 2001, 58.0% of our assets, as measured by
aggregate outstanding principal amount, consisted of participation interests in
commercial mortgage loans. Commercial mortgage loans generally tend to have
shorter maturities than residential mortgage loans and may not be fully
amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. Commercial real estate properties tend to be
unique and are more difficult to value than single-family residential real
estate properties. They are also subject to relatively greater environmental
risks and to the corresponding burdens and costs of compliance with
environmental laws and regulations. Due to these risks, we may experience higher
rates of default on our participation interests in commercial mortgage loans
than we would if our participation interests were more diversified and included
a greater number of underlying residential and other loans.
THE TRANSACTIONS AMONG THE BANK, HOLDINGS, AND US BY WHICH WE ACQUIRED OUR
ASSETS WERE NOT THE RESULT OF ARMS-LENGTH NEGOTIATIONS AND WE HAVE NOT OBTAINED
ANY THIRD PARTY VALUATION OF THOSE ASSETS. WE CANNOT ASSURE YOU THAT WE WILL
ACQUIRE OR DISPOSE OF ASSETS IN THE FUTURE AT THEIR FAIR MARKET VALUE.
Although we believe that we paid fair market value for our assets
acquired from Holdings, these transactions were not the result of arms-length
negotiations and we did not obtain a third party valuation of such assets. There
has been no third party valuation of our assets for purposes of this offering.
In addition, we do not intend to obtain third party valuations in connection
with future acquisitions and/or dispositions of assets even in circumstances
where an affiliate of ours is selling the assets to us, or purchasing the assets
from us. Such acquisitions and dispositions will not be the result of
arms-length negotiations. Accordingly, we cannot assure you that the
consideration to be paid by us to, or the consideration to be paid to us by, the
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Bank or any of our affiliates in connection with future acquisitions or
dispositions of assets will be equal to the fair value of such assets.
WE WOULD SUFFER ADVERSE TAX CONSEQUENCES IF WE FAIL TO QUALIFY AS A REIT.
No assurance can be given that we will be able to continue to operate
in such a manner so as to remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex tax law provisions for
which there are only limited judicial or administrative interpretations and
involves the determination of various factual matters and circumstances not
entirely within our control. No assurance can be given that new legislation or
new regulations, administrative interpretations, or court decisions will not
significantly change the tax laws in the future with respect to qualification as
a REIT or the federal income tax consequences of such qualification in a way
that would materially and adversely affect our ability to operate. Any such new
legislation, regulation, interpretation, or decision could be the basis of a Tax
Event that would permit us to redeem the Class C preferred securities. We have
described in more detail the effect of a Tax Event and other Special Events
later in this prospectus under the heading "Description of the Class C Preferred
Securities - Redemption."
If we were to fail to qualify as a REIT, the dividends on our preferred
securities, including the Class C preferred securities, would not be deductible
by us for federal income tax purposes, and we would likely become part of the
consolidated group of which the Bank is a member. Consequently, the consolidated
group would face a greater tax liability which could result in a reduction in
the Bank's net earnings after taxes. A reduction in the Bank's net earnings
after taxes could adversely affect the Bank's ability to raise additional
capital, as well as its ability to generate additional capital internally, and
consequently its ability to add interest-earning assets to its portfolio.
If in any taxable year we fail to qualify as a REIT, unless we are
entitled to relief under certain statutory provisions, we would also be
disqualified from treatment as a REIT for the four taxable years following the
year our qualification was lost. As a result, the amount of funds available for
distribution to our shareholders would be reduced for the year or years
involved.
As a REIT, we generally will be required each year to distribute as
dividends to our shareholders at least 90% of our REIT taxable income, excluding
capital gains. Failure to comply with this requirement would result in our
earnings being subject to tax at regular corporate rates. In addition, we would
be subject to a 4% nondeductible excise tax on the amount by which certain
distributions considered as paid by us with respect to any calendar year are
less than the sum of:
- 85% of our ordinary income for the calendar year,
- 95% of our capital gains net income for the calendar year, and
- 100% of undistributed taxable income from prior periods.
Although we currently intend to operate in a manner designed to qualify
as a REIT, future economic, market, legal, tax, or other considerations may
cause us to determine that it is in our best interests and the best interests of
holders of our common shares and preferred securities to revoke the REIT
election. As long as any Class C preferred securities are outstanding, any such
determination by us may be made without stockholder approval, but will require
the approval of a majority of our Independent Directors.
WE HAVE IMPOSED OWNERSHIP LIMITATIONS ON THE CLASS C PREFERRED SECURITIES WHICH
MAY AFFECT THE SECONDARY MARKET FOR SUCH SECURITIES.
To qualify as a REIT under the Internal Revenue Code, no more than 50%
of the value of our outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals or entities during the last half of
a taxable year. We refer to this as the Five or Fewer Test. The Internal Revenue
Code requires that the Five or Fewer Test be applied using constructive
ownership rules which treat certain organizations as one individual.
Our articles of incorporation provide that, subject to certain
exceptions, no individual or entity may own, or be deemed to own by virtue of
the attribution rules of the Internal Revenue Code, more than 9.2% of the
aggregate initial liquidation value of all of our issued and outstanding
preferred securities, including our Class C preferred
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securities. The ownership by Huntington Bancshares and its wholly owned direct
and indirect subsidiaries of 100% of our common shares and, after the issuance
of all authorized Class C and Class D preferred securities and the sale of all
Class C preferred securities to the public, 93.6% of the aggregate initial
liquidation value of our preferred securities, will not adversely affect our
REIT qualification because each shareholder of Huntington Bancshares, whose
capital stock is widely held, counts as a separate beneficial owner of us for
purposes of the Five or Fewer Test.
Although the Five or Fewer Test references the aggregate value of all
shares of our capital stock, the ownership limit has been established with
reference to the aggregate initial liquidation preference of our outstanding
preferred securities. If (1) the relative values of our common shares and any of
our outstanding preferred securities, including the Class C preferred
securities, or (2) the relative values of the different series or classes of
preferred securities, were to change significantly, there is a risk that the
Five or Fewer Test would be violated notwithstanding compliance with the
ownership limit. Although we believe that it is unlikely that the relative value
of the common shares will decrease by an amount sufficient to cause a violation
of the Five or Fewer Test, there can be no assurance that such a change in value
will not occur.
The ownership of our common shares or the transfer of common shares
and/or preferred securities of Huntington Bancshares to an entity which is
considered an individual for purposes of the Five or Fewer Test could cause us
to fail the Five or Fewer Test in certain circumstances, such as the sale of all
Huntington Bancshares stock to an individual. If we fail the Five or Fewer Test,
we will fail to qualify as a REIT.
Upon the receipt of a ruling from the Internal Revenue Service, or IRS,
or the advice of counsel satisfactory to our board of directors, our board may,
but will not be required to, waive the ownership limit with respect to an
individual or entity if such individual's or entity's proposed ownership will
not then or in the future jeopardize our status as a REIT. If any purported
transfer of our preferred securities or any other event would otherwise result
in any person violating the stock ownership limit, then any such purported
transfer will be void and of no force or effect with respect to the purported
transferee as to that number of securities in excess of the applicable limit and
such prohibited transferee will acquire no right or interest in such excess
preferred securities. Our amended and restated articles of incorporation provide
that any excess securities will automatically be transferred, by operation of
law, to a trust for the benefit of a charity to be named by us as of the day
prior to the day the prohibited transfer took place. All rights to dividends to
such excess securities will be held by such trust.
The restrictions imposed by us in connection with the Five or Fewer
Test could impair the liquidity of the Class C preferred securities which may
affect the secondary market for such Class C preferred securities.
ENVIRONMENTAL LIABILITIES ASSOCIATED WITH REAL PROPERTY SECURING LOANS
UNDERLYING OUR PARTICIPATION INTERESTS COULD REDUCE THE FAIR MARKET VALUE OF OUR
PARTICIPATION INTERESTS AND MAKE THE PROPERTY MORE DIFFICULT TO SELL.
In its capacity as servicer, the Bank may be forced to foreclose on an
underlying commercial or residential mortgage loan where the borrower has
defaulted on his obligation to repay the loan. We call this type of foreclosed
property Other Real Estate Owned, or OREO property. It is possible that the Bank
may be subject to environmental liabilities, particularly on industrial and
warehouse properties, which are generally subject to relatively greater
environmental risks than non-commercial properties. In addition, the Bank may
find it difficult or impossible to sell the property prior to or following an
environmental cleanup. Even though we intend to sell to the Bank, at fair value,
our participation interest in any loan at the time the real property securing
that loan becomes OREO property, the discovery of these liabilities, any
associated costs for removal of hazardous substances, wastes, contaminants, or
pollutants, and the difficulty in selling the underlying real estate, could have
a material adverse effect on the fair value of that loan and therefore we may
not recover any or all of our investment in the underlying loan.
WE DO NOT HAVE INSURANCE TO COVER OUR EXPOSURE TO BORROWER DEFAULTS AND
BANKRUPTCIES AND SPECIAL HAZARD LOSSES THAT ARE NOT COVERED BY STANDARD
INSURANCE.
Generally, neither we nor the Bank obtain credit enhancements such as
borrower bankruptcy insurance or obtain special hazard insurance for the loans
underlying our participation interests, other than standard hazard insurance
typically required by the Bank, which will in each case only relate to
individual loans. Without third party insurance, we are subject to risks of
borrower defaults and bankruptcies and special hazard losses, such as losses
occurring from floods, that are not covered by standard hazard insurance. The
Bank has a right to foreclose certain,
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but not all, commercial loans underlying our participation interests if the
collateral values decline and substitute collateral is not provided on demand.
In such cases, we would bear the risk of loss of principal to the extent of any
deficiency between (a) the value of the related collateral plus any payments
from any insurer or guarantor and (b) the amount owing on the commercial loan.
For commercial loans without this type of default clause, and for substantially
all of the other loans underlying our participation interests, the Bank does not
have the ability to foreclose or, as a matter of practice, does not foreclose
due to declining collateral values or worsening economic conditions and,
consequently, we bear the risk of loss of principal to the extent the loan is
undercollateralized in the event of a foreclosure on a payment default.
DELAYS IN LIQUIDATING DEFAULTED LOANS COULD OCCUR WHICH COULD CAUSE OUR BUSINESS
TO SUFFER.
Substantial delays could be encountered in connection with the
liquidation of the collateral securing defaulted loans underlying our
participation interests, with corresponding delays in our receipt of related
proceeds. An action to foreclose on a mortgaged property or repossess and sell
other collateral securing a loan is regulated by state statutes and rules. Any
such action is subject to many of the delays and expenses of lawsuits, which may
impede the Bank's ability to foreclose on or sell the collateral or to obtain
proceeds sufficient to repay all amounts due on the related loan underlying our
participation interest.
AN ACTIVE TRADING MARKET FOR THE CLASS C PREFERRED SECURITIES MAY NOT DEVELOP
AND NO TRADING MARKET IS LIKELY TO EXIST FOR THE BANK CLASS C PREFERRED
SECURITIES YOU WOULD RECEIVE IF A CONDITIONAL EXCHANGE OCCURS.
No Class C preferred securities are currently outstanding and, thus,
there has never been a public market for the Class C preferred securities prior
to this offering. We have applied for quotation of the Class C preferred
securities on The Nasdaq National Market under the symbol "HPCC."
Nevertheless, we cannot assure you that an active and liquid trading market for
the Class C preferred securities will develop or be sustained. If such a market
were to develop, the prices at which the Class C preferred securities may trade
will depend on many factors, including prevailing interest rates, our operating
results, and the market for similar securities. You may not be able to resell
your Class C preferred securities at or above the initial price to the public or
at all.
There are no shares of Bank Class C preferred securities currently
outstanding. The Bank does not intend to apply for listing or quotation of the
Bank Class C preferred securities on any national securities exchange or
automated quotation system. Consequently, there can be no assurance as to the
liquidity of the trading market for the Bank Class C preferred securities, if
issued, or that an active and liquid trading public market for such securities
will develop or be maintained. The lack of liquidity and an active trading
market could adversely affect prospective investors' ability to dispose of the
Bank Class C preferred securities in the event of a Conditional Exchange.
WE MAY REDEEM THE CLASS C PREFERRED SECURITIES UPON THE OCCURRENCE OF A SPECIAL
EVENT.
At any time following the occurrence of a Special Event, even if such
Special Event occurs prior to [__________], 2021, we will have the right to
redeem the Class C preferred securities in whole, subject to the prior written
approval of the OCC. The occurrence of such a Special Event will not, however,
give a shareholder any right to request that such Class C preferred securities
be redeemed. A Special Event includes:
- a Tax Event which occurs when we receive an opinion of counsel to
the effect that, as a result of a judicial decision or
administrative pronouncement, ruling, or other action or as a
result of certain changes in the tax laws, regulations, or related
interpretations, there is a significant risk that dividends with
respect to our capital stock will not be fully deductible by us or
we will be subject to a significant amount of additional taxes or
governmental charges;
- an Investment Company Event which occurs when we receive an
opinion of counsel to the effect that, as a result of certain
changes in the applicable laws, regulations, or related
interpretations, there is a significant risk that we will be
considered an investment company under the Investment Company Act
of 1940; and
- a Regulatory Capital Event which occurs when, as a result of
certain changes in the applicable laws, regulations, or related
interpretations, there is a significant risk that our Class C
preferred securities
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will no longer constitute Tier 1 capital of the Bank (other
than as a result of limitations on the portion of Tier 1
capital that may consist of minority interests in subsidiaries
of the Bank).
If we redeem the Class C preferred securities, you may not be able to
invest your redemption proceeds in securities with a dividend yield comparable
to that of the Class C preferred securities.
WE MAY INVEST IN ASSETS WHICH INVOLVE NEW RISKS AND NEED NOT MAINTAIN THE
PRESENT ASSET COVERAGE.
Although our portfolio currently consists primarily of residential and
commercial mortgage loan interests, and we presently intend to reinvest proceeds
of such interests in similar assets, we are not required to limit our
investments to assets of the types presently in our portfolio. Assets such as
mortgage-backed securities, automobile loans, equipment loans, or real estate
may involve different risks not described in this prospectus. Moreover, while
our policies will call for maintaining specified levels of funds from operations
coverage as to expected dividend distributions, we are not required to maintain
the levels or asset coverage that currently exist relative to the amount of our
preferred securities and obligations senior to them. For example, a sale of
assets and distribution of cash to Holdings as described under the heading
"Recent Developments" would not be restricted from occurring again in the
future.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS
We have included statements in this prospectus that constitute
forward-looking statements identified by the fact that they do not relate
strictly to historical or current facts.
WE CAUTION YOU THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES, ASSUMPTIONS, AND OTHER FACTORS WHICH MAY CAUSE OUR ACTUAL
RESULTS, PERFORMANCE, OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THE FUTURE
RESULTS, PERFORMANCE, OR ACHIEVEMENTS WE HAVE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS.
Many of these factors are beyond our control. These factors include
changes in business and economic conditions; movements in interest rates;
success and timing of business strategies; the nature, extent, and timing of
governmental actions and reforms; and extended disruption of vital
infrastructure. Thus, we encourage you to understand forward-looking statements
to be strategic objectives rather than absolute targets of future performance.
Forward-looking statements speak only as of the date they are made. We
do not update forward-looking statements. You should assume that the information
appearing in this prospectus is accurate as of the date on the front of this
prospectus only. Our business, financial condition, results of operations, and
prospects may have changed since that date.
We have not, and the Underwriters have not, authorized any other person
to provide you with different information from that contained in this
prospectus. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the Underwriters are not, making an
offer to sell our Class C preferred securities in any jurisdiction where the
offer or sale of such securities is not permitted.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form S-11 under the Securities Act, with respect to
our Class C preferred securities. This prospectus, which forms a part of that
registration statement, does not contain all the information set forth in the
registration statement, certain portions of which have been omitted as permitted
by the rules and regulations of the SEC. Statements contained in this prospectus
as to the content of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. We refer you to the
registration statement and its exhibits for further information regarding us and
the Class C preferred securities offered by this prospectus.
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The registration statement and its exhibits which were filed by us with
the SEC can be inspected at and copies can be obtained from the SEC, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials can be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the SEC's home page on the Internet at
http://www.sec.gov.
Our articles of incorporation provide that we will maintain our status
as a reporting company under the Exchange Act for as long as the Class C
preferred securities are outstanding and held by unaffiliated shareholders.
While we are a reporting company, we intend to file with the SEC and furnish to
our shareholders annual reports containing audited financial statements
certified by independent auditors and file with the SEC quarterly reports
containing unaudited financial statements for the first three quarters of each
fiscal year.
OUR BACKGROUND AND CORPORATE STRUCTURE
We were incorporated in July 1992 as an Ohio corporation. We were
initially formed to acquire, hold, and manage property acquired by The
Huntington National Bank in foreclosure. We call this OREO property. All of our
OREO property was sold prior to May 1998 and we have not held OREO property
since that time. In May 1998, we began to acquire, hold, and manage
participation interests in mortgage assets and other authorized investments in a
manner so as to qualify as a REIT for federal income tax purposes under the
Internal Revenue Code. As a REIT, we are generally not subject to federal income
tax on net income and capital gains that we distribute to our shareholders.
We are a subsidiary of Huntington Preferred Capital Holdings, Inc., an
Indiana corporation. Holdings is a subsidiary of the Bank. The Bank is a
national banking association organized under the laws of the United States. The
Bank is a wholly owned subsidiary of Huntington Bancshares Incorporated. We have
one wholly owned subsidiary, HPCLI, Inc., formed for the purpose of holding
certain non-interest-earning assets.
In May 1998, Holdings entered into a loan participation agreement with
the Bank which granted Holdings 95% participation interests in various
commercial, consumer, and mortgage loans identified from time to time by the
Bank. We entered into a loan subparticipation agreement with Holdings which
granted us 100% participation interests in Holdings' participation interests in
those same loans. In March 2001, pursuant to an amendment to the loan
participation agreement, Holdings purchased for cash additional 4% participation
interests in such loans from the Bank. We then purchased for cash a 100%
participation interest in the additional 4% participation interests from
Holdings pursuant to an amendment to the loan subparticipation agreement. Thus,
we currently own a 100% participation interest in Holdings' 99% participation
interest in those commercial, consumer, and mortgage loans.
In January 1999, we issued 1,000 Class A preferred securities, at a
liquidation preference of $1,000 per share. The Class A preferred securities are
non-voting, unless otherwise required by law, and have a dividend rate of $80.00
per share per year. Dividends on the Class A preferred securities are
noncumulative. The Class A preferred securities will rank on parity with the
Class C and D preferred securities and are senior to the Class B preferred
securities.
In December 2000, we issued 400,000 Class B preferred securities, at a
liquidation preference of $1,000 per share. All of the Class B preferred
securities are owned by HPC Holdings-II, Inc., a wholly owned subsidiary of
Huntington Bancshares. The Class B preferred securities have a variable dividend
rate based on LIBOR which is determined quarterly. Dividends on the Class B
preferred securities are noncumulative. The Class B preferred securities will
rank subordinate to the Class A, C, and D preferred securities. The Class B
preferred securities are non-voting, except as otherwise required by law.
In February 2001, Huntington Bancshares purchased 18,667 common shares
from Holdings (adjusting for the April 2001 18,666.66667-for-1 stock split) for
approximately $8.4 million and one Holdings common share from the Bank for
approximately $6.7 million. The Bank currently owns, and following the
completion of this offering will continue to own, 99.9% of Holdings' issued and
outstanding common shares.
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On or about the date of this prospectus, we intend to amend and restate
our articles of incorporation in order to, among other things, establish the
terms of the Class C and Class D preferred securities and authorize blank check
preferred securities, the terms of which may be established in the future by our
board of directors. We intend to issue to Holdings approximately 14,000,000
Class D preferred securities at the same time that we issue the Class C
preferred securities, none of which were outstanding immediately prior to the
date of this prospectus. Like the Class C preferred securities, it is
anticipated that dividends on the Class D preferred securities will be
noncumulative and the securities will have a 1/10th vote per share. The Class D
preferred securities will rank senior to our common shares and Class B preferred
securities and on a parity with the Class A and Class C preferred securities.
It is anticipated that we will receive from Holdings $25 per Class D
preferred security, or $350 million in the aggregate, payable in additional
participation interests in certain commercial loans, including commercial real
estate loans, and participation interests in certain consumer loans not secured
by real estate, such as automobile and equipment loans as well as certain
leasehold improvements. We intend to subsequently transfer the leasehold
improvements to our subsidiary, HPCLI, Inc. in exchange for common shares of
HPCLI, Inc. The aggregate principal balance of the participation interests and
leasehold interests acquired by us in connection with the issuance of both the
Class C and Class D preferred securities will represent less than 6.0% of our
assets as of June 30, 2001. We anticipate that non-performing assets as a
percentage of total loan participations will increase as a result of our
acquisition of participation interests in connection with the issuance of our
Class C and Class D preferred securities to Holdings. The pro forma information
beginning on page F-13 of this prospectus also reflects, on a pro forma basis,
the assets we expect will be acquired in connection with the issuance of our
Class C and Class D preferred securities and their impact on our asset quality.
We anticipate that Holdings will continue to hold our Class D preferred
securities after the completion of this offering for an indefinite period of
time. Holdings intends to sell those securities to investors in the future in
accordance with its capital needs. Holdings currently owns and, following the
completion of this offering, will continue to own, the majority of our issued
and outstanding common shares. Holdings currently intends that, so long as any
classes of preferred securities are outstanding, it will maintain at least 80%
of the voting rights in our company.
BENEFITS TO THE BANK
The Bank expects to realize the following benefits in connection with
the offering:
- The Bank has received confirmation from the OCC that the
proceeds from the issuance and sale to the public of our Class
C preferred securities will qualify as Tier 1 capital of the
Bank under relevant regulatory capital guidelines. Those
guidelines limit the inclusion of our Class C preferred
securities, together with all other outstanding noncumulative
perpetual preferred securities, to 25% of the Bank's Tier 1
capital, with the balance treated as Tier 2 capital of the
Bank. As of June 30, 2001, the Bank expects that all of the
proceeds of the issuance of Class C preferred securities will
qualify as Tier 1 capital of the Bank once they are sold to
the public. The increase in the Bank's Tier 1 risk-based
capital level that will result from the treatment of the Class
C preferred securities as Tier 1 capital will enable the Bank
to retain a higher base of interest-earning assets, resulting
in incrementally higher related earnings.
National banks are subject to a risk-based capital system,
involving a prescribed minimum ratio of total capital -
consisting generally of the sum of Tier 1 and Tier 2 capital -
to total risk-weighted assets. The most important components
of Tier 1 capital are common shares and noncumulative
perpetual preferred securities. The most important components
of Tier 2 capital are subordinated debt, certain other forms
of preferred securities, allowances for loan and lease losses,
and certain hybrid instruments. A national bank's assets are
assigned to four risk categories, with weightings from zero to
100%, that determine the percentage of the asset to be
included in the national bank's total risk weighted assets. A
national bank is considered well-capitalized when the ratio of
its total risk-based capital to its total risk-weighted assets
is 10%, provided also that its Tier 1 risk-based capital alone
is at least 6% of its total risk-weighted assets and at least
5% of its adjusted total (not risk-weighted) assets. In
addition, a national bank cannot be subject to any special
capital maintenance directives from OCC to be considered
well-capitalized.
- Holdings will raise additional funds which will be held on
deposit with, and may be loaned to, the Bank.
- The Bank is eligible to obtain advances from various federal
agencies, such as the FHLBC. We may in the future be asked to
act as co-borrower or guarantee the Bank's obligations under
such advances and/or pledge all or a portion of our assets in
connection with those advances. Any such borrowing, guarantee,
or pledge would rank senior to the Series C preferred
securities upon liquidation. Accordingly, any governmental
agencies that make advances to the Bank where we have acted as
co-
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borrower or guarantor or have pledged our assets as collateral
will have a preference over the holders of our Class C
preferred securities and other Parity Stock. These holders
would receive their liquidation preference only to the extent
there are assets available after satisfaction of our
Indebtedness. As of June 30, 2001, the Bank had outstanding
advances of approximately $17 million from the Federal Home
Loan Bank of Indianapolis and is currently eligible to obtain,
but has not yet obtained, advances from the discount window of
the Federal Reserve Bank of Cleveland. We have not been asked
and do not anticipate being asked to act as co-borrower or
guarantee these advances or pledge our assets as collateral.
The Bank, however, also intends to obtain a line of credit or
one or more advances, not to exceed at any one time $800
million in the aggregate, from the FHLBC prior to the end of
2001. The terms of such line of credit or advances have not
yet been determined. We do not yet know what our exact role
will be, but it is expected that up to 25% of our assets may
serve as collateral for such advances. Any agreement setting
forth our obligations will be approved by our directors. Any
such borrowing, guarantee, and/or pledge will fall within the
definition of Indebtedness; however, it and all other future
Indebtedness to the FHLBC will be deemed to be Permitted
Indebtedness and we will not need to obtain the consent of the
holders of our Class C preferred securities for any such
borrowing, guarantee, and/or pledge.
- The Bank will continue to receive monthly servicing fees and
quarterly dividends on the common shares held by the Bank. On
an annual basis, the service fee with respect to the
commercial mortgage, commercial, and consumer loans is equal
to the outstanding principal balance of each loan multiplied
by a fee of .125% and the service fee for residential mortgage
loans is equal to . 282% of the interest income collected. We
paid the Bank service fees, through Holdings, of $7.8 million
in each of the recent two years, and $4.5 million for the year
ended December 31, 1998. We have not paid any other
compensation to the Bank or its affiliates during these
periods, although the Bank may receive dividends and other
benefits associated with its affiliation to us as further
described in this section. Dividends paid on common shares for
each of the last three years were $458.3 million, $413.8
million, and $293.9 million, respectively.
- The Bank will continue to be entitled to retain any late
payment charges or penalties, assumption fees, and conversion
fees collected in connection with the loans serviced by it. In
addition, the Bank will receive all benefits derived from
interest earned on collected principal and interest payments
between the date of collection and the date of remittance to
us.
HOW WE INTEND TO USE THE PROCEEDS
Holdings will pay $25 per Class C preferred security purchased by it.
Holdings' payment for the Class C preferred securities will be in the form of
additional participation interests in commercial loans, including commercial
real estate loans, and consumer loans not secured by real estate, such as
automobile and equipment loans, as well as leasehold interests. The consumer
loans will include a combination of automobile, truck, and equipment loans. We
intend to hold these participation interests as long term investments and
transfer the leasehold improvements to our wholly owned subsidiary, HPCLI, Inc.
in exchange for common shares of HPCLI, Inc. Assuming Holdings purchases all
2,000,000 Class C preferred securities offered by this prospectus, the fair
market value of the participation interests and leasehold improvements paid to
us by Holdings will be $50 million. Even though a portion, the exact size of
which we cannot determine at this time, of the loans underlying the
participation interests that we will receive from Holdings in exchange for our
Class C preferred securities will not be considered real estate assets for
purposes of determining our REIT status, the combined total of these interests
and all of our other non-qualifying REIT assets will not exceed the statutory
limits imposed by the Internal Revenue Service on organizations that qualify as
real estate investment trusts.
Holdings, a statutory underwriter, intends to sell the Class C
preferred securities through an underwriting syndicate to the public for cash
consideration of $25 per share. We will not receive any of Holdings' proceeds
from the sale of our Class C preferred securities owned by it. The proceeds,
before expenses and commissions, to be received by Holdings from the sale of the
Class C preferred securities are expected to be $50 million. Holdings will
deposit the proceeds received in this offering in an interest-bearing deposit
account or product with the Bank or lend the proceeds to the Bank. Holdings will
not use the proceeds to purchase additional assets for contribution to us.
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Holdings, our parent company, will pay all expenses and underwriting
discounts and commissions involved with the offering to the public.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2001,
and as adjusted to reflect the issuance of our Class C and Class D preferred
securities to Holdings.
June 30, 2001
----------------------
Actual As Adjusted
-------- -----------
(Dollars in thousands)
Long-term debt ......................................................... $ -- $ --
---------- -----------
SHAREHOLDERS' EQUITY
Preferred securities:
Preferred securities, $25 par value, 10,000,000 shares authorized,
none issued and outstanding .................................... -- --
Class A preferred securities, $1,000 par value, 1,000 shares
authorized, issued, and outstanding ............................ 1,000 1,000
Class B preferred securities, $1,000 par value, noncumulative
and conditionally exchangeable(1), 500,000 shares authorized,
400,000 shares issued and outstanding .......................... 400,000 400,000
Class C preferred securities, $25 par value, noncumulative and
conditionally exchangeable(1), 2,000,000 shares authorized,
issued, and outstanding ........................................ -- 50,000
Class D preferred securities, $25 par value, noncumulative and
conditionally exchangeable(1), 14,000,000 shares authorized,
issued, and outstanding ........................................ -- 350,000
Common shares, without par value, 14,000,000 shares authorized,
issued, and outstanding ......................................... 6,349,149 6,349,149
Retained earnings .................................................. 336,930 336,930
----------- -----------
Total shareholders' equity ......................................... 7,087,079 7,487,079
----------- -----------
TOTAL CAPITALIZATION ............................................... $7,087,079 $ 7,487,079
=========== ===========
----------------
(1) Our Class B, Class C, and Class D preferred securities are exchangeable,
without the approval or any action on the part of the holder, for preferred
securities of the Bank if such an exchange is directed by the OCC after the
occurrence of a Supervisory Event.
24
26
BUSINESS
GENERAL
Our principal business objective is to acquire, hold, and manage
mortgage assets and other authorized investments that will generate net income
for distribution to our shareholders. At June 30, 2001, we had total assets and
shareholders' equity of $7.1 billion. As of such date, $4.1 billion, or 58.0% of
our assets, were comprised of participation interests in commercial mortgage
loans; $1.1 billion, or 14.9% of our assets, were comprised of participation
interests in consumer loans; $.6 billion, or 8.3% of our assets, were comprised
of participation interests in residential mortgage loans; and $.5 billion, or
7.4% of our assets, were comprised of participation interests in commercial
loans, each before the allowance for loan losses. The weighted average yield
earned on all of the participation interests for the six months ended June 30,
2001, was 7.42%.
In connection with the issuance of our Class C and Class D preferred
securities, we will acquire participation interests and leasehold interests
having an aggregate market value of approximately $400 million, which will
represent less than 6.0% of our total assets as of June 30, 2001. The additional
participation interests which we will acquire will include consumer loans not
secured by real estate, such as automobile loans and equipment loans. Although
these assets may have different underwriting, maturity, and interest rate
characteristics and may have a greater rate of delinquency than the loans
summarized with respect to our existing portfolio, such characteristics will not
be material to the availability of funds from operations in amounts sufficient
to enable us to declare dividends on our preferred securities, including our
Class C preferred securities, at their respective stated dividend rates. In
addition, after we acquire these assets, we will continue to meet all of the
REIT qualification tests described in more detail below under the heading
"Federal Income Tax Consequences." Thus, our acquisition of these assets will
not prevent us from qualifying as a REIT.
Although we have the authority to acquire interests in an unlimited
number of mortgage assets from unaffiliated third parties, all of our interests
in mortgage and other assets acquired prior to this offering have been acquired
from the Bank pursuant to the loan participation agreement between the Bank and
Holdings and the loan subparticipation agreement between Holdings and us. The
Bank either originated the mortgage assets or acquired them as part of the
acquisition of other financial institutions. We may also acquire from time to
time a limited amount of additional non-mortgage related securities. We have no
present plans or expectations with respect to purchases of mortgage assets or
other assets from unaffiliated third parties. Although permitted to acquire
mortgage-backed securities, we have no present intention to do so.
Our participation interests do not entitle us to receive any portion of
any late payment charges or penalties, assumption fees, or conversion fees
collected and retained by the Bank in connection with the loans underlying our
participation interests serviced by it.
GENERAL DESCRIPTION OF MORTGAGE ASSETS AND OTHER AUTHORIZED INVESTMENTS;
INVESTMENT POLICY
The Internal Revenue Code requires us to invest at least 75% of the
total value of our assets in real estate assets, which includes residential
mortgage loans and commercial mortgage loans, including participation interests
in residential or commercial mortgage loans, mortgage-backed securities eligible
to be held by REITs, cash, cash equivalents which includes receivables,
government securities, and other real estate assets. We refer to these types of
assets as REIT Qualified Assets. We may invest up to 25% of the value of a
REIT's total assets in non-mortgage-related securities as defined in the
Investment Company Act. Under the Investment Company Act, the term "security" is
defined broadly to include, among other things, any note, stock, treasury stock,
debenture, evidence of indebtedness, or certificate of interest or participation
in any profit sharing agreement or a group or index of securities. The Internal
Revenue Code also requires that the value of any one issuer's securities, other
than those securities included in the 75% test, may not exceed 5% by value of
the total assets of the REIT. In addition, under the Internal Revenue Code, the
REIT may not own more than 10% of the voting securities nor more than 10% of the
value of the outstanding securities of any one issuer, other than those
securities included in the 75% test and the securities of wholly-owned,
qualified REIT subsidiaries such as our subsidiary, HPCLI, Inc.
As of June 30, 2001, 90.28% of our assets were invested in REIT
Qualified Assets and 9.72% were invested in commercial loans and other assets
that are not REIT Qualified Assets. We do not hold any securities nor do we
intend to hold securities in any one issuer that exceed 5% of our total assets
or more than 10% of the voting securities of any one issuer other than our
permitted investment in HPCLI, Inc. Our assets consisted of the following as of
June 30, 2001:
25
27
AMOUNT PERCENTAGE OF
DESCRIPTION (000) TOTAL ASSETS
--------------------- ------------------- ----------------
Participation interests:
Commercial mortgage loans......................... $4,107,659 58.0%
Consumer loans secured by real property........... 1,053,293 14.9
Residential mortgage loans........................ 586,347 8.3
Commercial loans.................................. 524,297 7.4
Allowance for loans losses........................ (90,724) (1.3)
Interest bearing deposits in banks..................... 633,003 8.9
Accrued income and otherOther assets................... 273,204 3.8
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that would be qualifying
income for purposes of the 75% gross income test, less deductible expenses
directly connected with the production of such income. Therefore, prior to
foreclosure of any underlying loan acquired by us from the Bank, we currently
intend to sell the participation interest in the underlying loan back to the
Bank at fair value less estimated selling costs of the property at the time the
property is transferred to OREO. The Bank then bears all expenses related to the
foreclosure after that time.
Commercial and Commercial Mortgage Loans. We own participation
interests in commercial loans secured by non-real property such as industrial
equipment, aircraft, livestock, furniture and fixtures, and inventory.
Participation interests acquired in commercial mortgage loans are secured by
real property such as office buildings, multi-family properties of five units or
more, industrial, warehouse, and self-storage properties, office and industrial
condominiums, retail space, strip shopping centers, mixed use commercial
properties, mobile home parks, nursing homes, hotels and motels, churches, and
farms. Commercial and commercial mortgage loans also may not be fully
amortizing. This means that the loans may have a significant principal balance
or "balloon" payment due on maturity. Additionally, there is no requirement
regarding the percentage of any commercial or commercial real estate property
that must be leased at the time we acquire a participation interest in a
commercial or commercial mortgage loan secured by such property nor are
commercial loans required to have third party guarantees.
Commercial properties, particularly industrial and warehouse properties,
generally are subject to relatively greater environmental risks than
non-commercial properties. This gives rise to increased costs of compliance with
environmental laws and regulations. The Bank may be affected by environmental
liabilities related to the underlying real property which could exceed the value
of the real property. Although the Bank has exercised and will continue to
exercise due diligence to discover potential environmental liabilities prior to
our acquisition of any participation in loans secured by such property,
hazardous substances or wastes, contaminants, pollutants, or their sources may
be discovered on properties during our ownership of the participation interests.
There can be no assurance that the Bank would not incur full recourse liability
for the entire cost of any removal and clean-up on a property it acquired in
foreclosure, that the cost of removal and clean-up would not exceed the value of
the property, or that the Bank could recoup any of the costs from any third
party. Even though we intend to sell back to the Bank at fair value the
participation interest in any loan at the time the real property securing that
loan is transferred to OREO, the discovery of these liabilities and any
associated costs could have a material adverse effect on the fair value of that
loan and therefore we may not recover any or all of our investment in the
underlying loan.
The credit quality of a commercial or commercial mortgage loan may
depend on, among other factors:
- the existence and structure of underlying leases,
- the physical condition of the property, including whether any
maintenance has been deferred,
- the creditworthiness of tenants,
- the historical and anticipated level of vacancies,
- rents on the property and on other comparable properties located in the
same region,
- potential or existing environmental risks,
- the availability of credit to refinance the loan at or prior to
maturity, and
- the local and regional economic climate in general.
26
28
Foreclosures of defaulted commercial or commercial mortgage loans generally are
subject to a number of complicating factors, including environmental
considerations, which are not generally present in foreclosures of residential
mortgage loans.
The following table sets forth certain information, as of June 30,
2001, with respect to the types of loans underlying the commercial and
commercial mortgage loan participations:
TYPE OF COMMERCIAL LOANS
AGGREGATE PERCENTAGE BY
PRINCIPAL AGGREGATE
BALANCE PRINCIPAL
TYPE (IN 000S) BALANCE
------------ ---------- -------------
Commercial loans $ 524,297 11.3%
Commercial mortgage loans 4,107,659 88.7
---------- -----
Total $4,631,956 100.0%
========== =====
As of June 30, 2001, $ 3,224,604,000 or 69.6%, of the commercial and
commercial mortgage loans underlying our participation interests were secured by
a first mortgage or first lien. The following table shows data with respect to
the collateral, if any, securing the loans underlying the commercial and
commercial mortgage loan participations and the weighted average maturity by
primary collateral, if any, of the loans underlying the commercial and
commercial mortgage loan participations at June 30, 2001:
COMMERCIAL AND COMMERCIAL MORTGAGE LOANS BY PRIMARY COLLATERAL AND MATURITY
PERCENTAGE
AGGREGATE BY WEIGHTED
PRINCIPAL AGGREGATE AVERAGE
BALANCE PRINCIPAL MONTHS TO
COLLATERAL, IF ANY (IN 000S) BALANCE MATURITY
-------------------- ----------- ----------- ----------
Real estate $4,129,731 89.2% 64.4
Receivables 262,126 5.7 27.3
Equipment/inventory 48,130 1.0 33.3
Stocks, bonds, and other securities 31,192 0.7 34.6
Assignments 26,567 0.6 45.7
Deposits 2,580 0.1 34.6
Miscellaneous 90,238 1.9 41.2
Unsecured 41,392 0.8 32.0
---------- ----- -----
Total $4,631,956 100.0% 60.9
========== ===== =====
The following table shows data with respect to the geographic
distribution of the loans underlying the commercial and commercial mortgage loan
participations at June 30, 2001:
GEOGRAPHIC DISTRIBUTION OF COMMERCIAL AND COMMERCIAL MORTGAGE LOANS
AGGREGATE PERCENTAGE BY
PRINCIPAL AGGREGATE
NUMBER BALANCE PRINCIPAL
STATE OF LOANS (IN 000S) BALANCE
------------- ---------- ----------- ------------
Ohio 4,996 $2,133,542 46.1%
Michigan 3,948 1,254,058 27.1
Florida 1,981 692,840 15.0
Indiana 535 278,848 6.0
Kentucky 224 173,918 3.8
32 other states 155 98,750 2.0
---------- ---------- -----
Total 11,839 $4,631,956 100.0%
========== ========== =====
27
29
The following table shows data with respect to the principal balance of
the loans underlying the commercial and commercial mortgage loan participations
at June 30, 2001:
PRINCIPAL BALANCES OF COMMERCIAL AND COMMERCIAL MORTGAGE LOANS
PERCENTAGE
AGGREGATE BY
PRINCIPAL AGGREGATE
NUMBER BALANCE PRINCIPAL
PRINCIPAL BALANCE OF LOANS (IN 000S) BALANCE
----------------------------------- ---------- ------------ ----------
Less than $50,000 2,590 $ 67,455 1.5%
Greater than $50,000 to $100,000 2,307 170,659 3.7
Greater than $100,000 to $250,000 3,202 514,825 11.1
Greater than $250,000 to $500,000 1,768 621,344 13.4
Greater than $500,000 to $1,000,000 1,025 715,963 15.5
Greater than $1,000,000 to $2,000,000 530 730,920 15.8
Greater than $2,000,000 to $3,000,000 191 466,453 10.1
Greater than $3,000,000 to $4,000,000 93 324,461 7.0
Greater than $4,000,000 to $5,000,000 45 199,858 4.3
Greater than $5,000,000 to $6,000,000 23 130,737 2.8
Greater than $6,000,000 to $10,000,000 39 285,456 6.2
Greater than $10,000,000 26 403,825 8.6
---------- ---------- -----
Total 11,839 $4,631,956 100.0%
========== ========== =====
Some of the loans underlying our commercial and commercial mortgage
loan participations bear interest at fixed rates and some bear interest at
variable rates based on indices such as LIBOR and the prime rate. The following
tables show data with respect to interest rates of the loans underlying our
commercial and commercial mortgage loan participations at June 30, 2001:
FIXED AND VARIABLE RATE COMMERCIAL AND COMMERCIAL MORTGAGE LOANS
PERCENTAGE
AGGREGATE BY WEIGHTED
PRINCIPAL AGGREGATE AVERAGE
NUMBER BALANCE PRINCIPAL INTEREST
TYPE OF LOANS (IN 000S) BALANCE RATE
------------- ---------- ---------- ---------- --------
Fixed Rate 4,430 $1,258,744 27.2% 8.19%
Variable Rate 7,409 3,373,212 72.8 7.07
---------- ---------- ----- -----
Total 11,839 $4,631,956 100.0% 7.37%
========== ========== ===== =====
28
30
INTEREST RATE DISTRIBUTION - COMMERCIAL AND COMMERCIAL MORTGAGE LOANS
FIXED RATE VARIABLE RATE
------------------------------------------- -------------------------------------------
PERCENTAGE PERCENTAGE
AGGREGATE BY AGGREGATE BY
PRINCIPAL AGGREGATE PRINCIPAL AGGREGATE
NUMBER BALANCE PRINCIPAL NUMBER BALANCE PRINCIPAL
INTEREST RATE OF LOANS (IN 000S) BALANCE OF LOANS (IN 000S) BALANCE
------------------- ------------ ------------ ---------- --------- ----------- ----------
under 5.00% 21 $ 7,221 0.6% 39 $ 43,404 1.3%
5.00% to 5.99% 30 46,666 3.7 264 662,902 19.7
6.00% to 6.99% 110 46,944 3.7 1,437 1,085,321 32.1
7.00% to 7.99% 1,025 442,263 35.2 2,766 867,333 25.7
8.00% to 8.99% 1,783 480,208 38.2 2,034 528,650 15.7
9.00% to 9.99% 1,139 176,816 14.0 738 160,207 4.7
10.00% to 10.99% 264 43,763 3.5 109 22,655 0.7
11.00% to 11.99% 36 5,359 0.4 17 2,543 0.1
12.00% to 12.99% 14 6,406 0.5 5 197 ---
13.00% to 13.99% 6 459 --- --- --- ---
over 14.00% 2 2,639 0.2 --- --- ---
---------- ---------- ---------- ---------- ---------- ----------
Total 4,430 $1,258,744 100.0% 7,409 $3,373,212 100.0%
========== ========== ========== ========== ========== ==========
The following table provides delinquency information for the underlying
loans in the commercial and commercial mortgage loan participations at June 30,
2001.
COMMERCIAL AND COMMERCIAL MORTGAGE LOAN DELINQUENCIES
FIXED VARIABLE
------------------------------------------ ----------------------------------------
AGGREGATE AGGREGATE
PRINCIPAL PERCENTAGE PRINCIPAL PERCENTAGE
NUMBER BALANCE OF NUMBER BALANCE OF
OF LOANS (IN 000S) TOTAL OF LOANS (IN 000S) TOTAL
----------- -------------- ------------- ----------- ------------- ------------
Current 3,848 $1,143,400 90.9% 6,556 $3,035,313 90.0%
1 to 30 days delinquent 451 89,760 7.1 597 236,565 7.0
31 to 60 days delinquent 53 9,003 0.7 87 34,678 1.0
61 to 90 days delinquent 18 4,797 0.4 29 18,942 0.6
over 90 days delinquent 60 11,784 0.9 140 47,714 1.4
---------- ---------- ----- ---------- ---------- -----
Total 4,430 $1,258,744 100.0% 7,409 $3,373,212 100.0%
========== ========== ===== ========== ========== =====
Consumer Loans. We own participation interests in consumer loans
generally secured by a first or a junior mortgage primarily on the borrower's
primary residence. As of June 30, 2001, $ 110,596,000 or 10.5%, of the consumer
loans underlying our participation interests were secured by a first mortgage.
Many of these loans were made for reasons such as home improvements, acquisition
of furniture and fixtures, and debt consolidation. These loans are predominately
repaid on an installment basis and income is accrued based on the outstanding
balance of the loan over terms that range from 6 to 360 months. Of the loans
underlying the consumer loan participations, most bear interest at fixed rates
but some bear interest at variable rates.
29
31
The following table shows data with respect to the geographic
distribution of the loans underlying the consumer loan participations at June
30, 2001:
GEOGRAPHIC DISTRIBUTION OF CONSUMER LOANS
PERCENTAGE
AGGREGATE BY
PRINCIPAL AGGREGATE
NUMBER BALANCE PRINCIPAL
STATE OF LOANS (IN 000S) BALANCE
------------- ----------- ------------ -----------
Ohio 16,126 $ 442,626 42.1%
Florida 10,958 332,186 31.5
Michigan 9,540 205,742 19.5
Indiana 1,513 36,343 3.5
Kentucky 1,480 33,938 3.2
32 other states 120 2,458 0.2
---------- ---------- -----
Total 39,737 $1,053,293 100.0%
========== ========== =====
The following tables show data with respect to interest rates of the
loans underlying the consumer loan participations at June 30, 2001:
FIXED AND VARIABLE RATE CONSUMER LOANS
PERCENTAGE
AGGREGATE BY WEIGHTED WEIGHTED
PRINCIPAL AGGREGATE AVERAGE AVERAGE
NUMBER BALANCE PRINCIPAL MONTHS TO INTEREST
TYPE OF LOANS (IN 000S) BALANCE MATURITY RATE
--------------- ------------ ---------------- ---------- ---------- ----------
Fixed Rate 39,418 $1,046,771 99.4% 126 9.48%
Variable Rate 319 6,522 0.6 81 8.55
---------- ---------- ---------- ---------- ----------
Total 39,737 $1,053,293 100.0% 126 9.47%
========== ========== ========== ========== ==========
INTEREST RATE DISTRIBUTION - CONSUMER LOANS
FIXED RATE VARIABLE RATE
--------------------------------------- ----------------------------------------
PERCENTAGE PERCENTAGE
AGGREGATE BY AGGREGATE BY
PRINCIPAL AGGREGATE PRINCIPAL AGGREGATE
NUMBER BALANCE PRINCIPAL NUMBER BALANCE PRINCIPAL
INTEREST RATE OF LOANS (IN 000S) BALANCE OF LOANS (IN 000S) BALANCE
------------------- --------- ---------- ------------ ---------- ----------- ----------
under 5.00% 11 $ 223 ---% --- $ --- ---%
5.00% to 5.99% 145 2,367 0.2 --- --- ---
6.00% to 6.99% 215 5,344 0.5 14 482 7.4
7.00% to 7.99% 3,470 86,824 8.3 65 1,600 24.5
8.00% to 8.99% 12,086 297,139 28.4 60 1,369 21.0
9.00% to 9.99% 11,639 370,791 35.4 134 2,376 36.4
10.00% to 10.99% 7,564 188,066 18.0 45 687 10.5
11.00% to 11.99% 3,555 81,752 7.8 1 8 0.2
12.00% to 12.99% 402 9,586 0.9 --- --- ---
13.00% to 13.99% 240 2,633 0.3 --- --- ---
14.00% to 14.99% 70 1,595 0.2 --- --- ---
15.00% and over 21 451 --- --- --- ---
---------- ---------- ----- ---------- ---------- -----
Total 39,418 $1,046,771 100.0% 319 $ 6,522 100.0%
========== ========== ===== ========== ========== =====
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32
The following table provides delinquency information for the underlying
loans in the consumer loan participations at June 30, 2001.
CONSUMER LOAN DELINQUENCIES
FIXED VARIABLE
---------------------------------------- ---------------------------------------
PERCENTAGE PERCENTAGE
AGGREGATE BY AGGREGATE BY
PRINCIPAL AGGREGATE PRINCIPAL AGGREGATE
NUMBER BALANCE PRINCIPAL NUMBER BALANCE PRINCIPAL
OF LOANS (IN 000S) BALANCE OF LOANS (IN 000S) BALANCE
----------- -------------- ---------- --------- ----------- ---------
Current 35,745 $ 950,458 90.8% 289 $ 5,784 88.6%
1 to 30 days delinquent 3,038 79,852 7.6 23 641 9.8
31 to 60 days delinquent 343 7,804 0.7 4 56 0.9
61 to 90 days delinquent 111 2,208 0.2 2 30 0.5
over 90 days delinquent 181 6,449 0.7 1 11 0.2
---------- ---------- ----- ---------- ---------- -----
Total 39,418 $1,046,771 100.0% 319 $ 6,522 100.0%
========== ========== ===== ========== ========== =====
Residential Mortgage Loans. We acquired participation interests in both
conforming and nonconforming residential mortgage loans under the loan
subparticipation agreement with Holdings. Conforming residential mortgage loans
comply with the requirements for inclusion in a loan guarantee or purchase
program sponsored by either the FHLMC or FNMA. Under current regulations, the
maximum principal balance allowed on conforming residential mortgage loans
ranges from $275,000 for one-unit residential loans to $528,700 for four-unit
residential loans. Nonconforming residential mortgage loans are residential
mortgage loans that do not qualify in one or more respects for purchase by FNMA
or FHLMC under their standard programs. A majority of the nonconforming
residential mortgage loans underlying the participation interests acquired by us
to date are nonconforming because they have original principal balances which
exceeded the requirements for FHLMC or FNMA programs, the original terms are
shorter than the minimum requirements for FHLMC or FNMA programs at the time of
origination, the original balances are less than the minimum requirements for
FHLMC or FNMA programs, or generally because they vary in certain other respects
from the requirements of such programs other than the requirements relating to
creditworthiness of the mortgagors. A substantial portion of our nonconforming
residential mortgage loans are expected to meet the requirements for sale to
national private mortgage conduit programs or other investors in the secondary
mortgage market.
Each residential mortgage loan is evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first or second lien on single-family residential properties. As of
June 30, 2001, $ 582,049,000 or 99.3%, of the residential mortgage loans
underlying our participation interests were secured by a first mortgage or first
deed of trust. Residential real estate properties underlying residential
mortgage loans consist of individual dwelling units, individual condominium
units, two- to four-family dwelling units, and townhouses.
The portfolio of residential mortgage loans currently consists of both
adjustable and fixed rate mortgage loans and we expect to purchase additional
participation interests in both types of residential mortgage loans in the
future, although the mix of variable and fixed rate mortgage loans may change.
Fixed rate mortgage loans currently consist of the fixed rate product types:
FIXED RATE MORTGAGE LOANS: A mortgage loan that bears interest at a
fixed rate for the term of the loan. Such loans generally mature in 15,
20, 25, or 30 years.
GOVERNMENT FIXED RATE LOANS: A fixed rate mortgage loan originated
under a specific governmental agency program, for example, the Federal
Housing Authority or the Veterans Administration. Such loans generally
mature in 15 or 30 years and may be guaranteed by a government agency.
BALLOON MORTGAGE LOANS: A fixed rate mortgage loan having original or
modified terms to maturity for a specified period, which is typically
5, 7, 10, or 15 years, at which time the full outstanding principal
balance on the loan will be due and payable. Such loans provide for
level monthly payments of principal and interest based on a longer
amortization schedule, generally 30 years. Some of these loans may have
a
31
33
conditional refinancing option at the balloon maturity, which provides
that, in lieu of payment in full of the then outstanding balance, the
loan may be modified to a then current market interest rate for the
remaining unamortized term. None of the residential mortgage loans
identified in this prospectus as balloon mortgage loans have yet
reached the balloon maturity date and any reference to maturity date
refers to the original or modified balloon maturity date.
Adjustable rate mortgage loans, or ARMs, currently consist of
adjustable rate product types:
CONVENTIONAL:
One-year Adjustable Rate Loans: A loan with interest
adjustments in 12-month intervals. Payment frequencies may
include biweekly, semimonthly, or monthly. Such loans may have
yearly and lifetime caps on the amount the interest rate may
change at an interval. The interest rate change calculation is
typically tied to a Treasury index rate. Typically, the
interest rate is based on the weekly average yield on United
States Treasury securities adjusted to a constant maturity of
one year plus the margin stated in the note, subject to
rounding and any caps.
3/1 Adjustable Rate Loans: A one-year ARM that is fixed for
the first three years of the loan. After the initial
three-year period, the interest adjusts in 12-month intervals
with caps on the initial change and each annual change
thereafter and may be subject to a maximum cap on lifetime
changes. Typically, the interest is based on the same Treasury
security as a one-year ARM and is calculated using the margin
and caps stated in the note.
5/1 Adjustable Rate Loans: A one-year ARM that is fixed for
the first five years of the loan. After the initial five-year
period, the interest adjusts in 12-month intervals with caps
on the initial change and each subsequent annual change and
may be subject to a maximum cap on lifetime changes.
Typically, the interest is based on the same Treasury security
as the one-year ARM and is calculated using the margin and
caps stated in the note.
7/1 Adjustable Rate Loans: A one-year ARM that is fixed for
the first seven years of the loan. After the initial
seven-year period, the interest adjusts in 12-month intervals
with caps on the initial change and each subsequent annual
change and may be subject to a maximum cap on lifetime
changes. Typically, the interest is based on the same Treasury
security as the one-year ARM and is calculated using the
margin and caps stated in the note.
10/1 Adjustable Rate Loans: A one-year ARM that is fixed for
the first ten years of the loan. After the initial 10-year
period, the interest adjusts in 12-month intervals with caps
on the initial change and each subsequent annual change and
may be subject to a maximum cap on lifetime changes.
Typically, the interest is based on the same Treasury security
as the one-year ARM and is calculated using the margin and
caps stated in the note.
GOVERNMENT: An adjustable rate loan originated under a specific
government agency program. Generally, the interest rate adjusts in
12-month intervals, and is based on specific requirements for date of
index and calculations.
32
34
TYPE OF MORTGAGE LOAN PRODUCT
AGGREGATE PERCENTAGE WEIGHTED
PRINCIPAL BY AGGREGATE AVERAGE WEIGHTED
NUMBER OF BALANCE PRINCIPAL MONTHS TO AVERAGE
TYPE LOANS (IN 000S) BALANCE MATURITY INTEREST RATE
---------------------- --------- ----------- ------------ ----------- -------------
Conventional:
Fixed rate:
First lien 2,003 $127,334 22.0% 184 8.01%
Second lien 66 970 0.2 74 9.00
-------- -------- -------- -------- --------
Subtotal 2,069 128,304 22.2 183 8.02
-------- -------- -------- -------- --------
Adjustable rate:
First lien 4,859 448,333 74.4 290 7.92
Second lien 60 3,297 0.6 300 8.63
-------- -------- -------- -------- --------
Subtotal 4,919 451,630 78.0 290 7.93
-------- -------- -------- -------- --------
Total 6,988 $579,934 100.0% 266 7.95%
======== ======== ======== ======== ========
Government:
Fixed rate:
First lien 87 $ 5,124 79.9% 259 7.65%
Second lien 7 31 0.5 77 11.04
-------- -------- -------- -------- --------
Subtotal 94 5,155 80.4 258 7.67
-------- -------- -------- -------- --------
Adjustable rate:
First lien 14 1,258 19.6 278 7.52
Second lien --- --- --- --- ---
-------- -------- -------- -------- --------
Subtotal 14 1,258 19.6 278 7.52
-------- -------- -------- -------- --------
Total 108 $ 6,413 100.0% 262 7.64%
======== ======== ======== ======== ========
Conventional and
Government Combined:
Fixed rate:
First lien 2,090 $132,458 22.6% 187 8.00%
Second lien 73 1,001 0.2 74 9.06
-------- -------- -------- -------- --------
Subtotal 2,163 133,459 22.8 186 8.01
-------- -------- -------- -------- --------
Adjustable rate:
First lien 4,873 449,591 76.7 290 7.92
Second lien 60 3,297 0.6 300 8.63
-------- -------- -------- -------- --------
Subtotal 4,933 452,888 77.3 290 7.93
-------- -------- -------- -------- --------
Total 7,096 $586,347 100.0% 266 7.95%
======== ======== ======== ======== ========
The following table sets forth data with respect to the geographic
distribution of the underlying residential mortgage loans in our participation
in those loans at June 30, 2001.
GEOGRAPHIC DISTRIBUTION OF RESIDENTIAL MORTGAGE LOANS
Aggregate Percentage
Principal By Aggregate
Number Balance Principal
State of Loans (in 000s) Balance
---------------- ---------- ----------- ------------
Florida 3,124 $223,931 38.1%
Michigan 2,052 143,990 24.6
Ohio 909 111,415 19.0
Indiana 394 23,897 4.1
Kentucky 240 12,401 2.1
38 other states and U.S. territories 377 70,713 12.1
-------- -------- -----
Total 7,096 $586,347 100.0%
======== ======== =====
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The following table shows data with respect to the principal balance of
the loans underlying the residential mortgage loan participations at June 30,
2001:
PRINCIPAL BALANCES OF RESIDENTIAL MORTGAGE LOANS
AGGREGATE PERCENTAGE
PRINCIPAL BY AGGREGATE
NUMBER BALANCE PRINCIPAL
PRINCIPAL BALANCE OF LOANS (IN 000S) BALANCE
----------------------------------- ----------- ----------- ------------
Less than $25,000 1,833 $ 23,602 4.0%
Greater than $25,000 to $50,000 2,110 76,769 13.1%
Greater than $50,000 to $75,000 1,101 66,475 11.3%
Greater than $75,000 to $100,000 604 51,968 8.9%
Greater than $100,000 to $250,000 933 136,205 23.3%
Greater than $250,000 to $500,000 396 135,618 23.2%
Greater than $500,000 to $750,000 76 46,497 7.9%
Greater than $750,000 to $1,000,000 27 24,177 4.1%
Greater than $1,000,000 to $1,500,000 10 12,090 2.0%
Greater than $1,500,000 to $2,000,000 3 5,233 0.9%
Greater than $2,000,000 3 7,713 1.3%
-------- -------- -----
Total 7,096 $586,347 100.0%
======== ======== =====
Of the residential mortgage loans underlying our participation
interests, approximately 22.8% by principal balance bear interest at fixed rates
and 77.2% at variable rates. The following table contains additional data with
respect to the interest rates of such fixed and variable rate residential
mortgage loans as of June 30, 2001.
INTEREST RATE DISTRIBUTION - RESIDENTIAL MORTGAGE LOANS
FIXED RATE VARIABLE RATE
-------------------------------------- --------------------------------------
INTEREST RATE AGGREGATE PERCENTAGE AGGREGATE PERCENTAGE
PRINCIPAL BY AGGREGATE PRINCIPAL BY AGGREGATE
NUMBER BALANCE PRINCIPAL NUMBER BALANCE PRINCIPAL
OF LOANS (IN 000S) BALANCE OF LOANS (IN 000S) BALANCE
-------- -------- ------------ -------- --------- ------------
under 6.00% 21 $ 1,612 1.2% 31 $ 1,466 0.3%
6.00% to 6.99% 177 27,665 20.7 375 55,014 12.1
7.00% to 7.99% 483 37,686 28.2 1,663 193,554 42.7
8.00% to 8.99% 742 39,737 29.8 1,806 141,375 31.2
9.00% to 9.99% 460 18,195 13.6 976 58,616 12.9
10.00% to 10.99% 191 7,037 5.3 65 2,444 0.5
11.00% to 11.99% 47 834 0.6 12 290 0.1
12.00% to 12.99% 22 322 0.2 3 35 0.1
13.00% to 13.99% 15 247 0.2 2 94 0.1
14.00% to 14.99% 3 73 0.1 --- --- ---
over 15.00% 2 51 0.1 --- --- ---
-------- -------- -------- -------- -------- --------
Total 2,163 $133,459 100.0% 4,933 $452,888 100.0%
======== ======== ======== ======== ======== ========
"Gross Margin" with respect to a residential mortgage loan that is an
adjustable rate residential mortgage loan means the applicable fixed rate which,
when added to the applicable index, results in the current interest rate paid by
the borrower of such residential mortgage loan without taking into account any
interest rate caps or minimum interest rates. The following table sets forth
certain additional data with respect to the Gross Margin on the underlying loans
in the participation of adjustable rate residential mortgage loans at June 30,
2001.
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GROSS MARGIN OF ADJUSTABLE RATE RESIDENTIAL MORTGAGE LOANS
AGGREGATE PERCENTAGE
PRINCIPAL BY AGGREGATE
NUMBER BALANCE PRINCIPAL
GROSS MARGINS OF LOANS (IN 000S) BALANCE
------------------- --------- ----------- ------------
Less than 2.50% 301 $ 10,967 2.4%
2.51% to 3.00% 3,734 348,421 76.9
Greater than 3.00% 898 93,500 20.7
-------- -------- -----
Total 4,933 $452,888 100.0%
======== ======== =====
The following tables provide certain delinquency and other information
for the underlying loans in the participation in the residential mortgage loans
at June 30, 2001.
RESIDENTIAL MORTGAGE LOAN DELINQUENCIES
AGGREGATE PERCENTAGE
PRINCIPAL BY AGGREGATE
NUMBER BALANCE PRINCIPAL
OF LOANS (IN 000S) BALANCE
----------- ----------- ----------
Current 4,557 $424,669 72.4%
1 to 30 days delinquent 2,055 129,867 22.1
31 to 60 days delinquent 264 16,235 2.8
61 to 90 days delinquent 73 5,220 0.9
over 90 days delinquent 147 10,356 1.8
-------- -------- -----
Total 7,096 $586,347 100.0%
======== ======== =====
Other Assets. Cash and due from banks represents cash received by the
Bank from borrowers for the payment of principal and interest on the underlying
loans deposited in a demand deposit account of the Bank. Interest bearing
deposits in banks consist of available funds invested nightly in an investment
product that provides us with a market return for overnight loans. These funds
are available for the purchase of additional participation interests. Other
assets also includes premises and equipment related to real property located in
Indiana, and, more predominantly, accrued interest on the loans underlying our
participation interests, which is calculated by the Bank's loan accounting
systems.
The participation interests in consumer loans not secured by real
estate that we will acquire in connection with the issuance of our Class C and
Class D preferred securities, may have different underwriting, maturity, and
interest rate characteristics and may have a greater rate of delinquency than
the loans summarized with respect to our existing portfolio. Such
characteristics, however, will not be material to the availability of funds from
operations in amounts sufficient to enable us to declare dividends on our
preferred securities, including our Class C preferred securities, at their
respective stated dividend rates.
Dividend Policy
We expect to distribute annually an aggregate amount of dividends with
respect to our outstanding capital shares equal to approximately 100% of our
REIT taxable income which excludes net capital gains. In order to remain
qualified as a REIT, we are required to distribute annually 90% of our REIT
taxable income to our shareholders.
Dividends will be authorized and declared at the discretion of our
board of directors. Factors that would generally be considered by our board of
directors in making this determination are our distributable funds, financial
condition and capital needs, the impact of current and pending legislation and
regulations, economic conditions, tax considerations, and our continued
qualification as a REIT. We currently expect that both our cash available for
distribution and our REIT taxable income will be in excess of the amounts needed
to pay dividends on all outstanding Class A, Class B, Class C, and Class D
preferred securities, even in the event of a significant drop in interest rate
levels because:
- substantially all of our mortgage assets and other authorized
investments are interest-bearing,
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- all outstanding Class A, Class B, Class C, and Class D
preferred securities represent in the aggregate only
approximately 11% of our capitalization,
- we do not anticipate incurring any Indebtedness other than
Permitted Indebtedness, which includes acting as a co-borrower
or guarantor of certain obligations of the Bank that we do not
anticipate will involve a pledge of more than 25% of our
assets,
- we expect that our interest-earning assets will continue to
exceed the liquidation preference of our preferred securities,
and
- we anticipate that, in addition to cash flows from operations,
additional cash will be available from principal payments on
our loan portfolio.
Accordingly, we expect that we will, after paying the dividends on all classes
of preferred securities, pay dividends to holders of our common shares in an
amount sufficient to comply with applicable requirements regarding qualification
as a REIT. There are, however, certain limitations that restrict our ability to
pay dividends on our common shares which are more fully described in this
prospectus under the heading "Description of Class C Preferred Securities -
Dividends."
Under certain circumstances, including any determination that the
Bank's relationship to us results in an unsafe and unsound banking practice, the
OCC will have the authority to issue an order that restricts our ability to make
dividend payments to our shareholders, including holders of the Class C
preferred securities. However, the exercise of the OCC's power to restrict
dividends on our Class C preferred securities would have the effect of
restricting our ability to pay dividends on our common shares. This could have a
material adverse effect on the financial condition of the Bank due to our size
and the Bank's reliance on our payment of dividends on our common shares.
If the OCC should, in addition, restrict the ability of the Bank to pay
dividends to its sole shareholder, Huntington Bancshares, the Bank's own
financial condition could be materially adversely affected in several ways,
including (a) an increase in the interest cost to the Bank of subordinated debt
issues designed to be treated as capital, (b) an increase in deposit interest
rates the Bank would have to pay in order to attract or retain deposits as the
Bank's deteriorated financial position became known to the public; and (c) a
decrease in the ability of the Bank's sole shareholder, which is very heavily
dependent on dividends from the Bank, to raise additional equity capital that
could be used as contributions to Bank capital.
CONFLICT OF INTERESTS AND RELATED POLICIES
After this offering and assuming the issuance of all authorized shares
of Class C and Class D preferred securities and the sale of all Class C
preferred securities to the public, the Bank will continue to control 98.5% of
the voting power of our then outstanding securities. Accordingly, the Bank will
continue to have the right to elect all of our directors, including our
Independent Directors, unless we fail to pay dividends on our Class C and Class
D preferred securities. In addition, all of our officers and all of our current
directors are also officers and directors of the Bank or its affiliates. Because
of the nature of our relationship with Holdings and the Bank, it is likely that
conflicts of interest will arise with respect to certain transactions because
the Bank and its affiliates have interests which are not identical to ours.
The Bank administers our day-to-day activities under the terms of the
participation agreement between the Bank and Holdings and the subparticipation
agreement between Holdings and us. Since the parties to these agreements are all
affiliated, these agreements were not the result of arms-length negotiations.
Any future modification of these agreements will require the approval of a
majority of our Independent Directors. However, since the Bank controls the
election of all of our directors, including our Independent Directors, any such
modification also would not be the result of arms-length negotiations. Thus, we
cannot assure you that such modifications will be on terms as favorable to us as
those that could have been obtained from unaffiliated third parties.
Huntington Bancshares, the owner of all the Bank's common shares, may
have investment goals and strategies that differ from those of the holders of
the Class C preferred securities. In addition, neither Huntington Bancshares nor
the Bank has a policy addressing the treatment of new business opportunities.
Thus, new business opportunities identified by Huntington Bancshares or the Bank
may be directed to affiliates other than us. Our board of directors has broad
discretion to revise our investment and operating strategy without stockholder
approval.
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The Bank, through its voting control of our securities, controls the election of
all of our directors, including our Independent Directors. Consequently, our
investment and operating strategies will largely be directed by Huntington
Bancshares and the Bank.
We are dependent on the diligence and skill of the officers and
employees of the Bank for the selection and structuring of the loans underlying
our participation interests and our other authorized investments. The Bank
selected the amount, type, and price of loan participation interests and other
assets which we acquired from the Bank and its affiliates prior to and in
connection with this offering. After the sale of the Class C preferred
securities to the public, we anticipate that we will continue to acquire all or
substantially all of our assets from the Bank or its affiliates. Neither we nor
the Bank have obtained any third-party valuations, nor do we intend to do
so in the future. Although our board of directors has adopted certain policies
to guide the acquisition and disposition of assets, these policies may be
revised or exceptions may be approved from time to time at the discretion of
the board of directors without a vote of our stockholders. Changes in or
exceptions made to these policies could permit us to acquire lower quality
assets.
We are also dependent on the Bank and others for monitoring and
servicing the loans underlying our participation interests. Conflicts may
arising as part of such servicing, particularly with respect to loans that are
placed on nonaccrual status. While we believe that the Bank will diligently
pursue collection of any non-performing assets, we cannot assure you that this
will be the case. Conflicts of interest among us, Holdings, and the Bank may
also arise in connection with making decisions that bear upon the credit
arrangements that the Bank may have with a borrower under a loan. For example,
the Bank may be influenced by its strong relationship with a trust customer in
deciding not to demand additional collateral from that same customer on a
commercial mortgage loan underlying our participation interests even though the
value of the existing collateral had deteriorated. The Bank could also seek to
exercise its influence over our affairs so as to cause the sale of our assets
and their replacement by lesser quality assets purchased from the Bank or
elsewhere. Although these potential conflicts exist, we believe that the Bank
will service the assets solely with a view toward our interests.
It is our intention that any agreements and transactions between us on
the one hand, and Holdings or the Bank on the other hand, be fair to all parties
and consistent with market terms for such types of transactions. The requirement
in our articles of incorporation that certain of our actions be approved by a
majority of our Independent Directors also is intended to ensure fair dealings
among us and each of Holdings and the Bank. There can be no assurance, however,
that any such agreement or transaction will be on terms as favorable to us as
could have been obtained from unaffiliated third parties.
There are no provisions in our articles of incorporation limiting any
of our officers, directors, shareholders, or affiliates from having any direct
or indirect pecuniary interest in any asset to be acquired or disposed of by us
or in any transaction in which we have an interest or from engaging in
acquiring, holding, and managing our assets. As described in this prospectus, it
is expected that the Bank will have direct interests in transactions with us
including, without limitation. the sale of assets to us; however, it is not
anticipated that any of our officers or directors will have any interests in
such assets, other than as borrowers or guarantors of loans underlying our
participation interests, in which case such loans would be on substantially the
same terms, including interest rates and collateral on loans, as those
prevailing at the time for comparable transaction with others and would not
involve more than the normal risk of collectibility or present other unfavorable
features.
The Bank is eligible to obtain advances from various federal agencies,
such as the FHLBC. We may in the future be asked to act as co-borrower or
guarantee the Bank's obligations under such advances and/or pledge all or a
portion of our assets in connection with those advances. Any such borrowing,
guarantee, or pledge would rank senior to the Series C preferred securities upon
liquidation. Accordingly, any governmental agencies that make advances to the
Bank where we have acted as co-borrower or guarantor or have pledged our assets
as collateral will have a preference over the holders of our Class C preferred
securities and other Parity Stock. These holders would receive their liquidation
preference only to the extent there are assets available after satisfaction of
our Indebtedness. As of the date of this prospectus, we have never acted as
co-borrower or guarantor of any of the Bank's obligations under such advances or
otherwise and have never pledged any of our assets. The Bank, however, intends
to obtain a line of credit or one or more advances, not to exceed at any one
time $800 million in the aggregate, from the FHLBC prior to the end of 2001. The
terms of such line of credit or advances have not yet been determined. We do not
yet know what our exact role will be, but it is expected that up to 25% of our
assets may serve as collateral for such advances. Any agreement setting forth
our obligations will be approved by our directors. Any such borrowing,
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guarantee, and/or pledge will fall within the definition of Indebtedness;
however, it and all other future Indebtedness to the FHLBC will be deemed to be
Permitted Indebtedness and we will not need to obtain the consent of the holders
of our Class C preferred securities for any such borrowing, guarantee, and/or
pledge. A default by the Bank on its obligations to the FHLBC could adversely
affect our business and our ability to make timely dividend payments on the
Class C preferred securities
OTHER MANAGEMENT POLICIES AND PROGRAMS
General. In administering our participation interests and other
authorized investments, the Bank has a high degree of autonomy. Our board of
directors, however, has adopted certain policies to guide our administration
with respect to the acquisition and disposition of assets, use of capital and
leverage, credit risk management, and certain other activities. These policies,
which are discussed below, may be amended or revised from time to time at the
discretion of our board of directors and, in certain circumstances subject to
the approval of a majority of our Independent Directors, but without a vote of
our shareholders, including holders of the Class C preferred securities.
Underwriting Standards. The Bank has represented to Holdings, and
Holdings has represented to us, that most of the loans underlying our
participation interests were originated generally in accordance with
underwriting policies customarily employed by the Bank during the period in
which the commercial, consumer, residential mortgage, and commercial mortgage
loans were originated. The Bank emphasizes "in-market" lending, which means
lending to borrowers which are located where the Bank or its affiliates have
branches or loan origination offices. The Bank avoids transactions perceived to
have unacceptably high risk, as well as excessive industry and other
concentrations.
Some of the loans, however, were acquired by the Bank in connection
with the acquisition of other financial institutions. Prior to acquiring any
financial institution, the Bank performed a number of due diligence procedures
to, among other things, assess the overall quality of the target institution's
loan portfolio. These procedures included the examination of underwriting
standards used in the origination of loan products by the target institution,
the review of loan documents and the contents of selected loan files, and the
verification of the past due status and payment histories of selected borrowers.
Through its due diligence procedures, the Bank obtained a sufficient level of
comfort pertaining to the underwriting standards used by the target institution
and their influence on the quality of the portfolio. Even though the Bank did
not and does not warrant those standards, the Bank found them acceptable in
comparison to our underwriting standards in cases where the Bank had made a
favorable decision to acquire the institution as a whole.
COMMERCIAL LOANS. The underwriting and approval policies and procedures
utilized by the Bank in connection with the origination of the commercial loans,
including "owner-occupied" commercial real estate loans, underlying our
participation interests were intended to assess relevant economic, industry,
business, and borrower-specific factors, with emphasis upon the borrower's
capacity to repay throughout the life of the loan. Such relevant factors include
an assessment of:
- general economic conditions;
- prevailing industry trends;
- the financial condition of the borrower, including its
historical earnings, trends, capital structure, as well as,
when appropriate, forecasted results;
- the borrower's ability to consistently generate sufficient
cash flow to service its debt;
- the capability of management; and
- the appropriateness and value of secondary and tertiary
repayment sources, such as the assets of the borrower and
personal guaranties of owners.
The Huntington Commercial Policy Manual, as it relates to commercial
loans, provides the Bank's underwriting officers with guidelines for the
extension of commercial credit. The policy manual and its related procedures
manual, articulate policies and guidelines such as:
- loan approval procedures;
- appropriate underwriting and loan structure standards; and
- collateral advance rates.
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COMMERCIAL MORTGAGE LOANS. The loan underwriting procedures and
guidelines utilized by the Bank in connection with the origination of non-owner
occupied real estate loans underlying the participation interests acquired by us
were intended to assess the value of the underlying collateral, the ability of
the mortgaged property to be used by the borrower or its agents to generate
sufficient cash flow to repay the loan typically through collateral sale or
refinance, and the financial condition of the borrower and any guarantors,
including their ability to service the loan.
The underwriting procedures and guidelines taken into account by the
Bank include such factors as:
- suitability of the collateral for its proposed use;
- the availability, rental rates, and relative value of
comparable properties in the relevant market area;
- the anticipated growth or decline in both the immediate and
broader geographic areas in which the mortgaged property is
located;
- the current or projected occupancy or leasing ratios, if
relevant;
- the condition and age of the collateral;
- the management ability of the borrower, including its business
experience and financial soundness; and
- such other economic, demographic, or other factors as in the
judgment of the Bank might affect the value of the collateral
and the ability of the borrower to service the loan.
RESIDENTIAL MORTGAGE LOANS. The residential mortgage loans generally
consist of both conforming and non-conforming residential mortgage loans.
Conforming residential mortgage loans comply with the requirements for inclusion
in the loan guarantee program sponsored by either FHLMC or FNMA. Non-conforming
residential mortgage loans are residential mortgage loans that do not qualify in
one or more respects for purchase by FHLMC or FNMA. Substantially all of the
residential mortgage loans in our portfolio are non-conforming and would not
meet the guidelines for FHLMC/ FNMA because they have original principal
balances which exceeded the requirements for FHLMC or FNMA programs, the
original terms are shorter than the minimum requirements for FHLMC or FNMA
programs at the time of origination, the original balances are less than the
minimum requirements for FHLMC or FNMA programs, or generally because they vary
in certain other respects from the requirements of such programs other than the
requirements relating to creditworthiness of the mortgagors. A substantial
portion of our nonconforming residential mortgage loans are expected to meet the
requirements for sale to national private mortgage conduit programs or other
investors in the secondary mortgage market.
Generally, all residential mortgage loans were underwritten to
secondary market guidelines and documentation requirements to determine the
acceptability of all prospective borrowers. The guidelines may have been
modified for specific loan programs, especially for loans that did not meet the
standard program for FHLMC or FNMA. The loan terms under which these loans were
originated offered more liberal terms than traditional secondary market
financing, particularly with regard to the loan-to-value ratio and borrower
qualifications.
A capacity analysis was completed on each loan application. This
analysis was designed to evaluate the borrower's ability to repay the loan.
Additionally, physical damage and homeowners insurance was required on titled
collateral and all real property used to secure the loan and verification of
coverage was obtained prior to the loan closing. The coverage must be maintained
for the life of the loan.
For any prospective borrower, employment verification was obtained from
the borrower's employer to verify the length of the borrower's employment with
the employer, the borrower's then current salary, and whether it was expected
that the borrower would continue such employment in the future. Alternatively,
the borrower submitted such other evidence of employment, such as pay stubs,
satisfactory to the underwriting officer. For a self-employed prospective
borrower, the borrower generally was required to submit copies of personal and
business federal income tax returns for the previous two years. For certain
prospective borrowers, the borrower authorized verification of all deposits at
financial institutions at which the borrower has demand or savings accounts.
After the credit report and the employment and deposit verifications
were received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (1) to meet the borrower's monthly obligations on the
proposed residential mortgage loan, determined on the basis of the monthly
payments due in the year of origination, and other expenses related to the home
such as property taxes and hazard insurance, and (2) to meet other financial
obligations and
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monthly living expenses. In certain instances, exceptions may have been made to
the Bank's underwriting policies in cases deemed appropriate by its underwriting
officers.
In determining the adequacy of the residential property as collateral,
an appraisal or opinion of value was made of each property considered for
financing if the loan was intended to be a conforming loan and FNMA or FHLMC
required an estimate of value. For non-conforming loans, appraisals were
generally obtained. Each appraiser was selected in accordance with predetermined
guidelines established for appraisers. The appraiser was required to inspect the
property and verify that it was in good condition and that construction, if new,
had been completed. If the appraiser reported any exceptions to the
verification, then the Bank or its agent determined that such property had been
substantially completed to its satisfaction. The appraisal was based on the
appraiser's judgment of value giving appropriate weight to both the market value
of comparable properties and the cost of replacing the property and other
factors as appropriate. The Bank's underwriting standards also require a search
of the public records relating to a mortgaged property for liens and judgments
against such mortgaged property, as well as customary title insurance or a title
opinion.
CONSUMER LOANS. Consumer loans underlying our participation interests
are generally secured by either a first or a junior mortgage on real property.
Lien position is dependant upon available equity and other lien holders.
Generally, most consumer loans are secured by a second mortgage. Consumer loans
were underwritten at one of the Bank 's established underwriting centers where
authorized lending personnel objectively exercised their judgment regarding
credit decisions. Credit bureau scores were used to assist with decision making
and establishing rates. A credit bureau report was obtained on all loan
applicants while supplemental information was obtained from other sources, if
necessary. These sources may have included but are not limited to direct credit
checks, references from landlords, payment of utility bills, and deposit and
employment verifications. Certain senior regional management personnel were
authorized to overrule centralized underwriting credit decisions based upon
total Bank relationships and/or service issues. Additionally, a determination
was made of the value of the collateral, and a title report and flood zone
verification report were obtained on all loans.
As with residential mortgage loan applications, a capacity analysis was
completed on each consumer loan application. Physical damage and homeowners'
insurance was also required on titled collateral and all real property used to
secure the loan. Verification of coverage was obtained prior to the loan
closing. The coverage must be maintained for the life of the loan.
After the credit report and other required information was received by
the underwriting officer considering the loan application, a determination was
made as to whether the prospective borrower had sufficient monthly income
available to meet the borrower's monthly obligations on the proposed consumer
loan and to meet other financial obligations and monthly living expenses. In
certain instances, exceptions may have been made to the Bank's underwriting
policies in cases deemed appropriate by its underwriting officers.
A valuation was generally made of each property considered for
financing in order to determine the adequacy of the underlying collateral. A
valuation may consist of:
- a full home inspection by a certified appraiser,
- a "drive-by" inspection which typically involves an exterior
inspection, rather than a full home inspection, by a certified
appraiser,
- a determination by an evaluation model,
- tax assessment value, or
- an average of the customer stated value, the tax assessed
value, and/or the purchase price multiplied by an inflation
factor.
The Bank's underwriting standards also require a search of the public records
relating to a mortgaged property for liens and judgments against such mortgaged
property, as well as a customary property report to verify the record holder of
the property, legal description, and lien verification. In some cases a full
title policy with title insurance and/or a title opinion is required.
Asset Acquisition And Disposition Policies. Consistent with Holding's
policy, it is our policy to purchase from the Bank participation interests
generally in loans that:
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- are performing, meaning they have no more than two payments
past due, if any,
- are in accruing status,
- are secured by real property such that they are REIT
qualifying, and
- have not been previously sold, securitized, or charged-off
either in whole or in part.
Our policy also allows for investment in assets which are not REIT-Qualified
Assets up to but not exceeding the statutory limitations imposed on
organizations that qualify as a REIT. In the past, Holdings has purchased from
the Bank and sold to us participation interests in loans not secured by real
property because of available proceeds from loan repayments and pay-offs.
Management, under this policy, also has the discretion to purchase other assets
to maximize its return to shareholders.
We anticipate that from time to time we will receive participation
interests in additional mortgage loans from the Bank on a basis consistent with
secondary market standards pursuant to the loan participation and
subparticipation agreements, out of proceeds received in connection with the
repayment or disposition of loan participation interests in our portfolio.
Although we are permitted to do so, we have no present plans or intentions to
purchase loans or loan participation interests from unaffiliated third parties.
We currently anticipate that participation interests in additional loans
acquired by us will be of the types described above under the heading "General
Description of Mortgage Assets and Other Authorized Investments; Investment
Policy," although we are not precluded from purchasing additional types of loans
or loan participation interests.
We may continue to acquire from time to time limited amounts of
participation interests in loans that are not commercial or residential loans,
such as automobile loans and equipment loans, in addition to those being
acquired by us in connection with the issuance of our Class C and Class D
preferred securities. We also may from time to time acquire a limited amount of
other authorized investments. Although we currently do not intend to acquire any
mortgage-backed securities representing interests in or obligations backed by
pools of mortgage loans that will be secured by single-family residential,
multi-family, or commercial real estate properties located throughout the United
States, we are not restricted from doing so. We do not intend to acquire any
interest-only or principal-only mortgage-backed securities. We also will not be
precluded from investing in mortgage-backed securities when the Bank is the
sponsor or issuer. At June 30, 2001, we did not hold any mortgage-backed
securities.
We currently anticipate that we will not acquire the right to service
any loan underlying a participation interest that we acquire in the future and
that the Bank will act as servicer of any such additional loans. We anticipate
that any servicing arrangement that we enter into in the future with the Bank
will contain fees and other terms that would be substantially equivalent to or
more favorable to us than those that would be contained in servicing
arrangements entered into with third parties unaffiliated with us.
Our current policy is not to acquire any participation interest in any
commercial mortgage loan that constitutes more than 5.0% of the total book value
of our mortgage assets at the time of acquisition. In addition, our current
policy prohibits the acquisition of any loan or any interest in a loan other
than an interest resulting from the acquisition of mortgage-backed securities,
which loan is collateralized by real estate located in West Virginia or that is
made to a municipality or other tax-exempt entity.
Our current policy is to reinvest the proceeds of our assets in other
interest-earning assets such that our FFO over any period of four fiscal
quarters will be anticipated to equal or exceed 150% of the amount that would be
required to pay full annual dividends on the Class C preferred securities as
well as any other Parity Stock, except as may be necessary to maintain our
status as a REIT. Our articles of incorporation provide that we cannot amend or
change this policy with respect to the reinvestment of proceeds without the
consent or affirmative vote of the holders of at least two thirds of the Class C
preferred securities, voting as a separate class.
Credit Risk Management Policies. We expect that participation interests
in each commercial or residential mortgage loan acquired in the future will
represent a first lien position and will be originated by the Bank, one of its
affiliates, or an unaffiliated third party in the ordinary course of its real
estate lending activities based on the underwriting standards generally applied
by or substantially similar to those applied by the Bank at the time of
origination for its own account. We also expect that all loans will be serviced
by or through the Bank pursuant to the participation agreement and
subparticipation agreement, which require servicing in conformity with any loans
servicing guidelines promulgated by us and, in the case of residential mortgage
loans, with FNMA and FHLMC guidelines and procedures.
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Other Policies. We intend to operate in a manner that will not subject
us to regulation under the Investment Company Act. We do not intend to:
- invest in the securities of other issuers for the purpose of
exercising control over such issuers;
- underwrite securities of other issuer;
- actively trade in loans or other investments;
- offer securities in exchange for property; or
- make loans to third parties, including, our officers,
directors, or other affiliates.
The Investment Company Act exempts entities that, directly or through
majority-owned subsidiaries, are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate." We refer to these interests as Qualifying Interests. Under current
interpretations by the staff of the SEC, in order to qualify for this exemption,
we, among other things, must maintain at least 55% of our assets in Qualifying
Interests and also may be required to maintain an additional 25% in Qualifying
Interests or other real estate-related assets. The assets that we may acquire
therefore may be limited by the provisions of the Investment Company Act. We
have established a policy of limiting authorized investments which are not
Qualifying Interests to no more than 20% of the value of our total assets.
We may, under certain circumstances, purchase the Class C preferred
securities and other capital securities in the open market or otherwise. We have
no present intention of repurchasing any of our capital securities, and any such
action would be taken only in conformity with applicable federal and state laws
and regulations and the requirements for qualifying as a REIT.
We intend to distribute to our shareholders, in accordance with the
Securities and Exchange Act of 1934, as amended, annual reports containing
financial statements prepared in accordance with generally accepted accounting
principles and certified by our independent auditors. Our articles of
incorporation provide that we will maintain our status as a reporting company
under the Exchange Act for so long as any of the Class C preferred securities
are outstanding and held by unaffiliated shareholders.
We currently make investments and operate our business in such a manner
consistent with the requirements of the Internal Revenue Code to qualify as a
REIT. However, future economic, market, legal, tax, or other considerations may
cause our board of directors, subject to approval by a majority of our
Independent Directors, to determine that it is in our best interest and the best
interest of our shareholders to revoke our REIT status. The Internal Revenue
Code prohibits us from electing REIT status for the four taxable years following
the year of such revocation.
SERVICING
The loans underlying our participation interests are serviced by the
Bank pursuant to the terms of the participation agreement between the Bank and
Holdings and the subparticipation agreement between Holdings and us. The Bank
has delegated servicing responsibility of the residential mortgage loans to The
Huntington Mortgage Company and has delegated servicing responsibility for
certain of the loans acquired from Barnett Banks in 1998 to a third-party
servicer located in Florida.
Under the participation and subparticipation agreements, the Bank has
the right in its discretion to give consents, waivers, and modifications of the
loan documents to the same extent as if the loans were wholly owned by the Bank;
provided, however, that the Bank may not do the following without the written
consent of Holdings:
- waive any payment default;
- extend the maturity of the loans;
- reduce the rate or rates of interest with respect to the
loans;
- forgive or reduce the principal sum of the loans;
- increase the lending formula or advance rates; or
- amend or modify the financial covenants contained in the loan
documents in any way that would make such financial covenants
less restrictive.
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The Bank has the right to accept payment or prepayment of the whole
principal sum and accrued interest in accordance with the terms of the loans,
waive prepayment charges in accordance with the Bank's policy for loans in which
no participation interest has been granted, and accept additional security for
the loans. No specific term is specified in the participation agreement and
subparticipation agreement; the agreements may be terminated by mutual agreement
of the parties at any time, without penalty. Due to the relationship among the
REIT, Holdings, and the Bank, we do not anticipate that these agreements will be
terminated by any party in the foreseeable future.
The Bank, in its role as servicer under the terms of the loan
participation agreement, receives a loan servicing fee designed as a
reimbursement for costs incurred to service the underlying loan. The loan
servicing fee is payable monthly. The amount and terms of the fee are determined
by mutual agreement of the Bank, Holdings, and us from time to time during the
term of the participation agreement and subparticipation agreement.
Periodically, a review and analysis of loan servicing operations is conducted by
the Bank. As a result, among other things, the cost to service an individual
loan is calculated and is used as a basis to determine fair compensation for
services rendered. The loan servicing fee is subject to adjustment annually
based upon the Bank's review and analysis at the end of each calendar year
during the term of the participation agreement.
The Bank was paid servicing fees by us, through Holdings, of
$7,821,000, $7,762,000, and $4,456,000 for the years ended December 31, 2000,
1999, and 1998, respectively. Servicing fees paid to the Bank for the six months
ended June 30, 2001, were $ 4,083,000. For 2001, the annual servicing fee with
respect to the commercial mortgage, commercial, and consumer loans is equal to
the outstanding principal balance of each loan multiplied by a fee of .125% and
the annual servicing fee with respect to residential mortgages is equal to .282%
of the interest income collected. Based on these formulas and the current asset
levels, we estimate that we will pay the Bank servicing compensation of
approximately $8.2 million in 2001. Neither the participation agreement nor the
subparticipation agreement limits or caps the servicing fees that we pay to the
Bank. Other than the compensation referred to in this paragraph and the amounts
paid to the Bank and its directors as described under the subheadings "Related
Party Transactions" on pages 53-54 of this prospectus and the subheadings
"Compensation of Directors and Officers" and "Related party Transactions" on
page 57 of this prospectus, we pay no other compensation to the Bank or its
affiliates. The Bank does, however, receive certain non-compensation benefits
from its relationship with us. These benefits are described under the heading
"Benefits to the Bank" on pages 22-23 of this prospectus.
The participation and subparticipation agreements require the Bank to
service the loans underlying our participation interests in a manner
substantially the same as for similar work performed by the Bank for
transactions on its own behalf. The Bank or its affiliates collect and remit
principal and interest payments, maintain perfected collateral positions, and
submit and pursue insurance claims. The Bank and its affiliates also provide
accounting and reporting services required by us for our participation
interests. We also may direct the Bank to dispose of any loans that become
classified, placed in a non-performing status, or are renegotiated due to the
financial deterioration of the borrower. The Bank is required to pay all
expenses related to the performance of its duties under the participation and
subparticipation agreements, including any payment to its affiliates for
servicing the loans. The Bank or its affiliates may institute foreclosure
proceedings, 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
mortgaged property underlying a mortgage loan by operation of law or otherwise
in accordance with the terms of the participation and subparticipation
agreement.
Prior to foreclosure of any loan underlying our participation interests
acquired by us from the Bank, we currently intend to sell the participation
interest in the underlying loan back to the Bank at fair value less estimated
selling costs of the property at the time the property is transferred to OREO.
The Bank then bears all expenses related to the foreclosure after that time.
EMPLOYEES
We have six executive officers, each of whom is described further below
under "Management," and two additional non-executive officers. We do not
anticipate that we will require any additional employees because employees of
the Bank and its affiliates are servicing the loans under the participation and
subparticipation agreements. All of our officers are also officers or employees
of Huntington Bancshares, the Bank, and/or Holdings. We maintain corporate
records and audited financial statements that are separate from those of the
Bank and Holdings.
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Although there are no restrictions or limitations contained in our
articles of incorporation or bylaws, we do not anticipate that our officers,
employees, or directors will have any direct or indirect pecuniary interest in
any asset to be acquired or disposed of by us or in any transaction in which we
have an interest or will engage in acquiring, holding, and managing assets,
other than as borrowers or guarantors of loans underlying our participation
interests, in which case such loans would be on substantially the same terms,
including interest rates and collateral on loans, as those prevailing at the
time for comparable transaction with others and would not involve more than the
normal risk of collectibility or present other unfavorable features.
COMPETITION
In order to qualify as a REIT under the Internal Revenue Code, we can
only be a passive investor in real estate loans and certain other assets. Thus,
we will not engage in the business of originating loans. We do anticipate that
we will continue to possess participation interests in mortgage and other loans
in addition to those in the current portfolio and that substantially all of
these loans will be owned by the Bank, although we may purchase loans from
unaffiliated third parties. Accordingly, we do not expect to compete with
mortgage conduit programs, investment banking firms, savings and loan
associations, banks, thrift and loan associations, finance companies, mortgage
bankers, or insurance companies in acquiring loans.
LEGAL PROCEEDINGS
We are not the subject of any litigation. Neither we nor Holdings nor
the Bank is currently involved in nor, to our knowledge, currently threatened
with any material litigation with respect to the assets included in the current
portfolio, other than routine litigation arising in the ordinary course of
business.
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SELECTED FINANCIAL DATA
The following selected financial data for the three years ended
December 31, 2000, are derived from our audited financial statements. The
following selected financial data for the two years ended December 31, 1997 and
for the six months ended June 30, 2001 and 2000, are derived from unaudited
financial statements and reflect all adjustments, consisting only of normal
recurring adjustments, that, in the opinion of our management, are necessary for
a fair and consistent presentation of such data. Operating results for the six
months ended June 30, 2001, are not necessarily indicative of results expected
for the entire year. This data should be read in conjunction with our financial
statements, related notes, and other financial information included elsewhere in
this document. Since all of our common shares are owned by our affiliates, per
share data is not included. We elected REIT status in May 1998; prior to that
time we were an inactive company that held OREO property. Unaudited pro forma
financial data, reflecting the pending sale of Florida loans underlying our
participation interests as well as the issuance of our Class C and D preferred
securities to Holdings and the effect of the acquisition of assets in connection
with that issuance, is provided beginning on page F-13 of this prospectus.
SIX MONTHS ENDED
(in thousands) JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------------------------------------------
INCOME STATEMENT DATA: 2001 2000 2000 1999 1998 1997 1996
----------- ----------- ---------- ---------- ----------- --------- -------
(unaudited)
Net interest income ........ $ 250,553 $ 237,442 $ 489,100 $ 491,203 $ 298,420 --- ---
Provision for loan losses .. 371 --- --- --- --- --- ---
Non-interest income ........ 28 --- --- --- --- --- ---
Non-interest expense ....... 4,187 4,114 7,983 8,234 4,551 $ 26 $ 94
Net income (loss) .......... 246,023 233,328 481,117 482,969 293,869 17 (61)
Dividends paid:
Preferred ............... --- --- 80 80 --- --- ---
Common .................. --- --- 458,335 413,760 293,869 --- ---
Earnings per common share:
Basic and diluted........ $17.57 $16.67 $34.36 $34.49 $20.99 $-- $--
(in thousands) JUNE 30, DECEMBER 31,
--------------------------- -------------------------------------------------------------
BALANCE SHEET DATA: 2001 2000 2000 1999 1998 1997 1996
----------- ----------- ---------- ---------- ----------- --------- -------
(unaudited)
Net loan participations
purchased ............... $6,180,872 $5,892,077 $5,744,822 $5,939,286 $5,850,857 --- ---
Cash and due from banks .... 64,193 167,844 61,403 167,135 122,691 $ 1 $ 1
Interest bearing deposits in
bank .................... 633,003 449,224 818,872 67,071 --- --- ---
Total assets ............... 7,087,079 6,606,402 6,833,624 6,213,038 6,000,898 39 63
Total liabilities .......... --- --- --- 730 132,525 9 63
Total shareholders' equity . 7,087,079 6,606,402 6,833,624 6,212,308 5,868,373 30 1
Selected Other Information:
Non-performing loans as a
% of total loan
participations .......... 1.14% 0.64% 0.72% 0.64% 0.29% --- ---
Non-performing loans as a
% of total assets ....... 1.01 0.58 0.61 0.62 0.28 --- ---
Allowance for loan losses as
a % of non-performing
loans underlying
participations .......... 127.27 245.16 218.98 270.74 515.10 --- ---
Allowance for loan losses as
a % of total loan
participations .......... 1.45 1.57 1.57 1.72 1.48 --- ---
Ratio of earnings to fixed
charges(1) .............. --- --- 3,911.52x 3,926.58x --- --- ---
(1) No preferred dividends were paid during the six months ended June 30, 2001
and 2000, and the years ended December 31, 1998, 1997, and 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Our Management's Discussion and Analysis of Financial Condition and
Results of Operations does not reflect the impact of Huntington Bancshares' sale
of its Florida operations and the resulting impact on our financial condition
and results of operations. You are encouraged to review our pro forma financial
statements, beginning on page F-13 of this prospectus, which reflect the sale of
Florida loans underlying our participation interests as well as the issuance of
our Class C and Class D preferred securities to Holdings and the effect of the
acquisition of assets in connection with that issuance.
FINANCIAL CONDITION
At June 30, 2001 and 2000, we had total assets of $ 7.1 billion and $
6.6 billion, respectively, compared to total assets of $6.8 billion and $6.2
billion at December 31, 2000 and 1999, respectively. As of June 30, 2001, an
aggregate of $ 4.6 billion, or 65.4%, of our assets consisted of a 99%
participation interest in commercial and commercial mortgage loans, $ 1.1
billion, or 14.9%, of our assets consisted of a 99% participation interest in
consumer loans secured by real property, and $. 6 billion, or 8.3%, of our
assets consisted of a 99% participation interest in residential mortgage loans,
before the allowance for loan losses. These participation interests were all
acquired from Holdings and Holdings acquired them from the Bank. The weighted
average yield earned on all of the participation interests for the six months
ended June 30, 2001, was 7.42%.
Our exposure to credit risk is managed by 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
business activity concentrations. Its credit administration function employs
extensive risk management techniques, including forecasting, to ensure that
loans adhere to corporate policy and problem loans are promptly identified.
These procedures provide executive management of the Bank with the information
necessary to implement policy adjustments where necessary, and take corrective
actions on a proactive basis. These procedures also include evaluating the
adequacy of the allowance for loan losses, which we refer to as the ALL, for the
Bank and its subsidiaries, which include 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.
We maintain the ALL to absorb potential loan losses from the loans
underlying our participation interests. At June 30, 2001 and 2000, the ALL was $
90.7 million and $ 94.1 million, respectively. The ALL represented 1.45% and
1.57% of total loan participations at June 30, 2001 and 2000, respectively. The
ALL is established through a provision for loan losses charged to earnings and
by additions in connection with purchases of participation interests. Loan
losses are charged against the allowance when management believes the underlying
loan balance, or a portion thereof, is uncollectible. Subsequent recoveries, if
any, are credited to the allowance. Net loan losses for the six months ended
June 30, 2001, were $ 1.2 million compared with $ 1.5 million for the same
period a year ago. Net loan losses were $2.9 million and $9.6 million for the
years ended December 31, 2000 and 1999, respectively. Net loan losses for
commercial loan participations in 2000 declined $1.0 million from 1999, while
net loan losses for commercial mortgage and consumer loan participations
declined $2.6 million and $3.1 million, respectively. We have not been required
to record a provision for loan losses since our inception as a REIT in 1998,
except in the most recent six month period. Provision for loan losses in 2001
was $371,000. On an ongoing basis, management monitors the underlying loans and
evaluates the adequacy of the allowance for loan losses. Based upon its
analysis, management believes that the allowance for loan losses is sufficient
to absorb any known and inherent risks that currently exist in the underlying
loans in the participation interests. Management will continue to review the
underlying loans to determine the extent to which any changes in loss experience
may require provisions in the future.
We allocate the ALL to each underlying loan category based on a
detailed credit quality review performed periodically on specific underlying
commercial loans based on size and relative risk and other relevant factors such
as portfolio performance, internal controls, and impacts from mergers and
acquisitions. Loss factors are applied on larger, commercial and industrial and
commercial mortgage credits and represent management's estimate of the inherent
loss. The portion of the allowance allocated to homogeneous consumer loans is
determined by applying projected loss ratios giving consideration to existing
economic conditions and trends.
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ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
JUNE 30, 2001 2000 1999 1998
----------------------- ------------------------- ------------------------ ------------------------
% OF % OF % OF % OF
LOAN LOAN LOAN LOAN
PART. TO PART. TO PART. TO PART. TO
(in thousands of dollars) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- --------- --------- --------- -------- ----------
Commercial $ 37,867 8.4% $ 38,327 10.5% $ 38,270 13.5% $ 27,521 18.7%
Consumer secured by real
property 25,483 16.8 25,793 16.6 31,693 13.1 34,916 11.8
Residential mortgage 1,290 9.3 1,305 6.1 1,936 12.4 1,630 15.2
Commercial mortgage 12,233 65.5 12,381 66.8 12,923 61.0 11,797 54.3
Unallocated 13,851 -- 14,020 -- 19,329 -- 11,935 --
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 90,724 100.0% $ 91,826 100.0% $104,151 100.0% $ 87,799 100.0%
======== ======== ======== ======== ======== ======== ======== ========
Projected loss ratios incorporate factors such as trends in past due
and non-accrual amounts, recent loan loss experience, current economic
conditions, risk characteristics, and concentrations of various loan categories.
Actual loss ratios experienced in the future, however, could vary from those
projected because a underlying loan's performance depends not only on economic
factors but also other factors unique to each customer. The diversity in size of
corporate commercial loans can be significant as well and even if the projected
number of loans deteriorates, the dollar exposure could significantly vary from
estimated amounts. Additionally, the impact on individual customers from recent
economic events may yet be known. To ensure adequacy to a higher degree of
confidence, a portion of the ALL is considered unallocated. While amounts are
allocated to various portfolio segments, the total ALL, excluding impairment
reserves prescribed under provisions of Statement of Financial Accounting
Standard No. 114, is available to absorb losses from any segment of the
portfolio of participation interests.
Amounts due from Holdings at June 30, 2001, and June 30, 2000, were $
157.0 million and $ 53.4 million, respectively. Amounts due from Holdings at
December 31, 2000, were $159.9 million, versus a liability to Holdings of
$730,000 at December 31, 1999. These represent amounts due from or due to
Holdings and/or the Bank for unsettled transactions involving participation
interests, fees, and other related costs. Shareholders' equity was $ 7.1 billion
at June 30, 2001, after taking into consideration first half 2001 earnings of $
246.0 million; $6.8 billion at December 31, 2000, after the $400 million
issuance of Class B preferred securities; and $6.2 billion at the end of 1999,
after aggregate dividend payments on the common shares and Class A preferred
securities during each year.
RESULTS OF OPERATIONS
We reported net income of $ 246.0 million for the six months ended June
30, 2001, versus $ 233.3 million for the same period last year. Net income for
the year ended December 31, 2000, was $481.0 million, compared with $483.0
million and $293.9 million for each of the two previous years. The slight
decrease in earnings during 2000 was due to a decrease in interest earned on
participation interests as runoff outpaced new purchases. The increase in net
earnings during 1999 was primarily due to the full year impact from holding
participation interests since commencement of our business as a REIT in May
1998. No dividends have been declared or paid so far in 2001 but we paid $458.3
million, $413.8 million, and $293.9 million in dividends on our common stock in
2000, 1999, and 1998, respectively. We also paid $80,000 in dividends on our
Class A preferred stock in 2000 and 1999. We intend to pay dividends on our
preferred stock and common stock in amounts necessary to continue to preserve
our status as a REIT under the Internal Revenue Code.
Total revenues for the first six months of 2001 and 2000, were $ 250.6
million and $ 237.4 million, respectively. Total revenue for the year ended
December 31, 2000, amounted to $489.1 million compared to $491.2 million for
1999 and $298.4 million for 1998. The modest decrease in total revenue during
2000 was driven by lower interest earned on our participation interests in
commercial and commercial and residential mortgages. This decline was offset by
interest earned on participation interests in consumer loans and furthermore by
interest earned from cash invested with the Bank.
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The yields on the participation interests were as follows:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
------------------------------------- -------------------------------------
AVERAGE AVERAGE
(in millions) BALANCE INCOME YIELD BALANCE INCOME YIELD
------------ ----------- ---------- ------------ ----------- ----------
Loan participations:
Commercial $ 581.3 $ 19.9 6.90% $ 767.7 $ 27.5 7.21%
Consumer secured
by real property 1,019.0 47.3 9.36 814.3 36.2 8.94
Residential Mortgage 577.5 21.5 7.45 862.4 30.6 7.10
Commercial Mortgage 4,052.9 140.8 7.00 3,826.9 130.9 6.88
------------ ----------- ------------ -----------
Total loan participations 6,230.7 229.5 7.42 6,271.3 225.2 7.22
------------ ----------- ------------ -----------
Interest bearing deposits in banks 684.1 17.3 5.10 362.6 10.3 5.72
Allowance for loan losses/fees (89.8) 3.8 (92.3) 1.9
------------ ----------- ------------ -----------
Total interest-earning assets $ 6,825.0 $ 250.6 7.29% $ 6,541.2 $ 237.4 7.24%
============ =========== ============ ===========
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------------------- -------------------------------------
AVERAGE AVERAGE
(in millions) BALANCE INCOME YIELD BALANCE INCOME YIELD
------------ ----------- ---------- ------------ ----------- ----------
Loan participations(1):
Commercial $ 721.9 $ 53.5 7.41% $ 963.6 $ 74.3 7.71%
Consumer secured
by real property 865.8 78.3 9.04 724.7 65.8 9.08
Residential mortgage 689.2 46.4 6.73 811.2 59.6 7.35
Commercial mortgage 3,809.1 273.7 7.19 3,570.6 270.3 7.57
------------ ----------- ------------ -----------
Total loan participations 6,086.0 451.9 7.43 6,070.1 470.0 7.74
------------ ----------- ------------ -----------
Interest bearing deposits in banks 556.9 33.1 5.94 276.7 14.1 5.10
Allowance for loan losses/fees (96.4) 4.1 (84.1) 7.1
------------ ----------- ------------ -----------
Total interest-earning assets $ 6,546.5 $ 489.1 7.47% $ 6,267.7 $ 491.2 7.84%
============ =========== ============ ===========
(1) Individual components include non-accrual loan balances and related
interest received. For the twelve months ended December 31, 2000, the amount of
interest income which would have been recorded under original terms for total
loans classified as non-accrual was $2.9 million. Amounts actually collected and
recorded as interest income for these loans totaled $2.0 million.
The weighted average yield on our interest-earning assets was 7.29% for
the first six months of 2001 compared with 7.24% in the first half of the prior
year, and 7.47% for 2000, 7.84% for 1999, and 8.48% for 1998. The increase in
the yield from 2000 to 2001 is the result of a higher proportion of
higher-yielding consumer loan participations offset by our investment in a
higher amount of interest-bearing deposits in banks during the first half of
2001. The decline in the weighted average yield on our interest-earning assets
from the 1998 period to 1999 and 2000 was primarily driven by the impact of
pay-offs of higher-yielding loans underlying the participation interests,
particularly in the commercial and commercial mortgage portfolios.
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CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME
AND INTEREST RATES(1)
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 1999
--------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
FROM PREVIOUS YEAR DUE TO: FROM PREVIOUS YEAR DUE TO:
--------------------------------- ---------------------------------
FULLY TAX EQUIVALENT BASIS(2)
(IN MILLION OF DOLLARS) VOLUME YIELD TOTAL VOLUME YIELD TOTAL
-------- --------- --------- ---------- ------- -------
Interest bearing deposits in banks $ 16.3 $ 2.7 $ 19.0 $ 1.5 $ (1.0) $ 0.5
Loan participations purchased:
Commercial (18.2) (3.2) (21.4) 34.9 (3.0) 31.9
Consumer secured
by real property 12.9 (0.6) 12.3 41.7 (1.6) 40.1
Residential mortgage (8.6) (5.0) (13.6) 21.0 (0.6) 20.4
Commercial mortgage 17.8 (16.2) 1.6 124.2 (24.3) 99.9
------ ------ ------ ------ ------ ------
Total earning assets 20.2 (22.3) (2.1) 223.3 (30.5) 192.8
------ ------ ------ ------ ------ ------
Total interest bearing liabilities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Net interest income $ 20.2 $(22.3) $ (2.1) $223.3 $(30.5) $192.8
====== ====== ====== ====== ====== ======
(1) The change in interest rates due to both rate and volume has been allocated
between the factors in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Calculated assuming a 35% tax rate.
Total expenses, comprised largely of loan servicing and management fees
paid to the Bank, were $ 4.2 million for the six month period ended June 30,
2001, compared with $ 4.1 million for the same period in 2000. Expenses were
$8.0 million, $8.2 million, and $4.6 million for the years ended December 31,
2000, 1999, and 1998, respectively.
INTEREST RATE RISK
Our income consists primarily of interest income on participation
interests in commercial, consumer, residential mortgage, and commercial mortgage
loans. We do not intend to use any derivative products to manage our interest
rate risk. If there is a further decline in market interest rates, we may
experience a reduction in interest income on our participation interests and a
corresponding decrease in funds available to be distributed to our shareholders.
The reduction in interest income may result from downward adjustments of the
indices upon which the interest rates on loans are based and from prepayments of
loans with fixed interest rates, resulting in reinvestment of the proceeds in
lower yielding participation interests.
CREDIT QUALITY
Non-performing assets, or NPAs, consist of underlying loans that are no
longer accruing interest. Commercial, commercial mortgage, and residential
mortgage 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. 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. A
charge-off may be delayed in circumstances when the Bank repossesses collateral
and anticipates the sale at a future date. When participation interests are
purchased in loans from Holdings, the underlying loans are performing at the
date of purchase. No participation interests are purchased in non-performing
loans.
The participation and subparticipation agreements require the Bank to
service the loan portfolios in a manner substantially the same as for similar
work performed by the Bank for transactions on its own behalf. The Bank collects
and remits principal and interest payments, maintains perfected collateral
positions, and submits and pursues insurance claims. The Bank also provides to
us accounting and reporting services required by our participations. We also 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 is required to
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pay all expenses related to the performance of its duties under the
participation and subparticipation agreements. The Bank may institute
foreclosure proceedings, 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 underlying 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.
Total NPAs were $ 71.3 million and $ 38.4 million at June 30, 2001 and
2000, compared with $41.9 million, $38.5 million, and $17.0 million at year-end
2000, 1999, and 1998, respectively. As of the same dates, the non-performing
loans underlying our participation interests represented 1.14%, . 64%, .72%,
.64%, and .29% of total loan participations, respectively. Transfers of $24.3
million of large underlying commercial and commercial mortgage credits to
nonaccrual status drove a substantial portion of the increase in the recent six
months. Underlying loans past due ninety days or more but continuing to accrue
interest were $23.7 million at June 30, 2001, and $23.9 million at March 31,
2001.
SIGNIFICANT CONCENTRATION OF CREDIT RISK
Concentration of credit risk generally arises with respect to our
participation interests when a number of underlying loans have borrowers engage
in similar business activities or activities 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. Our
balance sheet exposure to geographic concentrations directly affects the credit
risk of the underlying loans within the participation interests. The majority of
the loans underlying the participation interests are located in Ohio, Michigan,
Florida, Indiana, and Kentucky. Borrowers obligated in loans underlying our
participation interests, however, do not represent a particular concentration of
similar business activity.
At June 30, 2001, 42.9% of the underlying loans in all participation
interests consisted of loans located in Ohio, 25.6% in Michigan, 19.9% in
Florida, 5.4% in Indiana, and 3.5% in Kentucky. 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 that may affect the
ability of borrowers to make payments of principal and interest on the
underlying loans.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of our financial commitments and to capitalize
on opportunities for business expansion. In managing liquidity, we take into
account various legal limitations placed on a REIT.
Our principal liquidity needs are to pay operating expenses and
dividends and acquire additional participation interests as the underlying loans
mature or prepay. 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. We do not
have and do not anticipate having any material capital expenditures.
To the extent that the board of directors determines that additional
funding is required, we may raise such funds through additional equity
offerings, 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.
We had no debt outstanding at June 30, 2001, and we do not currently
intend to incur any Indebtedness, except for Permitted Indebtedness. Our
articles of incorporation do not contain any limitation on the amount or
percentage of debt, funded or otherwise, we may incur, except that the
incurrence of debt for borrowed money or our guarantee of debt for borrowed
money in excess of amounts borrowed or guaranteed in connection with advances to
the Bank by the FHLBC plus 20% of our total shareholders' equity will require
the approval two-thirds of our Class C preferred securities. Any such debt
incurred may include intercompany advances made to us by the Bank.
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We have the power to create and issue Junior Stock without any approval
or consent of the holders of Class C preferred securities. So long as any Class
C preferred securities remain outstanding, we may not issue Senior Stock without
the approval of the holders of at least two-thirds of the Class C preferred
securities. So long as any Class C preferred securities remain outstanding,
additional shares of Parity Stock may not be issued without the approval of a
majority of our Independent Directors. The Class B preferred securities will
rank subordinate to the Class A, Class C, and Class D preferred securities. The
Class C preferred securities will rank prior to common shares and the Class B
preferred securities and to all other Junior Stock, if any. The Class C
preferred securities will rank junior to Senior Stock, if any, as to dividend
rights and rights upon liquidation, winding up, or dissolution. The Class A and
Class D preferred securities constitute Parity Stock with respect to the Class C
preferred securities. Prior to the issuance of additional shares of preferred
securities, we will take into consideration, among other things, the Bank's
regulatory capital requirements and an assessment of other available options for
raising any necessary capital.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is management's
objective to attempt to control risks associated with interest rate movements.
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Market risk arises primarily from interest rate risk inherent in
lending, investing in marketable securities, deposit taking, and borrowing
activities. Management actively monitors and manages interest rate risk
exposure. Our asset and liability management strategy is formulated and
monitored on an ongoing basis. Senior management reviews, among other things,
the sensitivity of assets and liabilities, as applicable, to interest rate
changes, the book and market values of assets and liabilities, unrealized gains
and losses, purchase and sale activity, maturities of investments and
anticipated loan participation pay-offs. As we have expanded our loan
participation portfolio, we have acquired a number of participations with
underlying loans at fixed rates. Such loans tend to increase our interest rate
risk. At June 30, 2001, approximately 38.9% of the loans underlying the
participation portfolio carried fixed interest rates. Management monitors the
rate sensitivity of assets acquired. Our methods for evaluating interest rate
risk include an analysis of interest-rate sensitivity "gap", which is defined as
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate-sensitive assets exceeds the amount of
interest-rate-sensitive liabilities. A gap is considered negative when the
amount of interest-rate-sensitive liabilities exceeds interest-rate-sensitive
assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution is perfectly matched in each maturity
category.
Assets that immediately reprice are placed in the overnight column. The
following table presents our interest-rate-sensitive gap by repricing date at
June 30, 2001:
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(in thousands) WITHIN ONE ONE TO THREE THREE TO OVER FIVE
OVERNIGHT YEAR YEARS FIVE YEARS YEARS TOTAL
---------- --------- ----------- --------- ---------- -----------
Rate sensitive assets:
Interest bearing
deposits in banks $ 633,003 $ -- $ -- $ -- $ -- $ 633,003
Loan participations:
Fixed rate -- 260,673 570,924 303,336 1,304,041 2,438,974
Variable rate 1,518,840 284,114 303,266 241,607 1,484,795 3,832,622
----------- ----------- ----------- ---------- ----------- -----------
Total rate-sensitive assets 2,151,843 544,787 874,190 544,943 2,788,836 6,904,599
Total rate-sensitive
liabilities -- -- -- -- -- --
----------- ----------- ----------- ---------- ----------- -----------
Gap $ 2,151,843 $ 544,787 $ 874,190 $ 544,943 $ 2,788,836 $ 6,904,599
=========== =========== =========== ========== =========== =========
Cumulative gap $ 2,151,843 $ 2,696,630 $ 3,570,820 $4,115,763 $ 6,904,599
=========== =========== =========== ========== ===========
% of total assets 30.4% 38.0% 50.4% 58.1% 97.4%
=========== =========== =========== ========== ===========
At June 30, 2001, we did not have any interest-rate-sensitive
liabilities. Our interest-rate-sensitive assets consisted primarily of
participation interests in commercial, consumer, residential mortgage, and
commercial mortgage loans. As indicated earlier, our income consists primarily
of interest income from these participation interests. If there is a decline in
market interest rates resulting from downward adjustments in the indices upon
which the interest rates on loans are based, we may experience a reduction in
interest income and a corresponding decrease in funds available for distribution
to our shareholders. A decline in interest income can also be realized from
prepayments, including pay-offs, of loans with fixed interest rates, resulting
in reinvestment of proceeds in lower-yielding participation interests. The
borrower has the ability to prepay a loan with or without premium or penalty
depending on the provisions found in the underlying loan agreements. The level
of underlying loan prepayments is influenced by several factors, including the
interest rate environment, the real estate market in particular areas, the
timing of transactions, and circumstances related to individual borrowers and
loans.
Because the movement of interest rates cannot be known in advance,
management uses simulation models to analyze various interest-rate scenarios.
Prepayment assumptions are based on management's experience and estimate of loan
prepayment activity for the loans underlying the participations. Given the
interest rate environment at June 30, 2001, management applied the assumption
that, on average, 13% of the outstanding fixed and adjustable rate loans will
prepay annually. This prepayment assumption is based on Huntington Bancshares'
experience and management's estimate of loan prepayment activity. The results of
our sensitivity analysis indicated that net interest income would be expected to
increase by approximately 3.2% if rates rose 200 basis points and would drop an
estimated 3.1%, in the event of a gradual 200 basis point decline.
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BENEFICIAL OWNERSHIP OF OUR STOCK
As of June 30, 2001, we had 14,000,000 common shares issued and
outstanding. The following table sets forth, as of June 30, 2001, the number and
percentage of outstanding common shares beneficially owned by all persons known
by us to own more than five percent of such shares.
NUMBER OF COMMON SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------------------------ ------------------ --------
Huntington Preferred Capital Holdings, Inc. 13,981,333 common shares 99.87%
201 N. Illinois, Suite 1800
Indianapolis, Indiana 46204
None of our directors or executive officers own any of our common
shares. Our Class A and Class B preferred securities are non-voting. Each share
of our Class C and Class D preferred securities will have 1/10th of a vote per
share. Immediately prior to the date of this prospectus, there were no shares of
Class C or Class D preferred securities outstanding.
RELATED PARTY TRANSACTIONS
On May 1, 1998, the Bank transferred a 95% participation interest in
certain loans, worth approximately $2.7 billion, to Holdings in exchange for all
1,000 shares of the common stock of Holdings pursuant to the terms of the
original participation agreement between the Bank and Holdings. From time to
time between May 1, 1998, and February 28, 2001, the Bank transferred 95%
participation interests in certain additional loans either as additional
contributions to the capital of Holdings or for cash. In each case , the amount
of consideration paid was equal to 95% of the outstanding principal balances of
the loans subject to such participation interests at the time of the respective
transfers. The aggregate amount of consideration paid for such participation
interests during this period was approximately $ 16.6 billion in cash and $5.0
billion in contributions to capital.
On March 1, 2001, the Bank sold to Holdings an additional 4%
participation interest in all of the loans in which Holdings had acquired a 95%
participation interest, for approximately $ 249.1 million in cash, which amount
was equal to 4% of the aggregate outstanding principal balances of such loans at
the time of the sale. Between March 1, 2001, and June 30, 2001, the Bank
transferred 99% participation interests in additional loans to Holdings for
cash. The aggregate amount of cash paid for participation interests during this
period was approximately $ 2.1 billion, which was equal to 99% of the
outstanding principal balances of the loans subject to such participation
interests at the time of the respective transfers.
Likewise, on May 1, 1998, Holdings transferred to us a 100%
participation interest in all of the 95% participation interests that it
received from the Bank, worth approximately $2.7 billion, in exchange for all
750 of our common shares, plus 896 of our Class A Preferred Shares, pursuant to
the terms of the original subparticipation agreement. From time to time between
May 1, 1998, and June 30, 2001, Holdings transferred to us additional 100%
participation interests in all of the participation interests that Holdings
acquired in the Bank's loans for the same types and amounts of consideration,
that is, either as additional capital contributions or for cash, as for the
transfers of the same participation interests from the Bank to Holdings, as
described in the preceding paragraph.
These participation interests were purchased by Holdings from the Bank
and by us from Holdings shortly after the underlying loans were originated,
except for the initial transaction that occurred on May 1, 1998. As stated
above, in each case the consideration paid for the participation interests which
we purchased was equal to a specific percentage of the outstanding principal
balance (which is equal to the Bank's and Holding's carrying values) at the time
of the respective purchase and, accordingly, we believe that the purchase price
approximated fair market value. The parties to these transactions, however, are
all affiliated and, thus, the transactions were not the result of arms-length
negotiations. We did not obtain third party valuations. Accordingly, we cannot
assure you that such transactions were on terms as favorable to us as those that
could have been obtained from unaffiliated third parties.
The Bank services the loans underlying the participation agreement
between the Bank and Holdings and the subparticipation agreement between
Holdings and us. The terms of these agreements are more fully described above
under the heading "Business - Servicing." The Bank was paid servicing fees by
us, through Holdings, of $7,821,000, $7,762,000, and $4,456,000 for the years
ended December 31, 2000, 1999, and 1998, respectively.
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Servicing fees paid to the Bank for the six months ended June 30, 2001, were
$4,083,000. For 2001, the annual servicing fee with respect to the commercial
mortgage, commercial, and consumer loans underlying our participation interests
is equal to the outstanding principal balance of each loan multiplied by a fee
of .125% and the annual servicing fee with respect to residential mortgages is
equal to .282% of the interest income collected.
Huntington Bancshares and the Bank provide to us personnel to handle
day-to-day operations of the company such as accounting, financial analysis, tax
reporting, and other administrative functions which are not directly related to
servicing the loans. On a monthly basis, we reimburse Huntington Bancshares and
the Bank for the cost related to the time spent by employees for performing
these functions. The personnel costs were $ 81,000 for each of the six month
periods ended June 30, 2001 and 2000, $162,000 for each of the years ended
December 31, 2000 and 1999, and $95,000 for the year ended December 31, 1998.
In addition, we maintain and transact all of our cash activity through
a non-interest bearing demand deposit account with the Bank. We also invest
available funds in Eurodollar deposits with the Bank for a term of not more than
30 days. As of June 30, 2001, and December 31, 2000, $ 64,193 and $61,403,
respectively, were on deposit with the Bank in a non-interest bearing account
and $ 633,003 and $818,872, respectively, were on deposit with the Bank in an
interest bearing account.
The Bank is eligible to obtain advances from various federal agencies,
such as the FHLBC. We may in the future be asked to act as co-borrower or
guarantee the Bank's obligations under such advances and/or pledge all or a
portion of our assets in connection with those advances. Any such borrowing,
guarantee or pledge would rank senior to the Series C preferred securities upon
liquidation. Accordingly, any governmental agencies that make advances to the
Bank where we have acted as co-borrower or guarantor or have pledged our assets
as collateral will have a preference over the holders of our Class C preferred
securities and other Parity Stock. These holders would receive their liquidation
preference only to the extent there are assets available after satisfaction of
our Indebtedness. As of June 30, 2001, the Bank had outstanding advances of
approximately $17 million from the Federal Home Loan Bank of Indianapolis and is
currently eligible to obtain, but has not yet obtained, advances from the
discount window of the Federal Reserve Bank of Cleveland. We have not been asked
and do not anticipate being asked to act as co-borrower or guarantee these
advances or pledge our assets as collateral. The Bank, however, also intends to
obtain a line of credit or one or more advances, not to exceed at any one time
$800 million in the aggregate, from the FHLBC prior to the end of 2001. The
terms of such line of credit or advances have not yet been determined. We do not
yet know what our exact role will be, but it is expected that up to 25% of our
assets may serve as collateral for such advances. Any agreement setting forth
our obligations will be approved by our directors. Any such borrowing,
guarantee, and/or pledge will fall within the definition of Indebtedness;
however, it and all other future Indebtedness relating to the FHLBC will be
deemed to be Permitted Indebtedness and we will not need to obtain the consent
of the holders of our Class C preferred securities for any such borrowing,
guarantee, and/or pledge.
In connection with the sale of Huntington Bancshares' Florida
operations, we will sell approximately $1.2 billion in participation interests
in certain Florida loans to Holdings for cash.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Currently, our board of directors is composed of six members, all of
whom are officers of the Bank or its affiliates. Prior to the sale of the Class
C preferred securities to the public, we intend to increase the size of our
board to nine members and add three additional directors. All three additional
directors will be Independent Directors. An " Independent Director" is a
director who is not one of our current officers or employees or a current
director, officer, or employee of the Bank or any affiliate of the Bank.
Each of our directors will serve until their successors are duly
elected and qualified. There is no current intention to further alter the number
of directors comprising the board of directors after the sale of the Class C
preferred securities in this offering; however, if full dividends on the Class C
preferred securities and any Parity Stock have not been paid for six dividend
periods, the number of our directors will be increased by two and holders of the
Class C preferred securities, voting together as a class with the holders of any
Parity Stock with the same voting rights, will have the right to elect such
additional directors. Pursuant to our articles of incorporation, the Independent
Directors are required to consider the interests of the holders of both the
common shares and the
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preferred securities, including the Class C preferred securities, in determining
whether any proposed action requiring their approval is in our best interests.
We currently have six executive officers, all of whom are officers of
Huntington Bancshares and/or the Bank. We estimate that our officers devote less
than 5% of their time to managing our business. We have no other employees and
do not anticipate that we will require additional employees.
The persons who were our directors and executive officers as of
September 1, 2001 are as follows:
NAME AGE POSITION HELD
---- --- -------------
Michael J. McMennamin 56 President and Director
Richard A. Cheap 50 Vice President, Secretary, and Director
Paul V. Sebert 38 Vice President, Treasurer, and Director
Ronald C. Baldwin 54 Vice President and Director
R. Larry Hoover 51 Vice President and Director
John Van Fleet 46 Vice President and Director
The principal occupation for at least the last five years of each
director and executive officer is set forth below.
MICHAEL J. MCMENNAMIN. Mr. McMennamin has served as one of our
directors since December 2000 and as our President since April 2001. He has also
served as Vice Chairman and Chief Financial Officer of Huntington Bancshares
since October 2000 and as President of Huntington Capital Corp. and Executive
Vice President of the Bank since June 2000. From November 1998 to February 2000,
Mr. McMennamin served as Group Executive Vice President and Chief Financial
Officer of Citizens Financial Corp. in Providence, Rhode Island. Prior thereto,
Mr. McMennamin served as Executive Vice President and Chief Financial Officer
for Banc One Corporation from May 1995 to November 1998.
RICHARD A. CHEAP. Mr. Cheap has served as our Vice President and
Secretary and as one of our directors since April 2001. He has also served as
General Counsel and Secretary for Huntington Bancshares and as Executive Vice
President, General Counsel, Secretary, and Cashier of the Bank since May 1998.
Prior to joining Huntington Bancshares and the Bank, Mr. Cheap practiced law
with the law firm of Porter, Wright, Morris & Arthur LLP, Columbus, Ohio, from
1981, and as a partner from 1987 to May 1998. Mr. Cheap concentrated his law
practice in the areas of general business, corporate finance, mergers and
acquisitions, and business taxation. While with Porter, Wright, Morris & Arthur
LLP, Mr. Cheap represented Huntington Bancshares on a variety of matters,
including acting as lead attorney in negotiating the terms and documentation of
most of Huntington Bancshares' bank acquisitions during the preceding nine
years.
PAUL V. SEBERT. Mr. Sebert has served as our Vice President and
Treasurer and as one of our directors since April 2001. He has also served as
Senior Vice President of Huntington Bancshares since May 1999 responsible for
budgeting, forecasting, financial performance reporting, and tax planning. Mr.
Sebert served Huntington Bancshares as Vice President from February 1997 until
his promotion in May 1999. Mr. Sebert also served Huntington Bancshares as its
Corporate Controller from February 1998 to October 2000, its Assistant
Controller from February 1997 to February 1998, and its Corporate Accounting
Manager from June 1994 until February 1997. Prior to joining Huntington
Bancshares in 1994, Mr. Sebert was a Senior Manager at the firm of Ernst & Young
LLP.
RONALD C. BALDWIN. Mr. Baldwin has served as our Vice President and as
one of our directors since April 2001. He has also served as Vice Chairman for
Huntington Bancshares and the Bank since April 2001, overseeing the corporate
and retail lines of business. Mr. Baldwin served as President of Retail Delivery
for the Retail Banking Group of Bank One Corporation, managing branches,
telephone call centers, ATM's, and internet banking across a multi-state network
from December 1997 to December 2000. Prior thereto, Mr. Baldwin served as Bank
One Corporation's president of Business Banking from January 1996 to December
1997 and as Chairman and Chief Executive Officer of Bank One Wisconsin
Corporation from April 1994 to January 1996.
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R. LARRY HOOVER. Mr. Hoover has served as one of our directors
since June 1997 and as our Vice President since April 2001. He also served as
our President from June 1997 to April 2001. Mr. Hoover has served as Executive
Vice President and Senior Administrative Credit Officer of Huntington Bancshares
since April 1997, where he is responsible for credit policy, portfolio credit
risk management, loan review, special asset management, and collateral
management services. He has also served as Executive Vice President, Commercial
Banking Manager, for the Bank from April 1991 to April 1997, as Senior Lender
for the Bank from December 1985 to April 1991, and as Sales Team Leader and
Marketing Director for the Bank from November 1981 to December 1985.
JOHN VAN FLEET. Mr. Van Fleet has served as our Vice President and as
one our directors since July 2001. Mr. Van Fleet has served as Senior Vice
President and Controller for the Bank since February 1997, as Senior Vice
President for Huntington Bancshares since February 2001, and as Corporate
Controller for Huntington Bancshares since August 2001. Mr. Van Fleet previously
served as Senior Vice President and Corporate Controller for Huntington
Bancshares from April 1993 until February 1997.
INDEPENDENT DIRECTORS
Our articles of incorporation require that, so long as any Class C
preferred securities are outstanding, certain actions by us must be approved by
a majority of our Independent Directors. The actions requiring independent
director approval are described in more detail under the heading "Description of
the Class C Preferred Securities-Independent Directors." In addition, although
not restricted from doing so, our board of directors does not currently intend
to approve the following transactions without the approval of a majority of our
Independent Directors:
- the modification of the general distribution policy or the
authorization or declaration of any distribution in respect of
common shares for any year if, after taking into account any
such proposed distribution, total distributions on our
preferred securities and our common shares would exceed an
amount equal to the sum of 105% of our REIT taxable income,
excluding capital gains, for such year plus our net capital
gains for that year; and
- the redemption of any of our common stock.
Prior to the sale of the Class C preferred securities to the public,
the size of our board of directors will be increased by three and Stephen E.
Dutton, Roger E. Kephart, and James D. Robbins will be elected to fill the
vacancies. Messrs. Dutton, Kephart, and Robbins have agreed to serve as
directors and members of our audit committee. Each of these individuals will be
Independent Directors, meaning that none of them are current or former
directors, officers, or employees of us, Huntington Bancshares, the Bank,
Holdings, or any affiliate of any of them.
STEPHEN E. DUTTON, age 51, has served as Chief Financial Officer and
Chief Operating Officer and has been a partner of the Don M. Casto Organization,
real estate developers based in Columbus, Ohio, since 1995.
ROGER E. KEPHART, age 57, co-founded the law firm of Kephart & Fisher
LLP in 1991. In addition to practicing law, Mr. Kephart has served as his firm's
administrative partner.
JAMES D. ROBBINS, age 55, has served as President of James D. Robbins
and Co., a financial advisory and investment company, since July 2001. Prior to
that time, Mr. Robbins served as managing partner of PricewaterhouseCoopers LLP
(and its predecessor firm, Coopers & Lybrand), Columbus market, from November
1993 until his retirement in June 2001. Mr. Robbins is a certified public
accountant in the State of Ohio and the Commonwealth of Kentucky.
If full dividends on Class C preferred securities and any Parity Stock
have not been paid for six dividend periods, the number of our directors will be
increased by two and holders of the Class C preferred securities, voting
together as a class with the holders of any Parity Stock with the same voting
rights, will have the right to elect such additional directors.
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Audit Committee
Prior to the sale of the Class C preferred securities to the public, we
will establish an audit committee comprised of Stephen E. Dutton, Roger E.
Kephart, and James D. Robbins. We believe that this audit committee will satisfy
the rules of the National Association of Securities Dealers, Inc. that govern
audit committee composition, even though Mr. Dutton may not be considered
"independent" as that term is defined by NASD Rule 4200(a)(14). Messrs. Kephart
and Robbins are considered "independent" under this NASD rule. Mr. Dutton is an
executive officer and partner of the Don M. Casto Organization, which is a
collection of real estate assets and businesses affiliated via their common
ownership. Certain of these businesses have borrowed money from the Bank and may
have made payments to the Bank that exceeded the greater of $200,000 or 5% of
that business' revenues. We have a participation interest in certain of these
loans. These loans were on substantially the same terms, including interest
rates and collateral for loans, as those prevailing at the time for comparable
transactions with others and did not involve more than the normal risk of
collectibility or present other unfavorable features. In light of these factors
and Mr. Dutton's extensive real estate industry and financial knowledge and
experience, we believe that our Board of Directors will find that it is in our
best interests and the best interests of our shareholders for Mr. Dutton to
serve on our audit committee.
The audit committee will have a written charter which will, among other
things, require the audit committee to:
- oversee our financial reporting process on behalf of our board of
directors and report the results of its activities to the board;
- review the engagement and independence of our auditors;
- review the adequacy of our internal accounting controls and
financial reporting process; and
- review transactions among us, Holdings, and the Bank.
COMPENSATION OF DIRECTORS AND OFFICERS
We intend to pay our Independent Directors fees for their services as
directors. The Independent Directors will receive a fee of $7,000 per year. We
do not pay any compensation to our officers or employees or to directors who are
not Independent Directors.
RELATED PARTY TRANSACTIONS
Some of our directors and executive officers are customers of
Huntington Bancshares' affiliated financial and lending institutions and have
transactions with such affiliates in the ordinary course of business.
Transactions with directors and executive officers have been on substantially
the same terms, including interest rates and collateral on loans, as those
prevailing at the time for comparable transactions with others and did not
involve more than the normal risk of collectibility or present other unfavorable
features. We may hold a participation interest in some of these loans.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
We are an Ohio corporation. Ohio law provides that a director must
perform his duties as a director, including the duties as a member of any
committee of the directors upon which he may serve:
- in good faith,
- in a manner the director reasonably believes to be in or not opposed
to the best interests of the corporation, and
- with the care that an ordinarily prudent person in a like position
would use under similar circumstances.
A director will be liable for damages in any action that the director takes or
fails to take as a director only if it is proved by clear and convincing
evidence in a court of competent jurisdiction that the director's action or
failure to act involved an act or omission undertaken with deliberate intent to
cause injury to the corporation or undertaken with reckless disregard for the
best interests of the corporation.
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In performing his duties, a director is entitled to rely on
information, opinions, reports, or statements, including financial statements
and other financial data, that are prepared or presented by:
- one or more directors, officers, or employees of the corporation who
the director reasonably believes are reliable and competent in
the matters prepared or presented;
- counsel, public accountants, or other persons as to matters that the
director reasonably believes are within the person's
professional or expert competence;
- a duly established committee of the directors upon which the
director does not serve as to matters within the committee's
designated authority, so long as the director reasonably believes
the committee merits confidence.
A director, in determining what he reasonably believes to be in the
best interests of the corporation, must consider the interests of the
corporation's shareholders and, in the director's discretion, may consider any
of the following:
- the interests of the corporation's employees, suppliers, creditors,
and customers;
- the economy of the state and nation;
- community and societal considerations;
- the long-term as well as short-term interests of the corporation and
its shareholders, including the possibility that these
interests may be best served by the continued independence of
the corporation.
Consistent with Ohio law, our regulations provide that we will
indemnify our directors, and may indemnify or agree to indemnify our officers,
against expenses, including attorney's fees, judgments, fines, and amounts paid
in settlement by reason of the fact that they are or were our directors,
officers, employees, or agents of or, at our request, were serving another
entity in a similar capacity. In order to receive indemnification, the directors
or officers must have acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, our best interests. With regard to
criminal matters, we will indemnify directors, and may indemnify or agree to
indemnify officers, if the directors or officers had no reasonable cause to
believe their conduct was unlawful. Directors or officers claiming
indemnification will be presumed to have acted in good faith and in a manner
they reasonably believed to be not opposed to our best interests and, with
respect to any criminal matter, to have had no reasonable cause to believe their
conduct was unlawful.
Our regulations also permit us to purchase and maintain insurance to
protect our directors, officers, employees, and agents against any liability
asserted against them, or incurred by them, arising out of their status as such.
DESCRIPTION OF THE CLASS C PREFERRED SECURITIES
The following summary describes the material terms and provisions of
the Class C preferred securities. This description is qualified in its entirety
by reference to the terms and provisions of our articles of incorporation. Our
articles of incorporation have been filed with the SEC as an exhibit to the
registration statement which we filed in connection with this offering.
GENERAL
The Class C preferred securities are validly issued, fully paid, and
nonassessable. The holders of the Class C preferred securities will have no
preemptive rights with respect to any of our capital stock or any of our other
securities convertible into or carrying rights or options to purchase any such
capital stock. The Class C preferred securities are perpetual and will not be
convertible into our common shares or any other class or series of our capital
securities and will not be subject to any sinking fund or other obligation for
its repurchase or retirement.
The transfer agent, registrar, and dividend disbursement agent for the
Class C preferred securities will be Computershare Investor Services. The
registrar for our Class C preferred securities will send notices to shareholders
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of any meetings at which holders of the Class C preferred securities have the
right to elect directors or to vote on any other matter.
DIVIDENDS
Holders of Class C preferred securities will be entitled to receive,
if, when, and as authorized and declared by our board of directors out of our
legally available assets, noncumulative cash dividends at the rate of [___]% per
annum of the initial liquidation preference which is $25.00 per share. Dividends
on the Class C preferred securities will be payable, if authorized and declared,
quarterly in arrears on March 31, June 30, September 30, and December 31 of each
year or, if any such day is not a business day, on the next business day, unless
the next business day falls in a different calendar year, in which case the
dividend will be paid on the preceding business day, commencing on [__________],
2001. We refer to each such quarter of a calendar year as a "dividend period".
Quarterly dividend periods will commence on and include the first day, and end
on and include the last day, of the calendar quarter in which the corresponding
dividend payment date occurs; provided, however, that the first dividend period
will commence on and include the original issue date of the Class C preferred
securities and will end on and include [__________], 2001. Each authorized and
declared dividend will be payable to holders of record as they appear on our
stock register on such record dates as will be fixed by our board of directors
or a duly authorized committee of our board. Such record dates, however, will
not be more than 45 days nor less than 10 days before the dividend payment
dates. Dividends payable on the Class C preferred securities for any period
greater or less than a full dividend period will be computed on the basis of
twelve 30-day months, a 360-day year, and the actual number of days elapsed in
the period; provided, however, that in the event of a Conditional Exchange, any
accrued and unpaid dividends on the Class C preferred securities as of the time
of exchange will be deemed to be accrued and unpaid dividends on the Bank Class
C preferred securities.
The right of holders of Class C preferred securities to receive
dividends is noncumulative. If our board of directors does not declare a
dividend on the Class C preferred securities or declares less than a full
dividend in respect of any dividend period, you will have no right to receive
any dividend or a full dividend, as the case may be, for that dividend period,
and we will have no obligation to pay a dividend or to pay full dividends for
that dividend period, whether or not dividends are declared and paid for any
future dividend period with respect to the Class C preferred securities or the
common shares. If we fail to pay or declare and set aside for payment full
dividends on the Class C preferred securities and any Parity Stock for six
dividend periods, holders of the Class C preferred securities, voting together
as a class with the holders of other Parity Stock with the same voting rights,
will be entitled to elect two independent directors in addition to the directors
then in office. These voting rights are described in more detail under the
heading "Description of the Class C Preferred Securities-Voting Rights."
If full dividends on the Class C preferred securities for any dividend
period have not been declared and paid, or declared and a sum sufficient for
such payment has not been set apart for such payment, no dividends will be
declared or paid or set aside for payment and no other distribution will be
declared or made or set aside for payment upon any Junior Stock, nor will any
Junior Stock be redeemed, purchased, or otherwise acquired for any
consideration, nor will any monies be paid to or made available for a sinking
fund for the redemption of any such securities by us, except by conversion into
or exchange for other Junior Stock, until such time as dividends on all
outstanding Class C preferred securities have been:
- declared and paid for three consecutive dividend periods, and
- declared and paid or declared and a sum sufficient for such payment
has been set apart for payment for the fourth consecutive
dividend period.
When dividends are not paid in full on, or a sum sufficient for such
full payment is not set apart for, the Class C preferred securities and any
Parity Stock, all dividends declared upon the Class C preferred securities and
any Parity Stock will be declared pro rata. Thus, the amount of dividends
declared per Class C preferred security and such other Parity Stock will in all
cases bear to each other the same ratio that (a) full dividends per Class C
preferred security for the then-current dividend period, which will not include
any accumulation in respect of unpaid dividends for prior dividend period, and
(b) full dividends, including required or permitted accumulations, if any, on
such other series of capital stock, bear to each other.
Legal and regulatory limitations on the payment of dividends by the
Bank could also affect our ability to pay dividends to unaffiliated third
parties, including the holders of our Class C preferred securities. Regulatory
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approval is required prior to the Bank's declaration of any dividends in excess
of available retained earnings. The amount of dividends that may be declared
without regulatory approval is further limited to the sum of net income for the
current year and retained net income for the preceding two years, less any
required transfers to surplus or common stock. The Bank could, without
regulatory approval, declare dividends in 2001 of approximately $278.9 million
plus an additional amount equal to its net income through the date of
declaration in 2001. We are members of the Bank's consolidated group. Thus,
payment of common and preferred dividends by the Bank and/or any member of its
consolidated group to unaffiliated third parties, including our payment of
dividends to the holders of our Class C preferred securities, would require
regulatory approval if aggregate dividends on a consolidated basis exceed these
limitations.
Regulations of the OCC prohibit institutions such as the Bank from
making a "capital distribution," unless the institution is at least "adequately
capitalized" after the distribution. Capital distributions are defined to
include a transaction that the OCC determines, by order or regulation, to be "in
substance a distribution of capital." The OCC could seek to restrict our payment
of dividends on the Class C preferred securities under this provision if the
Bank were to fail to be "adequately capitalized."
Adequate capitalization is determined in relation to certain risk-based
capital ratio and leverage ratio guidelines issued by the OCC. Generally, a
financial institution's capital is divided into two tiers. Tier 1 capital
includes common equity, noncumulative perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, less non-qualifying
intangible assets such as goodwill and nonqualifying mortgage and non-mortgage
servicing assets. Tier 2 capital includes, among other things, cumulative and
limited-life preferred stock, hybrid capital instruments, mandatory convertible
securities, qualifying subordinated debt, and the allowance for loan and lease
losses, subject to certain limitations. Total capital is the sum of Tier 1
capital plus Tier 2 capital. The leverage ratio is the ratio of Tier 1 capital
to adjusted average total assets.
Currently, an institution is considered "adequately capitalized" if it
has a total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based
capital ratio of at least 4.0% and a leverage, or core capital, ratio of at
least 4.0% or at least 3% if the institution has been awarded the highest
supervisory rating. An institution is considered "well capitalized" if the
foregoing ratios are at least 10.0%, 6.0%, and 5.0%, respectively. At June 30,
2001, the Bank's total risk-based capital ratio was 10.57%, its Tier 1
risk-based capital ratio was 6.65%, and its leverage ratio was 6.64%. The Bank
currently intends to maintain its capital ratios in excess of the "well
capitalized" levels under the prompt corrective action regulations. However,
there can be no assurance that the Bank will be able to maintain such capital
levels.
CONDITIONAL EXCHANGE
Each of our Class C preferred securities will be exchanged for one
newly issued Bank Class C preferred security if such an exchange is directed by
the OCC in writing upon or after the occurrence of a Supervisory Event. A
Supervisory Event occurs when:
- the Bank becomes "undercapitalized" under prompt corrective action
regulations;
- the Bank is placed into conservatorship or receivership; or
- the OCC, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term.
If the OCC so directs upon the occurrence of a Supervisory Event, each holder of
our Class C preferred securities will be unconditionally obligated to surrender
to the Bank the certificates representing our Class C preferred securities of
such holder, and the Bank will be unconditionally obligated to issue to such
holder in exchange for our Class C preferred securities a certificate
representing Bank Class C preferred securities on a share-for-share basis. Any
of our Class C preferred securities purchased or redeemed by us prior to the
time of exchange will not be deemed outstanding and will not be subject to the
Conditional Exchange.
The exchange will occur as of 8:00 a.m. Eastern Time on the date for
such exchange set forth in the applicable OCC directive, or, if such date is not
set forth in the directive, as of 8:00 a.m. on the earliest possible date such
exchange could occur consistent with the directive, as evidenced by the issuance
by the Bank of a press release prior to such time. As of the time of exchange,
all of our Class C preferred securities will be deemed cancelled and exchanged
for Bank Class C preferred securities without any further action by us; all
rights of the holders of our Class C preferred securities as our shareholders
will cease; and the Bank will give notice of the exchange to the
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OCC. As a result of such exchange, each holder of our Class C preferred
securities will then be a holder of Bank Class C preferred securities.
We will mail notice of the issuance of an OCC directive after the
occurrence of a Supervisory Event to each holder of our Class C preferred
securities within 30 days, and the Bank will deliver to each such holder
certificates for Bank Class C preferred securities upon surrender of
certificates for our Class C preferred securities. Until such replacement
certificates are delivered or in the event such replacement certificates are not
delivered, certificates previously representing our Class C preferred securities
will be deemed for all purposes to represent Bank Class C preferred securities.
All corporate approvals necessary for the Bank to issue the Bank Class C
preferred securities as of the time of exchange will be completed prior to or
upon completion of this offering. Accordingly, once the OCC directs a
Conditional Exchange after the occurrence of a Supervisory Event, no action will
be required to be taken by holders of our Class C preferred securities, by the
Bank (other than to provide notice of the exchange to the OCC), or by us in
order to effect the exchange as of the time of exchange.
Holders of our Class C preferred securities, by purchasing such
securities, whether in this offering or in the secondary market after this
offering, will be deemed to have agreed to be bound by the unconditional
obligation to exchange our Class C preferred securities for Bank Class C
preferred securities upon the OCC's direction after the occurrence of a
Supervisory Event. Our articles of incorporation provide that the holders of our
Class C preferred securities will be unconditionally obligated to surrender such
securities. In accordance with a Conversion Agreement, between the Bank,
Holdings, and us, which we will sign on the date our Class C and Class D
preferred securities are issued, the Bank is unconditionally obligated to issue
Bank Class C preferred securities in exchange for our Class C preferred
securities upon the OCC's direction after the occurrence of a Supervisory Event.
Holders of our Class C preferred securities cannot exchange our Class C
preferred securities for Bank preferred securities voluntarily. Absent an OCC
directive after the occurrence of a Supervisory Event, no exchange of our Class
C preferred securities for Bank preferred securities will occur. Upon the
issuance of an OCC directive after the occurrence of a Supervisory Event, the
Bank Class C preferred securities to be issued as part of the Conditional
Exchange would constitute a newly issued series of preferred securities of the
Bank and would have the same terms and provisions with respect to dividends,
liquidation, and redemption, except with respect to a Special Event, as the
Class C preferred securities, and except that:
- the Bank Class C preferred securities would not be listed on any
national securities exchange or national quotation system;
- the Bank Class C preferred securities do not have any voting rights;
and
- the Bank Class C preferred securities do not have any right to elect
independent directors if dividends are missed.
Any accrued and unpaid dividends on our Class C preferred securities as
of the time of exchange would be deemed to be accrued and unpaid dividends on
the Bank Class C preferred securities. The Bank Class C preferred securities
would rank on an equal basis in terms of dividend payment and liquidation
preference with the Bank Class D preferred securities and any of the Bank's
then-outstanding preferred securities that rank on a parity with the Bank Class
C preferred securities. The Bank has registered the Bank Class C preferred
securities with the OCC pursuant to a prospectus, a copy of which is affixed as
Annex I to, and is a part of, this prospectus. Because the Bank has registered
the Bank Class C preferred securities with the OCC, the Bank Class C preferred
securities are not required to be registered with the SEC. Absent an OCC
directive after the occurrence of a Supervisory Event, however, the Bank will
not issue any Bank Class C preferred securities, although the Bank will be able
to issue preferred securities in classes or series other than Bank Class C
preferred securities. There can be no assurance as to the liquidity of the Bank
Class C preferred securities, if issued. In addition, since the Bank Class C
preferred securities will not be listed, it is highly unlikely that an active
public market for the Bank Class C preferred securities would develop or be
maintained.
Absent the occurrence of the exchange, holders of our Class C preferred
securities will have no dividend, liquidation preference, or other rights with
respect to any security of the Bank; such rights as are conferred by our Class C
preferred securities exist solely as to us.
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RANK
Our Class C preferred securities will rank senior to our common shares
and our Class B preferred securities and to all of our other Junior Stock, if
any. The Class C preferred securities will rank junior to our Senior Stock, if
any, as to dividend rights and rights upon liquidation, winding up, or
dissolution. As of the date of this prospectus, there are no shares of Senior
Stock authorized, issued, or outstanding. Our Class A preferred securities and
Class D preferred securities constitute Parity Stock with respect to the Class C
preferred securities.
We have the power to create and issue Junior Stock without any approval
or consent of the holders of Class C preferred securities. So long as any Class
C preferred securities remain outstanding, we may not issue Senior Stock without
the approval of the holders of at least two-thirds of the Class C preferred
securities. So long as any Class C preferred securities remain outstanding,
additional shares of Parity Stock may not be issued without the approval of a
majority of our Independent Directors.
VOTING RIGHTS
Holders of Class C preferred securities are entitled to 1/10th of one
vote per share on all matters to be voted on by shareholders, voting as a single
class with the holders of the common shares and the holders of any other class
of shares entitled to vote as a single class with the holders of the common
shares.
If full dividends on the Class C preferred securities and any Parity
Stock have not been paid for six consecutive dividend periods, the authorized
number of our directors will be increased by two. Subject to compliance with any
requirement for regulatory approval of, or non-objection to, persons serving as
directors, the holders of Class C preferred securities, voting together as a
class with the holders of any other Parity Stock upon which the same voting
rights as those of the Class C preferred securities have been conferred and are
irrevocable, will have the right to elect the two independent directors in
addition to the directors then in office at our next annual meeting of
shareholders. This right will continue at each subsequent annual meeting until
full dividends have been authorized, declared, and paid for three consecutive
dividend periods and authorized and declared and paid or a sum sufficient for
payment has been set apart for payment for the fourth consecutive dividend
period on the Class C preferred securities and any other Parity Stock.
The term of such additional independent directors will terminate, and
the total number of directors will be decreased by two, at the first annual
meeting of shareholders after the payment or the authorization or declaration
and setting aside for payment of full dividends on the Class C preferred
securities and any other Parity Stock for four consecutive dividend periods or,
if earlier, upon the redemption of all Class C preferred securities or upon a
Conditional Exchange. After the term of such additional independent directors
terminates, the holders of the Class C preferred securities and the holders of
any other Parity Stock will not be able to elect additional directors unless
dividends on the Class C preferred securities and any other Parity Stock have
again not been paid for six consecutive dividend periods.
Any independent director elected by the holders of Class C preferred
securities and any Parity Stock may only be removed by the vote of the holders
of record of the outstanding Class C preferred securities and any Parity Stock
entitled to vote, voting together as a single class without regard to class or
series, at a meeting of our shareholders called for that purpose. As long as
dividends on the Class C preferred securities and any other Parity Stock have
not been paid for six consecutive dividend periods, (1) any vacancy created by
the removal of any such director may be filled by the vote of the holders of the
outstanding Class C preferred securities and any other Parity Stock entitled to
vote, voting together as a single class without regard to class or series, at
the same meeting at which such removal is considered, and (2) any other vacancy
in the office of any such director as a result of the director's death or
resignation or for any other reason may be filled by an instrument in writing
signed by any such remaining director and filed with us.
So long as any Class C preferred securities are outstanding, we will
not, without the consent or vote of the holders of at least two-thirds of the
outstanding Class C preferred securities, voting separately as a class:
- amend, alter, or repeal or otherwise change any provision of our
articles of incorporation, including the terms of the Class C
preferred securities, if such amendment, alteration, repeal,
or change would materially and adversely affect the
preferences, conversion, or other rights, voting powers,
restrictions,
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limitations as to dividends or other distributions,
qualifications, or terms or conditions of redemption of the
Class C preferred securities,
- authorize, create, or increase the authorized amount of or issue
any class or series of any of our equity securities, or any
warrants, options, or other rights exercisable for or
convertible or exchangeable into any class or series of any of
our equity securities, ranking senior to the Class C preferred
securities, either as to dividend rights or rights on our
liquidation, dissolution, or winding up;
- effect our consolidation, conversion, or merger with or into, or a
share exchange with, another entity except that we may
consolidate or merge with or into, or enter into a share
exchange with, another entity if:
- such entity is an entity that is controlled by or under common
control with the Bank;
- such entity is a corporation, business trust, or other
entity organized under the laws of the United States or a
political subdivision of the United States that is not
regulated as an investment company under the Investment
Company Act and that, according to an opinion of counsel
rendered by a firm experienced in such matters, is a REIT for
United States federal income tax purposes;
- such other entity expressly assumes all of our obligations
and commitments pursuant to such consolidation, merger, or share
exchange;
- the outstanding Class C preferred securities are exchanged
for or converted into shares of the surviving entity having
preferences, limitations, and relative voting and other rights
substantially identical to those of the Class C preferred
securities, including limitations on personal liability of the
shareholders;
- after giving effect to such merger, consolidation, or share
exchange, no breach, or event which, with the giving of notice
or passage of time or both, could become a breach, by us of
our obligations under our articles of incorporation will have
occurred and be continuing; and
- we will have received written notice from each of the rating
agencies and delivered a copy of such written notice to the
transfer agent confirming that such merger, consolidation, or
share exchange will not result in a reduction of the rating
assigned by any of such rating agencies to the Class C
preferred securities or the preferred interests of any
surviving corporation, trust, or entity issued in replacement
of the Class C preferred securities.
As a condition to effecting any such merger, consolidation, or share
exchange, we will deliver to the transfer agent and cause to be
mailed to each record holder of Class C preferred securities,
at least 30 days prior to such transaction becoming effective,
a notice describing such merger, consolidation, or share
exchange, together with a certificate of one of our executive
officers and an opinion of counsel, each stating that such
merger, consolidation, or share exchange complies with the
requirements of our articles of incorporation and that all
conditions precedent provided for in our articles of
incorporation relating to such transaction have been complied
with.
The creation or issuance of Parity Stock or Junior Stock, or an
amendment to our articles of incorporation that increases the number of
authorized preferred securities, Class C preferred securities, Junior Stock, or
Parity Stock, will not be deemed to be a material and adverse change requiring a
vote of the holders of Class C preferred securities.
Our articles of incorporation provide certain covenants in favor of the
holders of the Class C preferred securities. Except with the consent or
affirmative vote of the holders of at least two thirds of the Class C preferred
securities, voting as a separate class, we agree not to:
- make or permit to be made any payment to the Bank or its
affiliates relating to our Indebtedness or beneficial
interests in us when we are precluded, as described under the
subheading "Dividends" above, from making payments in respect
of our common shares or other Junior Stock, or make such
payment or permit such payment to be made in anticipation of
any liquidation, dissolution, or winding up;
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- incur Indebtedness at any time other than certain Permitted
Indebtedness;
- pay dividends on our common shares unless our FFO for the
four prior fiscal quarters equals or exceeds 150% of the amount
that would be required to pay full annual dividends on the Class
C preferred securities as well as any other Parity Stock, except
as may be necessary to maintain our status as a REIT;
- make any payment of interest or principal with respect to
our Indebtedness to the Bank or its affiliates unless FFO for
the four prior fiscal quarters equals or exceeds 150% of the
amount that would be required to pay full annual dividends on
the Class C preferred securities as well as any other Parity
Stock, except as may be necessary to maintain our status as a
REIT;
- amend or otherwise change our policy of reinvesting the
proceeds of our assets in other interest-earning assets such
that our FFO over any period of four fiscal quarters will be
anticipated to equal or exceed 150% of the amount that would
be required to pay full annual dividends on the Class C
preferred securities as well as any other Parity Stock, except
as may be necessary to maintain our status as a REIT;
- issue any additional common shares in an amount that would
result in the Bank or its affiliates owning less than 100% of
the outstanding common shares; or
- remove "Huntington" from our name unless the name of either
the Bank or Huntington Bancshares changes and we need to make
a change to our name to be consistent with the new group name.
REDEMPTION
Except upon the occurrence of a Tax Event, an Investment Company Act
Event, or a Regulatory Capital Event, the Class C preferred securities will not
be redeemable prior to [_____], 2021. On or after such date, we may redeem the
Class C preferred securities for cash, in whole or in part, at any time and from
time to time at our option with the prior approval of the OCC at the redemption
price of $25.00 per share, plus authorized, declared, and unpaid dividends to
the date of redemption, without interest.
After [_____], 2021, our board of directors may determine that we
should redeem fewer than all the outstanding Class C preferred securities. In
that event, the securities to be redeemed will be determined by lot, pro rata,
or by such other method as our board of directors in its sole discretion
determines to be equitable. The method selected by our board must satisfy any
applicable requirements of The Nasdaq Stock Market or any securities exchange on
which Class C preferred securities are then listed. Any such partial redemption
can only be made with the prior approval of the OCC.
Prior to [_________], 2021, upon the occurrence of a Tax Event, an
Investment Company Act Event, or a Regulatory Capital Event, with the prior
approval of the OCC, we have the right to redeem the Class C preferred
securities, in whole, but not in part, at a redemption price of $25.00 per
share, plus all authorized, declared, and unpaid dividends for the then-current
dividend period to the date of redemption, without interest.
"Tax Event" means the receipt by us of an opinion of counsel, rendered
by a law firm experienced in such matters, in form and substance satisfactory to
us, to the effect that there is a significant risk that dividends paid or to be
paid by us with respect to our capital stock are not or will not be fully
deductible by us for United States federal income tax purposes or that we are or
will be subject to additional taxes, duties, or other governmental charges, in
an amount we reasonably determine to be significant as a result of:
- any amendment to, clarification of, or change in, the laws,
treaties, or related regulations of the United States or any
of its political subdivisions or their taxing authorities
affecting taxation, or
- any judicial decision, official administrative
pronouncement, published or private ruling, technical advice
memorandum, Chief Counsel Advice, as such term is defined in
the Internal Revenue Code, regulatory procedure, notice, or
official announcement, which we refer to collectively as
Administrative Actions,
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which amendment, clarification, or change is effective, or such official
pronouncement or decision is announced, on or after the date of issuance of the
Class C preferred securities.
"Investment Company Act Event" means the receipt by us of an opinion of
counsel, rendered by a law firm experienced in such matters, which states that
there is a significant risk that we are or will be considered an "investment
company" that is required to be registered under the Investment Company Act, as
a result of the occurrence of a change in law or regulation or a written change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency, or regulatory authority.
"Regulatory Capital Event" means our determination, based on an opinion
of counsel rendered by a law firm experienced in such matters, that there is a
significant risk that the Class C preferred securities will no longer constitute
Tier 1 capital of the Bank (other than as a result of limitations on the portion
of Tier 1 capital that may consist of minority interests in subsidiaries of the
Bank) for purposes of the capital adequacy guidelines or policies of the OCC, or
its successor as the Bank's primary federal banking regulator, as a result of:
- any amendments to, clarification of, or change in applicable laws
or related regulations or official interpretations or policies,
or
- any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations.
Dividends will cease to accrue on the Class C preferred securities
called for redemption on and as of the date fixed for redemption and such Class
C preferred securities will be deemed to cease to be outstanding, provided that
the redemption price, including any authorized and declared but unpaid dividends
to the date fixed for redemption, without interest, has been duly paid or
provision has been made for such payment.
Notice of any redemption will be mailed at least 30 days, but not more
than 60 days, prior to any redemption date to each holder of Class C preferred
securities to be redeemed at such holder's registered address.
Our ability to redeem any Class C preferred securities is subject to
compliance with applicable regulatory requirements, including the prior approval
of the OCC, relating to the redemption of capital instruments. Under current
policies of the OCC, such approval would be granted only if the redemption were
to be made out of the proceeds of the issuance of another capital instrument or
if the OCC were to determine that the conditions and circumstances of Huntington
Bancshares and the Bank warrant the reduction of a source of permanent capital.
RIGHTS UPON LIQUIDATION
In the event we voluntarily or involuntarily liquidate, dissolve, or
wind up, the holders of the Class C preferred securities at the time outstanding
will be entitled to receive liquidating distributions in the amount of $25.00
per share, plus any authorized, declared, and unpaid dividends for the current
period to the date of liquidation, out of our assets legally available for
distribution to our shareholders, before any distribution of assets is made to
holders of Junior Stock and subject to the rights of the holders of any class or
series of Senior Stock upon liquidation and the rights of our general creditors.
After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Class C preferred securities will have
no right or claim to any of our remaining assets. In the event that, upon any
such voluntary or involuntary liquidation, dissolution, or winding up, our
available assets are insufficient to pay the amount of the liquidation
distributions on all outstanding Class C preferred securities and the
corresponding amounts payable on any other Parity Stock, then the holders of the
Class C preferred securities and any other Parity Stock will share ratably in
any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
For such purposes, our consolidation or merger with or into any other
entity, the consolidation or merger of any other entity with or into us, or the
sale of all or substantially all of our property or business, will not be deemed
to constitute our liquidation, dissolution, or winding up.
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INDEPENDENT DIRECTOR APPROVAL
Our articles of incorporation require that, so long as any Class C
preferred securities are outstanding, certain actions by us be approved by a
majority of our Independent Directors. In order to be considered "independent,"
a director must not be one of our current directors, officers, or employees, or
a current director, officer, or employee of Huntington Bancshares, the Bank,
Holdings, or any of their affiliates. In addition, any members of our board of
directors elected by holders of preferred securities, including the Class C
preferred securities, will be deemed to be Independent Directors for purposes
of approving actions requiring the approval of a majority of the Independent
Directors.
The actions which may not be taken without the approval of a majority
of our Independent Directors include:
- the issuance of additional Parity Stock,
- the incurrence of Indebtedness other than Permitted
Indebtedness,
- the termination or modification of, or the election not to renew, the
participation agreement, the subparticipation agreement, or the
subcontracting of any duties under these agreements to third parties
unaffiliated with the Bank,
- a change in our a policy of limiting authorized investments which are
not Qualifying Interests to no more than 20% of the value of our total
assets or a change in the investment policy that would be inconsistent
with our exemption under the Investment Company Act;
- any consolidation, conversion, or merger or share exchange that is not
tax-free to holders of the Class C preferred securities unless such
transaction is required to be approved by a 2/3rd vote of the holders
of Class C preferred securities;
- the determination to revoke our REIT status or any amendment to the
REIT-related transfer restrictions on our securities, or
- our dissolution, liquidation, or termination prior to [_____, 2021.]
Our articles of incorporation require that, in assessing the benefits
to us of any proposed action requiring their consent, the Independent Directors
take into account the interests of holders of both the common shares and the
preferred securities, including holders of the Class C preferred securities. Our
articles of incorporation provide that in considering the interests of the
holders of preferred securities, including the holders of the Class C preferred
securities, the Independent Directors owe the same duties which the Independent
Directors owe to the holders of common shares.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For information regarding restrictions on ownership of the Class C
preferred securities, see "Description of Capital Stock--Restrictions on
Ownership and Transfer."
DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms of our capital stock does
not purport to be complete and is subject in all respects to the applicable
provisions of the Ohio corporate law and our amended and restated articles of
incorporation and bylaws.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock consists of:
- 14,000,000 common shares, all of which are outstanding,
- 1,000 Class A preferred securities, all of which are outstanding,
- 500,000 Class B preferred securities, of which 400,000 are
outstanding,
- 2,000,000 Class C preferred securities, all of which are
outstanding, and
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- 14,000,000 Class D preferred securities, all of which are
outstanding, and
- 10,000,000 blank check preferred securities, none of which are
outstanding.
COMMON STOCK
General. All outstanding common shares are fully paid and
non-assessable. There is no established trading market for our common shares,
all of which is owned by Holdings and Huntington Bancshares. Holders of common
shares have no preemptive rights. There are no redemption or sinking fund
provisions with respect to the common shares.
Voting. Holders of common shares are entitled to one vote per share on
all matters to be voted on by shareholders. There are no cumulative voting
rights. As the holder of substantially all of our common shares, Holdings will
be able, subject to the rights of the holder of preferred securities, to elect
and remove directors, amend our articles of incorporation, and approve other
actions requiring shareholder approval.
Dividends. The holders of common shares are entitled to receive such
dividends, if any, as may be declared from time to time by our board of
directors, subject to any preferential dividend rights of holders of any
outstanding preferred securities. In order to remain qualified as a REIT, we
must distribute annually at least 90% of our annual REIT Taxable Income to
shareholders.
Liquidation Rights. Upon our dissolution or liquidation, holders of
common shares will be entitled to receive all of our assets which are available
for distribution to our shareholders, subject to any preferential rights of
holders of then outstanding preferred securities.
CLASS A PREFERRED SECURITIES
GENERAL. The Class A preferred securities rank senior to the Class B
preferred securities and the common shares as to dividends and in liquidation.
Holders of the Class A preferred securities have no preemptive rights with
respect to any shares of our capital stock. The Class A preferred securities are
not convertible into any of our other securities.
VOTING. Holders of the Class A preferred securities are not entitled to
vote at shareholder meetings and are not entitled to notice of such meetings,
except where specifically required by law.
DIVIDENDS. The holders of Class A preferred securities are entitled to
receive annual dividends in the amount of $80.00 per share. So long as any Class
A preferred securities are outstanding, no dividend or other distribution may be
declared or paid on, and no repurchase or redemption may be made with respect
to, the Class B preferred securities or the common shares unless all dividends
on the Class A preferred securities for all past annual dividend periods have
been paid and the full dividend on all Class A preferred securities for the then
applicable dividend period have been paid or declared and set apart for payment.
LIQUIDATION RIGHTS. If we voluntarily or involuntarily liquidate,
dissolve, or wind up, the holders of Class A preferred securities will be
entitled to receive out of our assets available for distribution to
shareholders, and before any amount is paid or distributed to holders of common
shares, Class B preferred securities, or any other class of junior preferred
securities, a liquidation amount of $1,000 per share, plus any accrued but
unpaid dividends. Thereafter, holders of Class A preferred securities are not
entitled to any further payment upon our involuntary liquidation, dissolution,
or winding up; however, upon our voluntary liquidation, dissolution, or winding
up, the holders of Class A preferred securities will share ratably with the
common shares in the distribution of available net assets after the payment of
all preferential amounts.
REDEMPTION. We can redeem the Class A preferred securities in whole or
in part at any time at $1,000 per share plus accrued and unpaid dividends.
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CLASS B PREFERRED SECURITIES
GENERAL. The Class B preferred securities rank junior to the Class A
preferred securities, and senior to the common shares, as to dividends and
liquidation rights. Holders of the Class B preferred securities have no
preemptive rights with respect to any shares of our capital stock.
VOTING. Holders of the Class B preferred securities are not entitled to
vote at shareholder meetings and are not entitled to notice of such meetings,
except as otherwise required by law.
DIVIDENDS. The holders of the Class B preferred securities are entitled
to receive dividends at a variable rate based on LIBOR. Dividends on the Class B
preferred securities are declared quarterly and payable annually. Dividends are
not cumulative; however, so long as any Class B preferred securities remain
outstanding, no dividend, except a dividend payable in common shares, or other
distribution on the common shares and no repurchase or redemption of the common
shares may be made in a particular calendar year unless the full dividend on the
Class B preferred securities for all calendar quarters within such year to the
date of such action have been paid or declared and set apart for payment.
LIQUIDATION RIGHTS. If we voluntarily or involuntarily liquidate,
dissolve, or wind up, the holders of the Class B preferred securities will be
entitled to receive out of our assets available for distribution to
shareholders, and before any amount is paid or distributed to holders of common
shares, a preferential liquidation amount of $1,000 per share, plus any accrued
and unpaid dividends. Holders of Class B preferred securities are not entitled
to any further payment with respect to those securities.
REDEMPTION. We can redeem the Class B preferred securities at any time
at $1,000 per share, plus the full accrued but unpaid dividend for the then
current dividend period.
CONVERSION. By agreement, dated December 28, 2000, among the Bank, HPC
Holdings-II, Inc. which is the sole owner of the Class B preferred securities,
and us, the Class B preferred securities are convertible into Class B preferred
securities of the Bank if the OCC may direct the Bank in writing to cause the
Class B preferred securities to be converted into Class B preferred securities
of the Bank upon the happening of a Supervisory Event. In the event the OCC
directs the Bank to cause the conversion,
- the holder of the Class B preferred securities must immediately
exchange its Class B preferred securities for Class B preferred
securities of the Bank, on a share for share basis,
- the Bank must issue the Bank's Class B preferred securities to such
holder, and
- we will promptly pay to the holder any and all accrued but unpaid
dividends on the Class B preferred securities through the date of
the exchange.
CLASS D PREFERRED SECURITIES
GENERAL. The Class D preferred securities rank senior to the Class B
preferred securities and the common shares, and on parity with the Class A and
Class C preferred securities, as to dividends and liquidation. Holders of the
Class D preferred securities have no preemptive rights with respect to any
shares of our capital stock.
VOTING. Holders of the Class D preferred securities are entitled to
1/10th of one vote per share on all matters to be voted on by shareholders,
voting as a single class with the holders of the common shares and the holders
of any other class of shares entitled to vote as a single class with the holders
of the common shares. In addition, the affirmative vote or written consent of
the holders of two-thirds of the outstanding Class D preferred securities,
voting as a separate class, is required in order to:
- amend, alter, repeal, or otherwise change any provision of our
articles of incorporation, including the terms of the Class D
preferred securities, if such amendment, alteration, repeal,
or change would materially and adversely affect the
preferences, conversion, or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications, or terms or conditions of
redemption of the Class D preferred securities,
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- authorize, create, or increase the authorized amount of or issue any
class or series of any of our equity securities, or any
warrants, options, or other rights exercisable for or
convertible or exchangeable into any class or series of any of
our equity securities, ranking senior to the Class D preferred
securities, either as to dividend rights or rights on our
liquidation, dissolution, or winding up,
- effect our consolidation, conversion, or merger with or into, or a
share exchange with, another entity except that we may
consolidate or merge with or into, or enter into a share
exchange with, another entity if:
- such entity is an entity that is controlled by or under common
control with the Bank;
- such entity is a corporation, business trust, or other entity
organized under the laws of the United States or a political
subdivision of the United States that is not regulated as an
investment company under the Investment Company Act and that,
according to an opinion counsel rendered by a firm experienced
in such matters, is a REIT for United States federal income
tax purposes;
- such entity expressly assumes all of our obligations and commitments
pursuant to such consolidation, merger, or share exchange;
- the outstanding Class D preferred securities are exchanged for or
converted into shares of the surviving entity having
preferences, limitations, and relative voting and other rights
substantially identical to those of the Class D preferred
securities, including limitations on personal liability of the
holders;
- after giving effect to such merger, consolidation, or share
exchange, no breach, or event which, with the giving of notice
or passage of time or both, could become a breach, of our
obligations under our articles of incorporation will have
occurred and be continuing; and
- we will have received written notice from each of the rating
agencies and delivered a copy of such written notice to the
transfer agent confirming that such merger, consolidation, or
share exchange will not result in a reduction of the rating
assigned by any of such rating agencies to the Class D
preferred securities or the preferred interests of any
surviving corporation, trust, or entity issued in replacement
of the Class D preferred securities.
Holders of the Class D preferred securities, voting together as a class
with the holders of the Class C preferred securities and any other Parity Stock
upon which the same voting rights as those of the Class D preferred securities
have been conferred and are irrevocable, will also have the right to elect two
independent directors if six consecutive dividends are missed. The term of the
independent directors will terminate after four consecutive quarterly dividends
are paid in full on the Class D preferred securities.
DIVIDENDS. The holders of the Class D preferred securities are entitled
to receive dividends at a variable rate equal to LIBOR plus [____]. Dividends on
the Class D preferred securities will be payable, if authorized and declared,
quarterly in arrears on March 31, June 30, September 30, and December 31 of each
year or, if any such day is not a business day, on the next business day, unless
the next business day falls in a different calendar year, in which case the
dividend will be paid on the preceding business day, commencing on [__________].
Dividends are not cumulative. If full dividends are not paid on the Class D
preferred securities for a quarterly dividend period, the payment of dividends
on the common shares or other shares ranking junior to the Class D preferred
securities will be prohibited for that period and at least the following three
quarterly dividend periods.
When dividends are not paid in full on, or a sum sufficient for such
full payment is not set apart for, our Class D preferred securities, our Class C
preferred securities, and any other Parity Stock, all dividends declared upon
our Class D preferred securities, our Class C preferred securities, and any
Parity Stock will be declared pro rata. Thus, the amount of dividends declared
per Class D preferred security and such other Parity Stock will in all cases
bear to each other the same ratio that (a) full dividends per Class D preferred
security for the then-current dividend period, which will not include any
accumulation in respect of unpaid dividends for prior dividend period, and (b)
full dividends, including required or permitted accumulations, if any, on such
other series of capital stock, bear to each other.
LIQUIDATION RIGHTS. If we voluntarily or involuntarily liquidate,
dissolve, or wind up, the holders of the Class D preferred securities will be
entitled to receive out of our assets legally available for distribution to
shareholders, and before any amount is paid or distributed to holders of common
shares, Class B preferred
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securities, or any other class of Junior Stock, a liquidation amount of $25.00
per share, plus any accrued and unpaid dividends for the current period only.
Holders of Class D preferred securities are not entitled to further payment with
respect to those shares.
REDEMPTION. Except upon the occurrence of a Tax Event, an Investment
Company Act Event, or a Regulatory Capital Event, the Class D preferred
securities will not be redeemable prior to [____________], 2006. On or after
such date, we may redeem the Class D preferred securities for cash, in whole or
in part, at any time and from time to time at our option with the prior approval
of the OCC at the redemption price of $25.00 per share, plus accrued and unpaid
dividends for the current period only.
CONDITIONAL EXCHANGE. Upon the occurrence of a Supervisory Event and at
the direction of the OCC, each Class D preferred security will be exchanged for
one Class D preferred security of the Bank. The Bank preferred securities will
be noncumulative, perpetual, nonvoting preferred stock of the Bank ranking pari
passu upon issuance with the most senior preferred stock of the Bank then
outstanding.
ABILITY TO ISSUE ADDITIONAL PREFERRED SECURITIES
In addition to the Class A, Class B, Class C, and Class D preferred
securities, our articles of incorporation authorize our board of directors to
issue up to 10,000,000 preferred securities from time to time in one or more
series with 1/10th vote per share and with such other designations, preferences,
conversion, or other rights, restrictions, limitations as to dividends or other
distributions, qualifications, and terms and conditions of redemption as are
determined by our board of directors without shareholder approval. The specific
terms of a particular class or series of preferred securities which is issued,
if any, will be described in an amendment to our articles of incorporation
relating to that class or series. As of the date of this prospectus, we have no
present plans to issue any other preferred securities.
We believe that the power of our board of directors to issue additional
authorized but unissued preferred securities and to classify or reclassify
unissued preferred securities and cause us to issue such classified or
reclassified shares of stock will provide us with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional securities will be available for
issuance without further action by our shareholders, unless such action is
required by applicable law or the rules of The Nasdaq Stock Market, except that
as long as any Class A, Class B, Class C, or Class D preferred securities remain
outstanding:
- additional preferred securities ranking senior to the Class A, Class
B, Class C, and Class D preferred securities may not be issued
without the approval of the holders of at least two-thirds of
the Class B, Class C, and Class D preferred securities, each
voting as a separate class, and
- additional preferred securities ranking on a parity with the Class C
and Class D preferred securities may not be issued without the
approval of the Independent Directors.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
To qualify as a REIT under the Internal Revenue Code:
- No more than 50% of the value of our outstanding shares of capital
stock may be owned, directly or indirectly, by five or fewer
individuals during the last half of a taxable year, other than
the first year. This is known as the Five or Fewer Test.
- Our capital stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year or during a
proportionate part of a shorter taxable year, other than the
first year. This is known as the One Hundred Persons Test.
Neither the ownership by Holdings and Huntington Bancshares of 100% of our
common shares nor the ownership by Holdings of 100% of the Class C and Class D
preferred securities will adversely affect our REIT qualification because each
shareholder of Huntington Bancshares, whose capital stock is widely held, counts
as a separate beneficial owner of us for purposes of the Five or Fewer Test.
Further, our amended and restated articles of incorporation contain restrictions
on the acquisition of preferred securities which are intended to ensure
compliance with the One Hundred Persons Test. These restrictions provide that,
if any transfer of preferred securities would
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cause us to be beneficially owned by fewer than 100 persons, such transfer will
be null and void and the intended transferee will acquire no rights to the
securities.
Consistent with our intention to reduce the likelihood that our status
as a REIT is jeopardized, our amended and restated articles of incorporation
provide that, subject to certain exceptions, no individual or entity, other than
the Bank or an affiliate of the Bank, may own, or be deemed to own by virtue of
the attribution rules of the Internal Revenue Code, more than a specified
ownership limit. The ownership limit prohibits any person, subject to certain
exceptions, from owning or being deemed to own by virtue of the attribution
rules more than 9.2% of the aggregate initial liquidation value of our issued
and outstanding preferred securities, including our Class C preferred
securities.
Although the Five or Fewer Test references the aggregate value of all
shares of our capital stock, the ownership limit has been established with
reference to the aggregate initial liquidation preference of the outstanding
preferred securities. If (1) the relative values of our common shares and any
outstanding preferred securities, or (2) the relative values of the different
series or classes of preferred securities were to change significantly, there is
a risk that the Five or Fewer Test would be violated notwithstanding compliance
with the ownership limit. Although we believe that it is unlikely that the
relative value of our common shares will decrease by an amount sufficient to
cause a violation of the Five or Fewer Test, there can be no assurance that such
a change in value will not occur.
The ownership of our common shares or the transfer of common and/or
preferred securities of Huntington Bancshares to an entity which is considered
an individual for purposes of the Five or Fewer Test could, in certain
circumstances, cause us to fail the Five or Fewer Test and, consequently, to
fail to qualify as a REIT. Upon the receipt of a ruling from the IRS or the
advice of counsel satisfactory to our board of directors, our board may, but
will not be required to, waive the ownership limit with respect to an individual
or entity if such individual's or entity's proposed ownership will not then or
in the future jeopardize our status as a REIT.
If any purported transfer of our preferred securities or any other
event would otherwise result in any person violating the stock ownership limit,
then any such purported transfer will be void and of no force or effect with
respect to the purported transferee as to that number of securities in excess of
the applicable limit and such prohibited transferee will acquire no right or
interest in such excess preferred securities.
Our amended and restated articles of incorporation provide that any
excess securities will automatically be transferred, by operation of law, to a
trust for the benefit of a charity to be named by us as of the day prior to the
day the prohibited transfer took place. Any dividends paid on Class C preferred
securities prior to the discovery of the prohibited transfer must be repaid by
the original transferee to us and by us to the trustee. Subject to applicable
law, any vote of the shares while the excess securities were held by the
original transferee prior to our discovery of the prohibited transfer will be
void and the original transferee will be deemed to have given its proxy to the
trustee. Any unpaid distributions with respect to the original transferee will
be rescinded as void. In liquidation, the original transferee's ratable share of
our assets would be limited to the price paid by the original transferee for the
excess securities or, if no value was given, the price per share equal to the
closing market price on the date of the purported transfer. The trustee of the
trust will sell the securities within 20 days to any person whose ownership is
not prohibited. As a result of the sale, the interest of the trust will
terminate. Proceeds of the sale will be paid to the original transferee up to
its purchase price or, if the original transferee did not purchase the
securities, the value on its date of acquisition, and any remaining proceeds
will be paid to a charity to be named by us.
All certificates representing our preferred securities will bear a
legend referring to the restrictions described above.
The ownership limit provisions will not be automatically removed even
if the REIT Requirements are changed so as to eliminate any ownership
concentration limitation or if the ownership concentration limitation is
increased. Our amended and restated articles of incorporation may not be amended
to alter, change, repeal, or amend any of the ownership limit provisions without
the prior approval of a majority of our Independent Directors. The foregoing
restrictions on transferability and ownership will not apply, however, if our
board of directors, including a majority of our Independent Directors,
determines that it is no longer in our best interest or the best interests of
our shareholders to attempt to qualify, or continue to qualify, as a REIT.
Our articles of incorporation require that any person who beneficially
owns at least 1% (or such lower percentage as may be required by the Internal
Revenue Code or the Treasury Regulations) of the outstanding
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preferred securities of any class or series must provide certain information to
us within 30 days of June 30 and December 31 of each year. In addition, each
shareholder will be required to disclose to us in writing upon demand such
information as we may request in order to determine the effect, if any, of such
shareholder's actual and constructive ownership on our status as a REIT and to
ensure compliance with the ownership limit.
ANTI-TAKEOVER STATUTES
Ohio Control Share Acquisition Act
Section 1701.831 of the Ohio Revised Code, known as the "Ohio Control
Share Acquisition Act," provides that notice and informational filings and
special shareholder meetings and voting procedures must occur prior to
consummation of a proposed control share acquisition. A control share
acquisition means any acquisition of shares of an issuing public corporation
that would entitle the acquirer, directly or indirectly, alone or with others,
to exercise or direct the voting power of the issuing public corporation in the
election of directors within any of the following ranges:
- one-fifth or more but less than one-third of the voting power;
- one-third or more but less than a majority of the voting power; or
- a majority or more of the voting power.
An issuing public corporation means an Ohio corporation with fifty or
more shareholders that has its principal place of business, principal executive
offices, or substantial assets within the State of Ohio, and as to which no
valid close corporation agreement exists. Assuming compliance with the notice
and informational filing requirements prescribed by the Ohio Control Share
Acquisition Act, the proposed control share acquisition may take place only if
the acquisition is approved at a duly convened special meeting of shareholders,
at which at least a majority of the voting power is represented in person or by
proxy, by both:
- a majority of the voting power of the corporation represented in
person or by proxy at the meeting, and
- a majority of the voting power at the meeting exercised by
shareholders, excluding:
- the acquiring shareholder,
- officers of the corporation elected or appointed by the
directors of the corporation,
- employees of the corporation who are also directors of the
corporation, and - persons who acquire specified amounts of
shares after the first public disclosure of the proposed
control share acquisition.
The Ohio Control Share Acquisition Act does not apply to a corporation
whose articles or regulations opt out of the Act. The Ohio Control Share
Acquisition Act applies to us since we have not taken any corporate action to
opt out of it.
Ohio Merger Moratorium Statute
Chapter 1704 of the Ohio Revised Code, known as the "Ohio Merger
Moratorium Statute," prohibits certain business combinations and transactions
between an issuing public corporation and an interested shareholder. An
interested shareholder is any beneficial owner of shares representing 10% or
more of the voting power of a corporation in the election of directors.
For three years after a person becomes an interested shareholder, the
following transactions between the corporation and the interested shareholder or
persons related to such shareholder are prohibited:
- the sale or acquisition of an interest in assets meeting thresholds
specified in the statute,
- mergers and similar transactions,
- a voluntary dissolution,
- the issuance or transfer of shares or any rights to acquire shares
having a fair market value at least equal to 5% of the
aggregate fair market value of the corporation's outstanding
shares,
- a transaction that increases the interested shareholder's
proportionate ownership of the corporation, and
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- any other benefit that is not shared proportionately by all
shareholders.
After the three-year period, transactions between the corporation and
the interested shareholder are permitted if:
- the transaction is approved by the holders of shares with at least
two-thirds of the voting power of the corporation in the
election of directors (or a different proportion specified in
the corporation's articles), including at least a majority of
the outstanding shares after excluding shares controlled by
the interested shareholder, or
- the business combination results in shareholders, other than the
interested shareholder, receiving a "fair market value" for
their shares determined by the method described in the
statute.
The prohibitions and limitations of the Ohio Merger Moratorium Statute
will not apply if the board of directors of the issuing public corporation
approves either (1) the transaction or (2) the acquisition of the corporation's
shares that resulted in the person becoming an interested shareholder, in each
case before the interested shareholder became such. A corporation may elect not
to be covered by the Ohio Merger Moratorium Statute by the adoption of an
appropriate amendment to its articles. The Ohio Merger Moratorium Statute
applies to us since we have not taken any corporate action to opt out of it.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax
considerations regarding the offering. This summary is based on current federal
income tax law, which is subject to change, with possible retroactive effect.
This summary does not address all aspects of taxation that may be relevant in
the particular circumstances of each shareholder or to certain types of
shareholders who are subject to special treatment under the federal income tax
laws, such as insurance companies, tax-exempt entities, financial institutions,
broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States, except to the extent specifically discussed
below. This summary is for general information only and is not tax advice.
Porter, Wright, Morris & Arthur LLP, acting as our counsel in
connection with the offering, has rendered an opinion as to our qualification
and taxation as a REIT which is described in more detail below under the heading
"Taxation as a REIT." Porter, Wright, Morris & Arthur LLP has also reviewed this
summary of federal income tax considerations and has rendered an opinion that
the information in the summary, to the extent it relates to matters of law or
legal conclusions, is accurate in all material respects. Investors should be
aware, however, that opinions of counsel are not binding on the IRS or any
court. It must be emphasized that the opinion of Porter, Wright, Morris & Arthur
LLP is based upon various assumptions and conditioned upon certain
representations which we made as to factual matters, including representations
regarding the nature of our assets and income and the past and future conduct of
our business. Moreover, the qualification and taxation as a REIT depends on our
ability to meet on a continuing basis, through actual annual operating results,
distribution levels, stock ownership, and the various qualification tests
imposed under the Internal Revenue Code discussed below. Porter, Wright, Morris
& Arthur LLP has not reviewed and will not review compliance with those tests on
a continuing basis and our ability to comply with those tests may not be fully
within our control. Accordingly, we cannot assure that the particular facts or
actual results of our operations for any particular taxable year will satisfy
any such requirements. The tax consequences of failure to qualify as a REIT are
discussed below under the subheading "Failure to Qualify."
EACH PROSPECTIVE INVESTOR IS ENCOURAGED TO CONSULT HIS OR HER TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE CLASS C PREFERRED SECURITIES AND OF OUR ELECTION TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION AS A REIT
GENERAL. In the opinion of Porter, Wright, Morris & Arthur LLP,
commencing with our taxable year ended
December 31, 1998:
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- we have qualified for taxation as a REIT under the applicable
provisions of the Internal Revenue Code, and
- our proposed method of operation will enable us to continue to
qualify as a REIT under the applicable provisions of the
Internal Revenue Code.
The requirements to qualify as a REIT under the Internal Revenue Code,
which we call the REIT Requirements, are technical and complex. Our
qualification and taxation as a REIT depends on our ability to meet, through
actual annual operating results, the REIT Requirements. Accordingly, while we
intend to continue to operate in a manner that would enable us to qualify to be
taxed as a REIT, no assurance can be given that the actual results of our
operations for any particular year will satisfy the REIT Requirements. The
following discussion summarizes only the material aspects of those requirements.
As a REIT, we generally will not be subject to federal corporate income
tax on that portion of our ordinary income or capital gain that is distributed
currently to our shareholders. Such treatment substantially eliminates the
federal "double taxation" of earnings at the corporate and the shareholder
levels that generally results from investment in a corporation.
Despite the REIT election, we may be subject to federal income and
excise tax as follows:
- We will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains.
- If we have a net capital gain, the applicable tax will be the sum
of: (a) the tax imposed on our REIT taxable income computed
without regard to the net capital gain and the deduction for
capital gain dividends, and (b) a tax on undistributed net
capital gains at the rate provided in Section 1201(a) of the
Internal Revenue Code.
- Under certain circumstances, we may be subject to the "alternative
minimum tax" on certain of our items of tax preferences, if any.
- If we have (a) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (b) other
nonqualifying net income from foreclosure property, then we
will be subject to tax at the highest corporate rate on such
income.
- If we have net income from prohibited transactions, such income will
be subject to a 100% tax. Prohibited transactions generally
consist of sales or other dispositions of property held
primarily for sale to customers in the ordinary course of
business, other than sales of foreclosure property and sales
that qualify for a statutory safe harbor.
- If we should fail to satisfy the 75% gross income test or the 95%
gross income test, but have nonetheless maintained our
qualifications as a REIT because certain other requirements
have been met, we will be subject to a 100% tax on the gross
income attributable to the greater of the amount by which we
fail the 75% or 95% (using 90% for years beginning after
December 31, 2000 for purposes of calculating this tax) gross
income test, multiplied by a fraction intended to reflect our
profitability. These tests are discussed further later in this
summary.
- If we should fail to distribute, or fail to be treated as having
distributed, during each calendar year at least the sum of (a)
85% of our REIT ordinary income for such year, (b) 95% of our
REIT capital gain net income for such year, other than such
capital gain net income which we elect to retain and pay tax
on, and (c) any undistributed taxable income from prior
periods, we would be subject to a 4% excise tax on the excess
of such required distribution over the amounts actually
distributed.
- If we acquire any asset from a "C" corporation in a merger or other
transaction in which the basis of the asset in our hands is
determined by reference to the basis of the asset in the hands
of such "C" corporation and we subsequently sell such asset
within 10 years, any built-in gain with respect to such asset
will be subject to tax at the highest applicable regular
corporate rate.
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ORGANIZATIONAL REQUIREMENTS. The Internal Revenue Code defines a REIT
as a corporation, trust, or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
securities or by transferable certificates of beneficial
interest;
(3) that would be taxable as a domestic corporation, but for Sections
856 through 859 of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) that satisfies the Five or Fewer Test because not more than 50%
in value of the outstanding stock of such entity is owned,
directly or indirectly, by five or fewer individuals at any time
during the last half of each taxable year other than the first
year in which the REIT election was made; and
(7) meets certain other tests, described below, regarding the nature
of its income and assets.
The Internal Revenue Code provides that conditions (1) through (4) must
be met during the entire taxable year and that condition (5) must be met during
at least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. Conditions (5) and (6) will not apply
until after the first taxable year for which an election is made to be taxed as
a REIT. For purposes of condition (6), a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes is generally considered an
individual, and stock owned by a corporation is treated as if owned by the
shareholders of the organization. The beneficiaries of a pension trust that
qualifies under Section 401(a) of the Internal Revenue Code and that holds
shares of a REIT, however, will generally be treated as holding shares of the
REIT in proportion to their actuarial interests in the pension trust.
We have satisfied conditions (1) through (5), and we believe we have
also satisfied condition (6). In addition, our articles of incorporation provide
for restrictions regarding the ownership and transfer of our securities. These
restrictions are intended to assist us in continuing to satisfy the share
ownership requirements described in conditions (5) and (6) above. The ownership
and transfer restrictions are described in more detail under the heading
"Description of Capital Stock - Restrictions on Ownership and Transfer."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. We also satisfy this requirement.
We currently have one corporate subsidiary. The Internal Revenue Code
provides that a corporation that is a qualified REIT subsidiary will not be
treated as a separate corporation, and all assets, liabilities, and items of
income, deduction, and credit of a qualified REIT subsidiary will be treated as
assets, liabilities, and items of income, deduction and credit of the REIT. A
qualified REIT subsidiary is a corporation, all of the capital stock of which is
held by the REIT. Our subsidiary is a qualified REIT subsidiary. In applying the
REIT Requirements, our qualified REIT subsidiary will be ignored, and all of its
assets, liabilities, and items of income, deduction, and credit will be treated
as our assets, liabilities, and items of income, deduction, and credit.
Income Tests. In order for us to maintain our qualification as a REIT,
we must annually satisfy two gross income requirements:
- At least 75% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived
directly or indirectly from:
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- investments relating to real property or mortgages on
real property, including interest on obligations
secured by mortgages on real property, certain "rents
from real property" or gain on the sale or exchange
of such property, and certain fees with respect to
agreements to make or acquire mortgage loans,
- certain types of temporary investments,
- certain other types of gross income.
- At least 95% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived from
the real property investments described above and from dividends,
interest and gain from the sale or other disposition of stock or
securities and certain other types of gross income, or from any
combination of the foregoing.
For interest to qualify as "interest on obligations secured by
mortgages on real property," the obligation must be secured by real property
having a fair market value at the time of acquisition at least equal to the
principal amount of the loan. The term "interest" includes only an amount that
constitutes compensation for the use or forbearance of money. For example, a fee
received or accrued by a lender which is in fact a charge for services performed
for a borrower rather than a charge for the use of borrowed money is not
includible as interest. Amounts earned as consideration for entering into
agreements to make loans secured by real property, although not interest, are
otherwise treated as within the 75% and 95% classes of gross income so long as
the determination of those amounts does not depend on the income or profits of
any person. Under the Internal Revenue Code, the term "interest" does not
include any amount based on income or profits of any person except that (1)
interest "based on a fixed percentage or percentages of receipts or sales" is
not excluded and (2) when the REIT makes a loan that provides for interest based
on the borrower's receipts or sales and the borrower leases substantially all of
its interest in the property securing the loan under one or more leases based on
income or profits, only a portion of the contingent interest paid by the
borrower will be disqualified as interest.
Rents received or deemed to be received by us will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT only
if certain statutory conditions are met that limit rental income essentially to
rentals on investment-type properties. In the event that a REIT acquires by
foreclosure property that generates income that does not qualify as "rents from
real property," such income will be treated as qualifying for three years
following the taxable year in which the trust acquires the property so long as
(1) all leases entered into after foreclosure generate only qualifying rent, (2)
only limited construction takes place, and (3) within 90 days of foreclosure,
any trade or business in which the property is used is conducted by an
independent contractor from which the REIT derives no income. The three year
period may be extended by the IRS. In the event the special foreclosure property
rule applies to qualify otherwise unqualified income, the net income that
qualifies only under the special rule for foreclosure property may be subject to
tax, as described above.
We expect to satisfy these requirements.
RELIEF PROVISIONS. If we fail to satisfy one or both of the 75% and 95%
gross income tests for any taxable year, we may nevertheless qualify as a REIT
for such year if we are entitled to relief under certain provisions of the
Internal Revenue Code. These relief provisions generally will be available if
(1) our failure to meet such tests was due to reasonable cause and not due to
willful neglect, (2) we attach a schedule of the sources of our income to our
return, and (3) any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances we would be entitled to the benefit of these relief provisions.
Even if these relief provisions were to apply, a tax would be imposed based upon
the greater of the amount by which we failed either the 75% or 95% (using 90%
for years beginning after December 31, 2000, for purposes of calculating this
tax) gross income test for that year.
ASSET TESTS. At the close of each quarter of each taxable year, we must
satisfy three tests relating to the nature of our assets:
(1) At least 75% of the value of our total assets must be
represented by real estate assets, including stock or debt
instruments held for not more than one year that were
purchased with the proceeds of a stock offering or long-term
(at least five years) debt offering, cash, cash items, and
government securities. Real estate assets also include
interests in real property, interests in mortgages on real
property, and shares of other REITs.
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(2) Not more than 25% of our total assets may be represented by
securities other than those in the 75% asset class.
(3) Of the investments included in the 25% asset class, the value
of any one issuer's securities may not exceed 5% of the value
of our total assets and we may not own more than 10% of any
one issuer's outstanding voting securities, nor more than 10%
of the value of any one issuer's outstanding securities.
If we should fail to satisfy the asset tests at the end of a calendar
quarter, such a failure would not cause us to lose our REIT status if:
- we satisfied the asset tests at the close of the preceding
calendar quarter; and
- the discrepancy between the value of our assets and the asset
test requirements arose from a change in the market value of
our assets and was not wholly or partially caused by the
acquisition of one or more non-qualifying assets.
If the failure to satisfy the asset tests results from an acquisition
of non-qualifying assets during a quarter, we still could avoid disqualification
by eliminating any discrepancy within 30 days after the close of that calendar
quarter. We intend to maintain adequate records of the value of our assets to
ensure compliance with the asset tests and to take such action within 30 days
after the close of any quarter as may be required to cure any noncompliance but
no assurance can be given that such asset tests will be met.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to be treated as a REIT, we
are required to distribute dividends, other than capital gain dividends, to our
shareholders in an amount at least equal to:
- the sum of (1) 90%, or 95% for taxable years beginning before
January 1, 2001, of our "REIT taxable income," computed
without regard to the dividends paid deduction and our net
capital gain, plus (2) 90%, or 95% for taxable years beginning
before January 1, 2001, of our net income, if any, from
foreclosure property in excess of the special tax on income
from foreclosure property, minus
- the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate or in
the following taxable year if declared before we timely file our tax return for
such year and if paid on or before the first regular dividend payment after such
declaration. To the extent that we do not distribute or are not treated as
having distributed all of our net capital gain or distribute or are treated as
having distributed at least 90%, but less than 100% of our "REIT taxable
income," as adjusted, we will be subject to tax thereon at regular ordinary and
capital gains corporate tax rates, as the case may be. If we elect to retain,
rather than distribute, our net long-term capital gains and to pay the tax on
such gains, then each shareholder must treat a designated amount of
undistributed capital gains as long-term capital gains for the shareholder's tax
year in which the last day of our tax year falls. The shareholder, however:
- is treated as having paid any capital gains tax imposed on us
on the designated amounts included in such shareholder's
long-term capital gains,
- is allowed a credit or refund for the tax deemed paid, and
- increases the basis in such shareholder's securities of the
REIT by the difference between the amount included in such
shareholder's gains and the tax deemed paid in respect of such
gains.
Moreover, if we should fail to distribute during each calendar year at least the
sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year and (3) any undistributed taxable income
from prior periods, we would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed. We
intend to make timely distributions sufficient to satisfy the annual
distribution requirement.
"REIT taxable income" is the taxable income of a REIT, which generally
is computed in the same fashion as the taxable income of any corporation, except
that (1) certain deductions are not available, such as the deduction
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for dividends received, (2) it may deduct dividends paid or deemed paid during
the taxable year, (3) net capital gains and losses are excluded, and (4) certain
other adjustments are made.
It is possible that, from time to time, we may not have sufficient cash
or other liquid assets to meet the 90% distribution requirement due to timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of such income and deduction of such
expenses in calculating our taxable income. In the event that such an
insufficiency or such timing differences occur, in order to meet the 90%
distribution requirement we may find it necessary to arrange for borrowings or
to pay dividends in the form of taxable stock dividends if it is practicable to
do so.
Under certain circumstances, we may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
Recordkeeping Requirements. Pursuant to applicable Treasury
Regulations, we must maintain certain records and on an annual basis certain
information from our shareholders designed to disclose the actual ownership of
our outstanding securities. Failure to comply with such recordkeeping
requirements could result in substantial monetary penalties being imposed on us.
FAILURE TO QUALIFY. If we fail to qualify for taxation as a REIT in any
taxable year and the relief provisions described above do not apply, we will be
subject to tax, including any applicable alternative minimum tax, on our taxable
income at regular corporate rates. Distributions to our shareholders in any year
in which we fail to qualify will not be deductible by us nor will they be
required to be made. In such event, to the extent of our current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations of the Internal Revenue
Code, corporate distributees may be eligible for the dividends-received
deduction.
Unless entitled to relief under specific statutory provisions, we also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost, and will not be
permitted to requalify unless we distribute any earnings and profits
attributable to the period during which we failed to qualify. In addition, we
would be subject to tax on any built-in gains on property held during the period
during which we did not qualify if we sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances we
would be entitled to such statutory relief from our failure to qualify as a
REIT.
TAXATION OF UNITED STATES SHAREHOLDERS
As used in this prospectus, the term "United States shareholder" means
a holder of the Class C preferred securities that for United States federal
income tax purposes is not an entity that has a special status under the
Internal Revenue Code, such as a tax-exempt organization or a dealer in
securities, and is:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any
political subdivision of the United States;
- an estate whose income from sources outside the United States
is includible in gross income for United States federal income
tax purposes regardless of its connection with the conduct of
a trade or business within the United States; or
- any trust with respect to which (a) a United States court is
able to exercise primary supervision over the administration
of such trust and (b) one or more United States persons have
the authority to control all substantial decisions of the
trust.
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DISTRIBUTIONS GENERALLY. As long as we qualify as a REIT, distributions
to our taxable United States shareholders that we do not designate as capital
gains dividends will be taken into account by such shareholders as ordinary
income up to the amount of our current or accumulated earnings and profits and
will not be eligible for the dividends-received deduction for corporations.
Distributions out of earnings or profits that we designate as capital gain
dividends will be taxed as long-term capital gain, to the extent they do not
exceed our actual net capital gain for the taxable year, without regard to the
period for which the shareholder has held its stock, however, corporate
shareholders may be required to treat up to 20% of certain capital gains
dividends as ordinary income. A distribution in excess of current or accumulated
earnings and profits first will be treated as a tax-free return of capital,
reducing the tax basis in the United States shareholder's Class C preferred
securities, and a distribution in excess of the United States shareholder's tax
basis in its Class C preferred securities will be taxable gain realized from the
sale of such securities. Any distribution declared by us in October, November,
or December of any year and payable to a shareholder of record on a specified
date in any such month will be treated as both paid by us and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by us during January of the following calendar year.
In the case of a shareholder who is an individual, estate, or trust,
long-term capital gains and losses are separated into different tax rate groups.
We will designate capital gains dividends, if any, and detail such designations
in a manner intended to comply with applicable requirements.
Shareholders may not claim the benefit of any of our tax losses on
their own income tax returns. Taxable distributions from us and gain from the
disposition of the Class C preferred securities will not be treated as passive
activity income and, therefore, shareholders will generally will not be able to
apply any passive activity losses against such income. In addition, taxable
distributions from us generally will be treated as investment income for purpose
of the investment interest limitations. Capital gains from the disposition of
the Class C preferred securities, however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. We will notify shareholders after the close of
our tax year as to the portions of the distributions attributable to that year
that constitute ordinary income or capital gain.
We will be treated as having sufficient earnings and profits to treat
as a dividend any distribution by us up to the amount required to be distributed
in order to avoid imposition of the 4% excise tax discussed under the
subheadings "General" and "Annual Distribution Requirements" above. As a result,
shareholders may be required to treat as taxable dividends certain distributions
that otherwise would result in tax-free returns of capital. Moreover, any
"deficiency dividend" will be treated as an ordinary dividend or a capital gain
dividend, as the case may be, regardless of our earnings and profits.
Losses incurred on the sale or exchange of Class C preferred securities
held for less than six months will be deemed a long-term capital loss to the
extent of any capital gain dividends received by the selling shareholder with
respect to such securities.
TAX TREATMENT OF CONDITIONAL EXCHANGE. Upon the issuance of an OCC
directive after the occurrence of a Supervisory Event, the outstanding Class C
preferred securities will be exchanged on a one-for-one basis for Bank Class C
preferred securities. The Conditional Exchange will most likely be a taxable
exchange with respect to which each holder of the Class C preferred securities
will in such event have a gain or loss, as the case may be, measured by the
difference between the basis of such holder in the Class C preferred securities
and the fair market value of the Bank Class C preferred securities received in
the Conditional Exchange. Because the Bank Class C preferred securities will not
be listed on any securities exchange or for quotation on The Nasdaq Stock Market
or on any over-the-counter market, the Bank will determine the fair market value
of such securities. The Bank will then issue a Form 1099-B (or a comparable
successor form specified by the Internal Revenue Service) to each holder of the
Class C preferred securities reporting the fair market value of the Bank Class C
preferred securities issued to such holder in the Conditional Exchange. Provided
that such holder's Class C preferred securities were held as capital assets for
more than 12 months prior to the Conditional Exchange, any gain or loss will be
long-term capital gain or loss. Long-term capital losses are deductible, subject
to certain limitations. The basis of the shareholder in the Bank Class C
preferred securities will be the securities' fair market value at the time of
the Conditional Exchange.
TREATMENT OF TAX-EXEMPT SHAREHOLDERS. Distributions from us to a
tax-exempt employee pension trust or other domestic tax-exempt shareholder
generally will not constitute "unrelated business taxable income," or UBTI,
unless the shareholder has borrowed to acquire or carry its Class C preferred
securities. For tax-exempt shareholders
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that are social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt
from Federal income taxation under Section 501(c)(7), (c)(9), (c)(19), and
(c)(20) of the Internal Revenue Code, respectively, income from an investment in
Class C preferred securities will constitute UBTI unless the organization is
able to properly deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its Class C preferred
securities. Such investors should consult their own tax advisors concerning the
"set aside" and reserve requirements.
Qualified trusts that hold more than 10% by value of our securities,
however, may be required to treat a certain percentage of distributions from us
as UBTI. This requirement will apply only if:
- We would not qualify as a REIT for federal income tax purposes
but for the application of the "look-through" exception to the
Five or Fewer Test applicable to securities held by qualified
trusts and
- Our securities are "predominantly held" by qualified trusts.
Our securities would be predominantly held by qualified trusts
if either:
- a single qualified trust holds more than 25% by value
of our securities, or
- one or more qualified trusts, each owning more than
10% by value of our securities, collectively own more
than 50% by value of our securities.
The percentage of any REIT dividend treated as UBTI is equal to the ratio of (a)
the UBTI earned by the REIT, treating the REIT as if it were a qualified trust
and therefore subject to tax on UBTI, to (b) the total gross income, less
certain associated expenses, of the REIT. If we were to incur indebtedness to
acquire property, the percentage of any REIT dividend treated as UBTI would be
increased to reflect any UBTI earned by us from "debt-financed property." A de
minimis exception applies where the ratio set forth above is less than 5% for
any year. For these purposes, a qualified trust is any trust described in
Section 401(a) of the Internal Revenue Code and exempt from tax under Section
501(a) of the Internal Revenue Code. The provisions requiring qualified trusts
to treat a portion of REIT distributions as UBTI will not apply if the REIT is
able to satisfy the Five or Fewer Test without relying upon the "look-through"
exception.
TAXATION OF FOREIGN SHAREHOLDERS
The following is a discussion of certain anticipated United States
federal income tax consequences of the ownership and disposition of our
securities applicable to non-United States holders of such securities. The
discussion is based on current law and is for general information only. The
rules governing the United States federal taxation of foreign shareholders are
complex and no attempt will be made herein to provide more than a summary of
such rules. The discussion addresses only certain and not all aspects of United
States federal income taxation to a foreign shareholder and prospective foreign
investors should consult with their own tax advisors to determine the impact of
federal, state, and local income tax laws with regard to an investment in the
Class C preferred securities, including any reporting requirements.
ORDINARY DIVIDENDS. The portion of dividends received by non-United
States shareholders payable out of our current or accumulated earnings and
profits which are not attributable to our capital gains, which are not
designated as capital gains dividends, and which are not effectively connected
with a United States trade or business of the non-United States shareholder will
be subject to U.S. withholding tax at the rate of 30% of the gross amount of the
distribution. This percentage may be reduced or eliminated by an applicable tax
treaty. In general, non-United States shareholders will not be considered
engaged in a United States trade or business solely as a result of their
ownership of our securities. In cases where the dividend income from a
non-United States shareholder's investment in our securities is, or is treated
as, effectively connected with the non-United States shareholder's conduct of a
United States trade or business, the non-United States shareholder generally
will be subject to United States tax at graduated rates, in the same manner as a
United States shareholder with respect to such dividends. Such non-United States
shareholder may also be subject to the 30% branch profits tax in the case of a
non-United States shareholder that is a foreign corporation.
NON-DIVIDEND DISTRIBUTIONS. Distributions by us that are not dividends
out of our current or accumulated earnings and profits will not be subject to
United States income or withholding tax to the extent that such
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distributions do not exceed the adjusted basis of the non-United States
shareholder's Class C preferred securities, but rather will reduce the adjusted
basis of such securities. To the extent that distributions in excess or our
current and accumulated earnings and profits exceed the adjusted basis of a
non-United States shareholder's Class C preferred securities, such distributions
will give rise to a tax liability if the non-United States shareholder would
otherwise be subject to tax on any gain from the sale or disposition of its
securities. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, then the distribution will be subject to withholding at
the rate applicable to dividends. However, the non-United States shareholder may
seek a refund of such amounts from the IRS if it is subsequently determined that
such distribution was, in fact, in excess of our current and accumulated
earnings and profits. Any distribution in excess of our current or accumulated
earnings and profits that is not otherwise subject to the 30% withholding may
nonetheless be subject to withholding at a 10% rate.
CAPITAL GAIN DIVIDENDS. Under the Foreign Investment in Real Property
Tax Act of 1980, or FIRPTA, a distribution made by us for any year in which we
qualify as a REIT to a non-United States shareholder, to the extent attributable
to gains from dispositions of United States real property interests, or USRPIs,
will be considered effectively connected with a United States trade or business
of the non-United States shareholder and subject to United States income tax at
the rate applicable to United States individuals or corporations, without regard
to whether such distribution is designated as a capital gain dividend. We
believe that it is unlikely that we will derive significant gain from USRPIs,
although whether we derive gain from USRPIs will depend on the facts as they
ultimately develop. We will be required to withhold tax equal to 35% of the
amount of dividends to the extent we pay dividends that are attributable to
gains from dispositions of USRPIs. Distributions subject to FIRPTA may also be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder.
DISPOSITION OF OUR SECURITIES. Unless our securities constitute a
USRPI, a sale of such securities by a non-United States shareholder generally
will not be subject to United States taxation under FIRPTA. Our securities will
be treated as USRPIs only if the fair market value of the USRPIs owned by us
equals or exceeds 50% of the fair market value of our total assets. If at no
time during the five years preceding the sale or exchange of our securities, the
Class C preferred securities constituted a USRPI, gain or loss on the sale or
exchange of our securities will not be treated as effectively connected with a
United States trade or business by reason of FIRPTA. Although ownership of real
property in the United States is always a USRPI, a loan secured by a mortgage on
United States real property does not constitute a USRPI unless the amounts
payable by the borrower are contingent on the income or receipts of the borrower
or the property or otherwise based on the property. We believe that it is
unlikely that our securities will constitute USRPIs. Our securities will not
constitute a USRPI if we are a "domestically controlled REIT." A domestically
controlled REIT is a REIT in which, at all times during a specified testing
period, less than 50% in value of its shares is held directly or indirectly by
non-United States shareholders. We believe that we are, and we expect to
continue to be, a domestically controlled REIT, and therefore that the sale of
our securities will not be subject to taxation under FIRPTA. Because our
securities will be publicly traded, however, no assurance can be given that we
will continue to be a domestically controlled REIT.
If we do not constitute a domestically controlled REIT and if our
securities constitute USRPIs, a non-United States shareholder's sale of our
securities generally will still not be subject to tax under FIRPTA as a sale of
a USRPI provided that (1) the securities are "regularly traded," as that term is
defined by applicable Treasury regulations, on an established securities market,
such as The Nasdaq National Market, on which we expect to list the Class C
preferred securities, and (2) the selling non-United States shareholder held 5%
or less of our outstanding securities at all times during a specified testing
period.
If the gain on the sale of our securities were subject to taxation
under FIRPTA, the non-United States shareholder would be subject to the same
treatment as a United States shareholder with respect to such gain, subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals, and the purchaser of the securities could
be required to withhold 10% of the purchase price and remit such amount to the
IRS.
Even if the gain on the sale of our securities is not subject to
FIRPTA, such gain will nonetheless be taxable in the United States to a
non-United States shareholder in two cases:
- if the non-United States shareholder's investment in our
securities is effectively connected with a United States trade
or business conducted by such non-United States shareholder,
the non-United
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States shareholder will be subject to the same treatment as a
United States shareholder with respect to such gain, or
- if the non-United States shareholder is a nonresident alien
individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the
United States, the nonresident alien individual will be
subject to a 30% tax on the individual's capital gain.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
We will report to our shareholders and the IRS on Form 1099-DIV, or any
successor form, the amount of dividends paid or deemed paid during each calendar
year, and the amount of tax withheld, if any.
UNITED STATES SHAREHOLDERS. Under certain circumstances, a United
States shareholder of Class C preferred securities may be subject to backup
withholding at a rate of 30.5% on payments made with respect to, or cash
proceeds of a sale or exchange of, Class C preferred securities. The backup
withholding rate was recently changed as a result of the Economic Growth and Tax
Relief Reconciliation Act of 2001 and is subject to further phased-in rate
reductions beginning in 2002. Backup withholding will apply only if the
shareholder:
- fails to furnish the person required to withhold with its
taxpayer identification number, or TIN, which, for an
individual, would be his or her social security number,
- furnishes an incorrect TIN,
- is notified by the IRS that it has failed to properly report
payments of interest and dividends, or
- under certain circumstances, fails to certify, under penalty
of perjury, that it has furnished a correct TIN and has not
been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend
payments.
Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations. A
United States shareholder should consult with a tax advisor regarding
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
United States shareholder will be allowed as a credit against such United States
shareholder's United States federal income tax liability and may entitle such
United States shareholder to a refund, provided that the required information is
furnished to the IRS.
FOREIGN SHAREHOLDERS. Additional issues may arise pertaining to
information reporting and backup withholding with respect to a non-United States
shareholder. A non-United States shareholder should consult with a tax advisor
with respect to any such information reporting and backup withholding
requirements. Backup withholding with respect to a non-United States shareholder
is not an additional tax. Rather, the amount of any backup withholding with
respect to a payment to a non-United States shareholder will be allowed as a
credit against any United States federal income tax liability of such non-United
States shareholder. If withholding results in an overpayment of taxes, a refund
may be obtained provided that the required information is furnished to the IRS.
OTHER TAX CONSEQUENCES
We or our shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which we or they
transact business, own property, or reside. The state and local tax treatment of
us and our shareholders may differ from the federal income tax consequences
discussed above. The tax laws of the State of Ohio apply the provisions of the
Internal Revenue Code relating to REITs with certain modifications which will
not have a material beneficial nor adverse effect on our ability to operate as a
REIT. Prospective shareholders should consult their own tax advisors regarding
the effect of state and local tax laws on an investment in our Class C preferred
securities.
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ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Class C preferred securities, a fiduciary
of a Plan should consider:
- whether the ownership of Class C preferred securities is in
accordance with the documents and instruments governing such
Plan;
- whether the ownership of Class C preferred securities is
solely in the interest of Plan participants and beneficiaries
and otherwise consistent with the fiduciary's responsibilities
and in compliance with the requirements of Part 4 of Title I
of ERISA, including, in particular, the diversification,
prudence, and liquidity requirements of Section 404 of ERISA
and the prohibited transaction provisions of Section 406 of
ERISA and Section 4975 of the Internal Revenue Code;
- whether our assets are treated as assets of the Plan; and
- the need to value the assets of the Plan annually.
For purposes of this prospectus, the term "Plan" means a qualified
profit-sharing, pension, or stock bonus plan, including a plan for self-employed
individuals and their employees, or any other employee benefit plan subject to
the Employee Retirement Income Security Act of 1974, as amended, or ERISA, a
collective investment fund, or separate account in which such plans invest and
any other investor using assets that are treated as the assets of an employee
benefit plan subject to ERISA.
In addition, the fiduciary of an individual retirement arrangement
under Section 408 of the Internal Revenue Code, which we refer to as an IRA,
considering the purchase of Class C preferred securities should consider whether
the ownership of Class C preferred securities would result in a non-exempt
prohibited transaction under Section 4975 of the Internal Revenue Code.
The fiduciary investment considerations summarized below provide a
general discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Internal Revenue Code and their
respective regulations and rulings, and may be changed by future legislative,
administrative, or judicial actions. Any such changes may be adverse and may
have retroactive effect. PLANS AND IRAS THAT ARE PROSPECTIVE PURCHASERS OF CLASS
C PREFERRED SECURITIES SHOULD CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN
EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the
assets of a Plan or IRA, which we refer to as Plan Assets, for purposes of ERISA
and the related prohibited transaction provisions of the Internal Revenue Code
found in 29 C.F.R. Sec. 2510.3-101, which we refer to as the Plan Asset
Regulation, when a Plan or IRA makes an equity investment in another entity, the
underlying assets of the entity will not be considered Plan Assets if the equity
interest is a "publicly-offered security." If our assets were deemed to be Plan
Assets, transactions between us and parties in interest or disqualified persons
with respect to the investing Plan or IRA could be prohibited transactions
unless a statutory or administrative exemption is available. In addition,
investment authority would also have been improperly delegated to such
fiduciaries, and, under certain circumstances, Plan fiduciaries who make the
decision to invest in the Class C preferred securities could be liable as
co-fiduciaries for actions taken by us that do not conform to the ERISA
standards for investments under Part 4 of Title I of ERISA.
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For purposes of the Plan Asset Regulation, a "publicly-offered
security" is a security that is:
- "freely transferable;"
- part of a class of securities that is "widely held;" and
- sold to the Plan or IRA as part of an offering of securities
to the public pursuant to an effective registration statement
under the Securities Act and part of a class of securities
that is registered under the Exchange Act within 120 days, or
such later time as may be allowed by the SEC, after the end of
the fiscal year of the issuer during which the offering of
such securities to the public occurred.
Our Class C preferred securities will be registered under the
Securities Act and the Exchange Act within the time periods specified in the
Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held"
only if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not fail
to be "widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. We expect the Class C preferred securities to be "widely held" upon
the completion of this offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, certain restrictions ordinarily will not, alone or in
combination, affect the finding that such securities are "freely transferable."
We believe that any restrictions imposed on the transfer of the Class C
preferred securities are limited to the restrictions on transfer generally
permitted under the Plan Asset Regulation and are not likely to result in the
failure of the Class C preferred securities to be "freely transferable."
A Plan should not acquire or hold the Class C preferred securities if
our underlying assets will be treated as the assets of such Plan. However, we
believe that under the Plan Asset Regulation, the Class C preferred securities
should be treated as "publicly-offered securities" and, accordingly, our
underlying assets should not be considered to be assets of any Plan or IRA
investing in the Class C preferred securities.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more
than 10% of the Class C preferred securities if we are "predominantly held" by
qualified trusts. This is discussed further under the heading "Federal Income
Tax Considerations--Taxation of United States Shareholders--Treatment of
Tax-Exempt Shareholders."
CERTAIN INFORMATION REGARDING THE BANK
We have attached as Annex I a copy of the Bank's prospectus filed with
the OCC relating to the Bank Class C preferred securities to be issued upon the
issuance of an OCC directive after the occurrence of a Supervisory Event. We
consider the Bank's prospectus to be an integral part of this prospectus. All
material information relating to the Bank, including information relating to the
Bank's financial position, can be found in the Bank's prospectus. There has been
no material change in the Bank's affairs since the conclusion of the period
ended June 30, 2001, which has not otherwise been disclosed by the Bank in its
prospectus.
UNDERWRITING
Subject to the terms and conditions stated in our subscription
agreement with Holdings dated the date of this prospectus, Holdings has agreed
to purchase and we have agreed to sell all of our Class C preferred securities
offered by this prospectus for $25 per Class C preferred security. The
consideration to be paid by Holdings for the
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Class C preferred securities will be in the form of additional participation
interests in commercial loans, including commercial real estate loans, and
consumer loans not secured by real estate, as well as leasehold improvements.
It is intended that, subsequent to the purchase of the Class C
preferred securities from us and subject to the terms and conditions stated in
the proposed underwriting agreement, each underwriter named in the table below,
which we refer to as an Underwriter and collectively as the Underwriters, will
severally agree to purchase, and Holdings will agree to sell the number of Class
C preferred securities set forth opposite the name of such Underwriter.
Name
----
Number of
Preferred Securities
--------------------
Salomon Smith Barney Inc.................................
A.G. Edwards & Sons, Inc.................................
Prudential Securities Incorporated.......................
Raymond James & Associates, Inc..........................
Huntington Capital Corp..................................
.........................................................
.........................................................
Total........................................... 2,000,000
=========
The underwriting agreement will provide that the obligation of the
several Underwriters to purchase the Class C preferred securities is subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters will be obligated to purchase all of the Class C preferred
securities if they purchase any Class C preferred securities. ___ Although a
statutory underwriter in connection with this offering, Holdings will not sell
the securities directly to the public and will not have the rights and
obligations of an Underwriter under the underwriting agreement.
The Underwriters, for whom Salomon Smith Barney Inc., A.G. Edwards &
Sons, Inc., Prudential Securities Incorporated, and Raymond James & Associates,
Inc. are acting as representatives ("Representatives"), intend to offer some of
the Class C preferred securities directly to the public at the public offering
price of $25 per share and some of the Class C preferred securities to certain
dealers at the public offering price less a concession not in excess of $0.[___]
per Class C preferred security. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $[___] per Class C preferred security to
certain brokers and dealers. After the initial offering of the Class C preferred
securities to the public, the public offering price and other selling terms may
be changed by the representative.
The Underwriters fees will constitute an amount equal to 3.15% of the
initial public offering price. The amount is calculated based on a management
fee equal to .63% of the initial public offering price, or $0.1575 per $25
security, an underwriting fee equal to .52% of the initial public offering
price, or $0.13 per $25 security, and a selling concession equal to 2.00% of the
initial public offering price, or $0.50 per $25 security. Additional expenses
associated with the offering of the Class C preferred securities are estimated
to be $810,000. These additional expenses include legal and accounting fees and
expenses, underwriters' legal fees expenses, rating agencies' fees, printing
expenses, and the SEC registration fee. Holdings, our parent company, will pay
these fees and expenses as well as the underwriting commissions and discounts.
Huntington Capital Corp. is a wholly owned subsidiary of Huntington
Bancshares and is, therefore, affiliated with us. Huntington Capital Corp. will
sell the Class C preferred securities to investors through Huntington Investment
Company, a wholly owned subsidiary of the Bank, which will act as agent.
Huntington Capital Corp. will not sell any Class C preferred securities to other
broker-dealers. Certain of the other Underwriters and their affiliates have in
the past provided, and may in the future provide, investment banking services to
Huntington Bancshares, the Bank, or their affiliates in the ordinary course of
business.
Holdings, which owns 99.87% of our common shares, 89.9% of our Class A
preferred securities, and 100% of our Class D preferred securities, is also
affiliated with us. The Bank owns 99.9% of Holdings' capital shares and
Huntington Bancshares owns 100% of the Bank's capital shares. Thus, the Bank and
Huntington Bancshares may be deemed to beneficially own the Class C preferred
securities being offered to the public even though Holdings will be the sole
record owner. As described in more detail under the Business section of this
prospectus, we acquired, and in the future will acquire, assets from Holdings
and have made arrangements through Holdings for the servicing of the
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loans in which we have a participation interest under a subparticipation
agreement between Holdings and us and a participation agreement between Holdings
and the Bank.
In connection with the offering to the public, the Underwriters, may
purchase and sell the Class C preferred securities in the open market. These
transactions may include syndicate covering transactions and stabilizing
transactions. Stabilizing transactions consist of certain bids or purchases of
the Class C preferred securities made for the purpose of preventing or retarding
a decline in the market price of the Class C preferred securities while the
offering is in progress. Syndicate covering transactions involve purchases of
the Class C preferred securities in the open market after the distribution has
been completed to cover syndicate short positions. Short sales involve the sale
by the Underwriters of a greater number of shares than they are required to
purchase in the offering. The Underwriters will not have an overallotment option
with respect to the distribution of the Class C preferred securities, and any
short position of the Underwriters will be a "naked" short position. A naked
short position may be created if the Underwriters are concerned that there may
be downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. The
Underwriters must close out any naked short position by purchasing shares in the
open market. Similar to other purchase transactions, the Underwriters' purchases
to cover short sales may have the effect of raising or maintaining the market
price of the Class C preferred securities or preventing or retarding a decline
in the market price of the Class C preferred securities.
The Representatives, on behalf of the Underwriters also may impose a
penalty bid. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Representatives, in covering
syndicate short positions or making stabilizing purchases, repurchases Class C
preferred securities originally sold by that syndicate member.
Any of these activities may cause the price of the Class C preferred
securities to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
in the over-the-counter market or otherwise and, if commenced, may be
discontinued at any time.
We and Holdings will agree to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, or contribute to payments the Underwriters may be required to
make in respect of any of those liabilities.
We have applied to list the Class C preferred securities on The Nasdaq
National Market under the symbol "HPCC". Prior to the offering to the public,
there has been no public market for the Class C preferred securities.
Consequently, the initial offering price for the Class C preferred securities
was determined by Holdings and us and the initial public offering price for the
Class C preferred securities was determined by negotiations between Holdings and
Salomon Smith Barney Inc. There can be no assurance, however, that the prices at
which the Class C preferred securities will sell in the public market after the
initial public offering will not be lower than the price at which they are sold
by the Underwriters or that an active trading market in the Class C preferred
securities will develop and continue after offering to the public.
We and Holdings will agree that, for the period beginning on the date
of the underwriting agreement and continuing for 30 days thereafter, we will
not, without the prior written consent of the Representatives, dispose of or
hedge any securities, including any backup undertakings of such securities, in
each case that are substantially similar to the Class C preferred securities, or
any securities convertible into or exchangeable for the Class C preferred
securities or such substantially similar securities. The Representatives may
release any of the securities subject to this lock-up at any time without
notice.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 1999, and for each of the three
years ended December 31, 2000, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
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LEGAL MATTERS
The validity of the Class C preferred securities offered hereby and
certain other legal and certain tax matters described under "Federal Income Tax
Considerations" will be passed upon for us by Porter, Wright, Morris & Arthur
LLP. The validity of the Class C preferred securities will be passed upon for
the Underwriters by Cleary, Gottlieb, Steen & Hamilton. In rendering its
opinion, Cleary, Gottlieb, Steen & Hamilton will rely, as to matters of Ohio
law, on the opinion of Porter, Wright, Morris & Arthur LLP.
GLOSSARY
"Automobile loan" means a loan secured by a motor vehicle.
"Commercial mortgage loan" means a whole loan secured by a mortgage or
deed of trust on a multi-family residential or commercial real estate property.
"Conditional Exchange" means the exchange on a share-for-share basis of
our Class C preferred securities for Bank preferred securities upon the issuance
of an OCC directive after the occurrence of a Supervisory Event.
"Consumer loan" means a loan secured by a second mortgage primarily on
the borrower's primary residence.
"Dividend payment date" means each quarterly date upon which dividends
are paid by us to the holders of the Class C preferred securities.
"Dividend period" means any quarterly dividend period.
"Excess securities" means the securities of any class or series of
preferred securities owned, or deemed to be owned, by or transferred to a
shareholder in excess of the ownership limit.
"Five or Fewer Test" means the Internal Revenue Code requirement that
not more than 50% in value of our outstanding securities may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code).
"FFO" means funds from operations and is equal to net income,
calculated according to generally accepted accounting principles in the United
States, plus depreciation of real or personal property used to generate income,
less any gain on the sale of real estate plus any loss on the sale of real
estate.
"Indebtedness" means all indebtedness for borrowed money and any
guarantees of indebtedness for borrowed money.
"Independent Directors" means the members of our board of directors who
are not current directors, officers or employees of us, Huntington Bancshares,
the Bank, Holdings, or any affiliate of any of them.
"Initial dividend period" means the first dividend period.
"Junior Stock" means common shares and all other classes and series of
shares which rank below the Class C preferred securities as to dividend rights
and rights upon liquidation, winding up, or dissolution.
"LIBOR" means the London Interbank Offer Rate, which is the short-term
rate of interest for U.S. dollar deposits overseas and is sometimes used as an
index upon which loan interest rates are based.
"Loan-to-value ratio" means, with respect to any mortgage loan, the
ratio (expressed as a percentage) of the original principal amount of such
mortgage loan to the lesser of (1) the appraised value at origination of the
mortgaged property underlying such mortgage loan and (2) if the mortgage loan
was made to finance the acquisition of property, the purchase price of the
mortgaged property.
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"Mortgage assets" means real estate mortgage assets.
"Mortgage-backed securities" means securities either issued or
guaranteed by agencies of the Federal government or government sponsored
agencies or that are rated by at least one nationally recognized independent
rating organization and that represent interests in or obligations backed by
pools of mortgage loans.
"Mortgage loans" means whole loans secured by single-family, one- to
four-unit, residential, multi-family residential, or commercial real estate
properties.
"Nonaccrual status" means a loan on which, in the opinion of
management, principal or interest is not likely to be paid in accordance with
the terms of the loan agreement or on which the principal or interest is
generally past due 90 days or more and collateral, if any, is insufficient to
cover principal and interest.
"One Hundred Persons Test" means the Internal Revenue Code requirement
that our capital stock be owned by 100 or more persons during at least 335 days
of a taxable year or during a proportionate part of a shorter taxable year.
"Other authorized investments" means non-mortgage-related securities
authorized by Section 856(c)(5)(B) of the Internal Revenue Code, in an amount
which will not exceed 20% of the value of our total assets. Non-mortgage related
security is defined in the Investment Company Act. Under the Investment Company
Act, the term "security" means, in part, any note, stock, treasury stock,
debenture, evidence of indebtedness, or certificate of interest or participation
in any profit sharing agreement or a group or index of securities.
"OREO" means Other Real Estate Owned.
"Parity Stock" means the Class A and Class D preferred securities and
any class and series of our equity securities designated in the future as being
on a parity with the Class C preferred securities as to dividend rights and
rights upon liquidation, winding up, or dissolution.
"Permitted Indebtedness" means (1) Indebtedness incurred by us in an
aggregate amount not to exceed 20% of our shareholders' equity as determined in
accordance with generally accepted accounting principles, plus (2) any
additional Indebtedness related to any and all advances or other financial
accommodations made or granted from time to time by the Federal Home Loan Bank
of Cincinnati to or for the benefit of the Bank whether now existing or arising
after the date of this prospectus, where we participate as a co-borrower,
guarantor, or in any other capacity where our assets are pledged as collateral.
"Portfolio" means the current portfolio of mortgage loans and other
loans held by us.
"Prime rate" is the short-term interest rate quoted by a commercial
bank as an indication of the rate being charged on loans to its best commercial
customers and is sometimes used as an index upon which loan interest rates are
based.
"REIT" means a real estate investment trust as defined pursuant to the
REIT Requirements, or any successor provisions of the Internal Revenue Code.
"REIT Requirements" means Sections 856 through 860 of the Internal
Revenue Code and the applicable Treasury regulations.
"REIT taxable income" means the taxable income of a REIT, which
generally is computed in the same fashion as the taxable income of any
corporation, except that (a) certain deductions are not available, such as the
deduction for dividends received, (b) it may deduct dividends paid (or deemed
paid) during the taxable year, (c) net capital gains and losses are excluded and
(d) certain other adjustments are made.
"Residential mortgage loan" means a whole loan secured by a mortgage or
deed of trust on a residential real estate property.
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"Senior Stock" means any class and series of our securities expressly
designated as being senior to the Class C preferred securities.
"Supervisory Event" means the occurrence of one of the following:
- the Bank becomes "undercapitalized" under prompt corrective
action regulations,
- the Bank is placed into conservatorship or receivership, or
- the OCC, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term.
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HUNTINGTON PREFERRED CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young, LLP, Independent Auditors................................................ F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999
and June 30, 2001 and 2000 (unaudited)......................................................... F-2
Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998
and the six months ended June 30, 2001 and 2000 (unaudited).................................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
2000, 1999, and 1998 and the six months ended June 30, 2001 (unaudited)....................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998
and the six months ended June 30, 2001 and 2000 (unaudited).................................... F-5
Notes to Consolidated Financial Statements........................................................ F-6
Pro Form Consolidated Financial Statements (unaudited)............................................ F-13
Pro Form Consolidated Balance Sheet as of June 30, 2001 (unaudited)............................... F-14
Pro Form Consolidated Statement of Income for the six months ended June 30, 2001 (unaudited)...... F-15
Pro Form Consolidated Statement of Income for the twelve months
ended December 31, 2000........................................................................ F-16
Notes to Unaudited Pro Forma Consolidated Financial Statements.................................... F-17
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Report of Independent Auditors
To the Board of Directors and Shareholders
Huntington Preferred Capital, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Huntington
Preferred Capital, Inc. and Subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Huntington
Preferred Capital, Inc. and Subsidiary at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/Ernst & Young LLP
Columbus, Ohio
May 16, 2001
F-1
93
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
------------------------------------- ---------------------------------------
(in thousands of dollars) 2001 2000 2000 1999
---------------------------------------------- ----------------- ---------------- ------------------ --------------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 64,193 $ 167,844 $ 61,403 $ 167,135
Interest bearing deposits in banks 633,003 449,224 818,872 67,071
Due from Huntington Preferred
Capital Holdings, Inc. 157,033 53,437 159,902 ---
Loan participations purchased
Commercial 524,297 723,549 614,956 813,809
Consumer Secured by Real Property 1,053,293 861,457 971,594 791,396
Residential Mortgage 586,347 700,640 355,571 749,563
Commercial Mortgage 4,107,659 3,700,522 3,894,527 3,688,669
----------------- ---------------- ------------------ --------------------
6,271,596 5,986,168 5,836,648 6,043,437
Less allowance for loan losses 90,724 94,091 91,826 104,151
----------------- ---------------- ------------------ --------------------
Net loan participations purchased 6,180,872 5,892,077 5,744,822 5,939,286
----------------- ---------------- ------------------ --------------------
Premises and equipment 789 --- --- ---
Accrued income and other assets 51,189 43,820 48,625 39,546
----------------- ---------------- ------------------ --------------------
TOTAL ASSETS $ 7,087,079 $6,606,402 $ 6,833,624 $ 6,213,038
================= ================ ================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Due from Huntington Preferred
Capital Holdings, Inc. $ --- $ --- $ --- $ 730
----------------- ---------------- ------------------ --------------------
Total Liabilities --- --- --- 730
----------------- ---------------- ------------------ --------------------
Shareholders' equity
Class A Preferred stock, $1,000 par
value - 1,000 shares authorized,
issued and outstanding 1,000 1,000 1,000 1,000
Class B Preferred stock, $1,000 par
value, noncumulative and
conditionally exchangeable -
authorized 500,000 shares;
400,000 and no shares issued
and outstanding, respectively 400,000 --- 400,000 ---
Common stock - without par value;
14,000,000 shares authorized,
issued, and outstanding 6,349,149 6,303,869 6,341,717 6,143,103
Retained earnings 336,930 301,533 90,907 68,205
----------------- ---------------- ------------------ --------------------
Total Shareholders' Equity 7,087,079 6,606,402 6,833,624 6,212,308
----------------- ---------------- ------------------ --------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 7,087,079 $6,606,402 $ 6,833,624 $ 6,213,038
================= ================ ================== ====================
See notes to consolidated financial statements.
F-2
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HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, DECEMBER 31,
(in thousands of dollars, --------------------------------- --------------------------------------------------
except per share amounts) 2001 2000 2000 1999 1998
--------------------------------------------- ---------------- --------------- --------------- ---------------- ---------------
(Unaudited)
Interest and fee income
Interest on loan participations purchased
Commercial $ 19,890 $ 27,532 $ 53,496 $ 74,318 $ 42,798
Consumer Secured by Real Property 47,316 36,200 78,327 65,832 26,204
Residential Mortgage 21,504 30,605 46,421 59,599 39,379
Commercial Mortgage 140,782 130,882 273,669 270,300 172,214
---------------- --------------- --------------- --------------- ---------------
229,492 225,219 451,913 470,049 280,595
Fees 3,750 1,915 4,092 7,043 4,225
Interest bearing deposits in banks 17,311 10,308 33,095 14,111 13,600
---------------- --------------- --------------- --------------- ---------------
TOTAL INTEREST AND FEE INCOME 250,553 237,442 489,100 491,203 298,420
---------------- --------------- --------------- --------------- ---------------
NET INTEREST INCOME 250,553 237,442 489,100 491,203 298,420
Provision for loan losses 371 --- --- --- ---
---------------- --------------- --------------- --------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 250,182 237,442 489,100 491,203 298,420
---------------- --------------- --------------- --------------- ---------------
Non-interest income
Rent 28 --- --- --- ---
Non-interest expense
Personnel and related costs 81 81 162 162 95
Occupancy expense 7 --- --- --- ---
Legal and other professional services 16 1 --- 310 ---
Management fees 4,083 4,032 7,821 7,762 4,456
---------------- --------------- --------------- --------------- ---------------
4,187 4,114 7,983 8,234 4,551
---------------- --------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 246,023 233,328 481,117 482,969 293,869
Provision for income taxes --- --- --- --- ---
---------------- --------------- --------------- --------------- ---------------
NET INCOME $ 246,023 $ 233,328 $ 481,117 $ 482,969 $ 293,869
================ =============== =============== =============== ===============
NET INCOME APPLICABLE TO COMMON SHARES $ 246,023 $ 233,328 $ 481,037 $ 482,889 $ 293,869
================ =============== =============== =============== ===============
PER COMMON SHARE(1)
Net income
Basic and diluted $ 17.57 $ 16.67 $ 34.36 $ 34.39 $ 20.99
Cash Dividends $ --- $ --- $ 32.74 $ 29.55 $ 20.99
AVERAGE COMMON SHARES(1)
Basic and diluted 14,000,000 14,000,000 14,000,000 14,000,000 14,000,000
(1) Adjusted for the 18,666.66667-to-1 stock split in April 2001.
See notes to consolidated financial statements.
F-3
95
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
PREFERRED COMMON RETAINED
------------------------ --------------------------- (DEFICIT)
(in thousands, except per share amounts) SHARES STOCK SHARES STOCK EARNINGS TOTAL
-------------------------------------------- ----------- ----------- ------------- ------------- ------------ -------------
BALANCE -- JANUARY 1, 1998 --- $ --- 750 $ 954 $ (924) $ 30
Net income 293,869 293,869
Paid in capital in excess of par value
in consideration for the purchase
of loan participations, net --- 7,163,348 7,163,348
Return of capital ($92.57 per share) (1,296,005) (1,296,005)
Cash dividends declared on common
stock ($20.99 per share) (293,869) (293,869)
----------- ----------- ------------- ------------- ------------ -------------
BALANCE -- DECEMBER 31, 1998 --- --- 750 5,868,297 (924) 5,867,373
----------- ----------- ------------- ------------- ------------ -------------
Net income 482,969 482,969
Issuance of Class A preferred stock 1,000 1,000 1,000
Paid in capital in excess of par value
in consideration for the purchase
of loan participations, net --- 274,806 274,806
Cash dividends declared on common
stock ($29.55 per share) (413,760) (413,760)
Cash dividends declared on preferred
stock ($80 per share) (80) (80)
----------- ----------- ------------- ------------- ------------ -------------
BALANCE -- DECEMBER 31, 1999 1,000 1,000 750 6,143,103 68,205 6,212,308
----------- ----------- ------------- ------------- ------------ -------------
Net income 481,117 481,117
Issuance of Class B preferred stock 400,000 400,000 400,000
Paid in capital in excess of par value
in consideration for the purchase
of loan participations, net --- 198,614 198,614
Cash dividends declared on common
stock ($32.74 per share) (458,335) (458,335)
Cash dividends declared on preferred
stock ($80 per share) (80) (80)
----------- ----------- ------------- ------------- ------------ -------------
BALANCE -- DECEMBER 31, 2000 401,000 401,000 750 6,341,717 90,907 6,833,624
----------- ----------- ------------- ------------- ------------ -------------
Net income 246,023 246,023
Common shares issued in
18,666.66667-to-1 stock split 13,999,250 ---
Paid in capital in excess of par value
in consideration for the purchase
of loan participations, net --- 7,432 7,432
----------- ----------- ------------- ------------- ------------ -------------
BALANCE -- JUNE 30,
2001 (UNAUDITED) 401,000 $ 401,000 14,000,000 $ 6,349,149 $ 336,930 $ 7,087,079
=========== =========== ============= ============= ============ =============
See notes to consolidated financial statements.
F-4
96
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------------------ --------------------------------------------------
(in thousands of dollars) 2001 2000 2000 1999 1998
------------------------------------------------ -------------- -------------- ---------------- --------------- ---------------
(Unaudited)
OPERATING ACTIVITIES
Net Income $ 246,023 $233,328 $ 481,117 $ 482,969 $ 293,869
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 7 --- --- --- ---
Increase in accrued interest and
other assets (229,542) (229,966) (456,704) (715,058) (274,217)
Increase (decrease) in Due from/to
Huntington Preferred Capital
Holdings, Inc. 2,869 (54,167) (160,632) (955) 1,676
-------------- -------------- ---------------- --------------- ---------------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 19,357 (50,805) (136,219) (233,044) 21,328
-------------- -------------- ---------------- --------------- ---------------
INVESTING ACTIVITIES
Decrease (increase) in interest
bearing deposits in banks 185,869 (382,153) (751,801) (67,071) ---
Participation interests purchased (3,195,323) (2,552,484) (6,747,027) (6,589,409) (2,362,702)
Sales and repayments on loans
underlying participations 2,993,684 2,986,151 7,587,730 7,478,648 3,922,098
Purchase of premises and equipment (797) --- --- --- ---
-------------- -------------- ---------------- --------------- ---------------
NET CASH (USED FOR) PROVIDED BY
INVESTING ACTIVITIES (16,567) 51,514 88,902 822,168 1,559,396
-------------- -------------- ---------------- --------------- ---------------
FINANCING ACTIVITIES
Proceeds from issuance of Class A
preferred stock --- --- --- 1,000 ---
Proceeds from issuance of Class B
preferred stock --- --- 400,000 --- ---
Dividends paid on common stock --- --- (458,335) (545,600) (162,029)
Dividends paid on Class A
preferred stock --- --- (80) (80) ---
Return of capital to Huntington
Preferred Capital Holdings, Inc. --- --- --- --- (1,296,005)
-------------- -------------- ---------------- --------------- ---------------
NET CASH USED FOR FINANCING
ACTIVITIES --- --- (58,415) (544,680) (1,458,034)
-------------- -------------- ---------------- --------------- ---------------
CHANGE IN CASH AND CASH
EQUIVALENTS 2,790 709 (105,732) 44,444 122,690
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 61,403 167,135 167,135 122,691 1
-------------- -------------- ---------------- --------------- ---------------
AT END OF PERIOD $ 64,193 $167,844 $ 61,403 $ 167,135 $ 122,691
============== ============== ================ =============== ===============
Supplemental information:
Capital contributions from common
stockholder in the form of loans $ 7,432 $160,766 $ 198,614 $ 274,806 $ 7,163,348
Income taxes paid --- --- --- --- ---
Interest paid --- --- --- --- ---
See notes to consolidated financial statements.
F-5
97
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
---------------------
Huntington Preferred Capital, Inc. (HPCI) is a real estate investment trust
(REIT) organized under Ohio law in 1992. HPCI is a subsidiary of Huntington
Preferred Capital Holdings, Inc. (Holdings), an Indiana corporation. Holdings is
a subsidiary of The Huntington National Bank (HNB), a national banking
association organized under the laws of the United States and headquartered in
Columbus, Ohio. HNB is a wholly owned subsidiary of Huntington Bancshares
Incorporated (HBI). HPCI has one subsidiary, HPCLI, Inc., formed in March 2001
for the purpose of holding certain assets (primarily leasehold improvements)
expected to be transferred into and then contributed by HPCI to this subsidiary
in exchange for common shares of HPCLI, Inc.
HPCI was initially formed to acquire, hold, and manage property acquired by
the HNB in foreclosure (Other Real Estate Owned or OREO property). In May 1998,
HPCI began to acquire, hold, and manage participation interests in mortgage
assets and other authorized investments in a manner so as to qualify as a REIT
for federal income tax purposes under the Internal Revenue Code of 1986, as
amended. As a REIT, HPCI is generally not subject to federal income tax on net
income and capital gains that it distributes to its shareholders. All of the
OREO property was sold prior to May 1998 and HPCI has not held OREO property
since that time.
In May 1998, Holdings entered into a loan participation agreement with HNB
that granted Holdings 95% participation interests in various commercial,
consumer, and mortgage loans identified from time to time by HNB. HPCI entered
into a loan subparticipation agreement with Holdings, which granted a 100%
participation interests in Holdings' participation interests in those same
loans. In March 2001, Holdings purchased for cash additional 4% participation
interests in such loans from HNB pursuant to an amendment to the loan
participation agreement. HPCI then purchased for cash the additional 4%
participation interests from Holdings pursuant to an amendment to the loan
subparticipation agreement. Thus, HPCI currently owns 99% participation
interests in those commercial, consumer, and mortgage loans.
In January 1999, HPCI issued 1,000 Class A preferred securities, at a
liquidation preference of $1,000 per share. The Class A preferred securities are
non-voting and have a dividend rate of $80.00 per share per year. In December
2000, HPCI issued 400,000 Class B preferred securities, at a liquidation
preference of $1,000 per share. All of the Class B preferred securities are
owned by HPC Holdings-II, Inc., a subsidiary of HBI. The Class B preferred
securities have a variable dividend rate based on London Interbank Offered Rate
(LIBOR) which is determined quarterly.
In February 2001, HBI purchased 18,667 common shares from Holdings (
restated to reflect the April 2001 18,666.66667-for-1 stock split) for
approximately $8.4 million and one Holdings common share from HNB for
approximately $6.7 million. HBI owns .1% and Holdings owns 99.9% of the issued
and outstanding common shares of HPCI.
In April 2001, HPCI created three new classes of preferred securities,
Class C & Class D preferred securities and blank check preferred securities.
HPCI intends to issue the Class C preferred securities to the public for the
purpose of increasing HNB's consolidated regulatory capital and to raise funds
for Holdings, which may be distributed or loaned to, or held on deposit with
HNB. At the same time, HPCI intends to issue to Holdings approximately 14
million Class D preferred securities . Like the Class C preferred securities, it
is anticipated that dividends on the Class D preferred securities will be
noncumulative and the securities will have a 1/10th vote per share. The Class D
preferred securities will rank senior to common shares and Class B preferred
securities and on a parity with the Class A and Class C preferred securities. It
is anticipated that HPCI will receive from Holdings $25 per Class D preferred
security, or $350 million in the aggregate, payable in additional participation
interests in certain commercial and real estate loans and, to a lesser extent,
participation interests in certain automobile loans, as well as certain
leasehold improvements.
F-6
98
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------
BASIS OF PRESENTATION: The audited consolidated financial statements
include the accounts of HPCI and its subsidiary and are presented in conformity
with accounting principles generally accepted in the United States (GAAP). The
unaudited interim consolidated financial statements 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 consolidated financial statements have been prepared according
to the rules and regulations of the Securities and Exchange
Commission and, therefore, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted.
The preparation of audited consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect amounts reported in the financial statements. Actual results could
differ from those estimates.
LOAN PARTICIPATIONS: Participation interests in loans are generally
purchased from the Bank by Holdings at the Bank's carrying value, which is the
principal amount outstanding plus accrued interest, net of unearned income, if
any. Similarly, participation interests in loans are generally purchased from
Holdings by HPCI at Holdings' carrying value.
Interest income is primarily accrued based on unpaid principal balances of
the underlying loans as earned. The underlying commercial and real estate loans
are placed on non-accrual status and stop accruing interest when collection of
principal or interest is in doubt. 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 HNB. Consistent with these statutes, consumer
loans are charged off when HNB, as servicer, determines that a loan is doubtful
of collection. Generally, this occurs when a loan is 120 days past due. HPCI
uses the cost recovery method in accounting for cash received on non-accrual
loans. Under this method, cash receipts are applied entirely against principal
until the loan has been collected in full, after which time any additional cash
receipts are recognized as interest income. When, in management's judgment, the
borrower's ability to make periodic interest and principal payments resumes, the
loan is returned to accrual status.
Net deferred loan fees and costs, when applicable, are amortized as an
adjustment of the related loan yields using the interest method.
ALLOWANCE FOR LOAN LOSSES: An allowance for loan losses was transferred to
HPCI from HNB on seasoned loans underlying the participations at the time the
participations were purchased. The allowance for loan losses reflects
management's judgment as to the level considered appropriate to absorb inherent
losses in the loan participation portfolio. This judgment is based on a review
of individual loans underlying the participations, historical loss experience of
similar loans owned by HNB, economic conditions, portfolio trends, and other
factors. When necessary, the allowance for loan losses will be adjusted through
a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the loan balance, or a portion thereof,
is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
The portion of the allowance for loan losses related to impaired loans
(non-accruing and restructured credits, exclusive of smaller, homogeneous loans)
is based on discounted cash flows using the loans initial effective interest
rate or the fair value of the collateral for collateral-dependent loans.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the related assets.
Estimated useful lives employed are on average 30 years for buildings, 10 to 20
years for building improvements, 10 years for land improvements, 3 to 7 years
for equipment, and 10 years for furniture and fixtures.
INCOME TAXES: HPCI has elected to be treated as a REIT for Federal income
tax purposes and intends to comply with the provisions of the Code. Accordingly,
HPCI will not be subject to Federal income tax to the extent it distributes its
earnings to stockholders and as long as certain asset, income and stock
ownership tests are met in accordance with the Code. As HPCI expects to qualify
as a REIT for Federal income tax purposes, no provision for income taxes is
included in the accompanying financial statements.
F-7
99
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined as "Cash and
due from banks". There were no interest payments or Federal income tax payments
made in any year presented.
--------------------------------------------------------------------------------
NOTE 3 - LOAN PARTICIPATIONS
----------------------------
At June 30, 2001 and 2000, December 31, 2000 and 1999, loan participations were comprised of the following:
----------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
---------------------------------- -----------------------------------
(in thousands of dollars) 2001 2000 2000 1999
----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Commercial $ 524,297 $ 723,549 $ 614,956 $ 813,809
Consumer secured by real property 1,053,293 861,457 971,594 791,396
Residential real estate 586,347 700,640 355,571 749,563
Commercial real estate 4,107,659 3,700,522 3,894,527 3,688,669
---------------- ---------------- ---------------- ---------------
Total loan participations $ 6,271,596 $ 5,986,168 $ 5,836,648 $ 6,043,437
================ ================ ================ ===============
Note: There are no underlying loans outstanding which would be considered a
concentration of lending in any particular industry, group of industries, or
business activity. Underlying loans are, however, concentrated in the five
states of Ohio, Michigan, Florida, Indiana, and Kentucky and comprise 97.3% of
the portfolio at June 30, 2001.
On July 12, 2001, HBI announced a comprehensive strategic and financial
restructuring plan. Under the plan, HBI will, among other things, divest its
Florida retail and corporate banking businesses. On September 26, 2001, HBI
announced that it has entered into an agreement to sell its Florida operations
to SunTrust Banks, Inc. Approximately $1.2 billion of loans underlying HPCI's
participation interests, representing 18% of its total assets, will be included
in this sale. HPCI will receive cash for the sale of its participation interests
and intends to distribute that cash to its common shareholders. HPCI does not
anticipate that any proceeds received from the sale of its participation
interests will be distributed to its preferred security holders. It is
anticipated that the sale of HBI's Florida operations, which is subject to
regulatory approval and other customary conditions, will close in the first
quarter of 2002.
--------------------------------------------------------------------------------
Note 4 - Allowance for Loan Losses
----------------------------------
A summary of the transactions in the allowance for loan losses follows for the first six months of 2001 and 2000 and each of
the three years ended December 31:
-----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
------------------------------------ -------------------------------------------------------
(in thousands of dollars) 2001 2000 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
BALANCE, BEGINNING OF YEAR $ 91,826 $ 104,151 $ 104,151 $ 87,799 $ ---
Allowance of loan participations
acquired/(redeemed) (266) (11,551) (9,434) 25,988 88,789
Net loan losses (1,207) 1,491 (2,891) (9,636) (990)
Provision for loan losses 371 --- --- --- ---
--------------- ------------------ ---------------- ---------------- ----------------
BALANCE, END OF YEAR $ 90,724 $ 94,091 $ 91,826 $ 104,151 $ 87,799
=============== ================== ================ ================ ================
HPCI allocates the Allowance for Loan Losses (ALL) to each loan category
based on a detailed credit quality review performed periodically on specific
commercial loans based on size and relative risk and other relevant factors such
as portfolio performance, internal controls, and impacts from mergers and
acquisitions. Loss factors are
F-8
100
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
applied on larger, commercial and industrial and commercial real estate credits
and represent management's estimate of the inherent loss. The portion of the
allowance allocated to homogeneous consumer loans is determined by applying
projected loss ratios to various segments of the loan portfolio giving
consideration to existing economic conditions and trends.
Projected loss ratios incorporate factors such as trends in past due and
non-accrual amounts, recent loan loss experience, current economic conditions,
risk characteristics, and concentrations of various loan categories. Actual loss
ratios experienced in the future, however, could vary from those projected
because a loan's performance depends not only on economic factors but also other
factors unique to each customer. The diversity in size of corporate commercial
loans can be significant as well and even if the projected number of loans
deteriorates, the dollar exposure could significantly vary from estimated
amounts. Additionally, the impact on individual customers from recent economic
events may yet be known. To ensure adequacy to a higher degree of confidence, a
portion of the ALL may be considered unallocated. While amounts are allocated to
various portfolio segments, the total ALL, excluding impairment reserves
prescribed under provisions of Statement of Financial Accounting Standard No.
114, is available to absorb losses from any segment of the loan participation
portfolio.
An underlying loan involved in a participation purchased by HPCI is
considered impaired when, based on current information and events, it is
determined that estimated cash flows are less than the cash flows estimated at
the date of purchase. A loan originated by HNB 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 is 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
is collateral dependent. Loans totaling $ 71.3 million (unaudited) and $ 38.4
million (unaudited) at June 30, 2001 and 2000, compared with $41.9 million at
December 31, 2000, and $38.5 million and $17.0 million at year-end 1999 and
1998, which have been identified as impaired and were on nonaccrual status, have
been measured by the fair value of existing collateral.
--------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------
At June 30, 2001 and 2000, and December 31, 2000 and 1999, premises and equipment stated at cost were comprised
of the following:
-----------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
--------------------------- ----------------------------
(in thousands of dollars) 2001 2000 2000 1999
-----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Land and land improvements $ 365 $ - $ - $ -
Buildings 533 - - -
----------- ----------- ----------- -------------
Total premises and equipment 898 - - -
Less accumulated depreciation and amortization 109 - - -
----------- ----------- ----------- -------------
NET PREMISES AND EQUIPMENT $ 789 $ - $ - $ -
=========== =========== =========== =============
F-9
101
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Depreciation expense charged to expense was:
SIX MONTHS ENDED
JUNE 30, TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2001 2000 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Total depreciation of premises and
equipment $ 7 $ --- $ --- $ --- $ ---
=========== =========== ============ =========== ============
The above assets were purchased from HPCI's parent company, Huntington Preferred
Capital Holdings, Inc.
NOTE 6 - DIVIDENDS AND STOCK SPLIT
----------------------------------
Holders of Class A preferred securities are entitled to receive, if, when
and as authorized and declared by the Board of Directors of HPCI out of funds
legally available, dividends at a rate of $80.00 per share per annum of the
initial liquidation preference ($1,000.00 per share). Dividends on the Class A
preferred securities, if authorized and declared, are payable annually in
December to holders of record on the respective record dates fixed for such
purpose by the Board of Directors in advance of payment. Dividends to the
holders of the Class A preferred securities totaled $80,000 in each of the years
ended December 31, 2000 and 1999.
The holders of the Class B preferred securities are entitled to receive
dividends at a variable rate based on the three-month London Interbank Offered
Rate (LIBOR) published on the first day of each calendar quarter. Dividends on
the Class B preferred securities are declared quarterly and payable annually and
are non-cumulative. The Board of Directors may declare dividends on Class B
preferred securities and may set apart funds for payment of dividends at the
time of declaration. Any dividend when and if declared by the Board of Directors
out of funds legally available shall be payable annually on a date fixed by the
Board of Directors. No dividend, except payable in common shares, shall be
declared or paid upon Class B preferred securities unless dividend obligations
are satisfied on the Class A preferred securities.
For the offered Class C preferred securities, dividends are payable if,
when, and as declared by the Board of Directors of HPCI. If declared, dividends
are payable quarterly in arrears. 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 (i) on HPCI's common stock and (ii) on other HPCI-issued securities
ranking junior to the Class C preferred securities will be prohibited for that
period and at least the following three quarterly dividend periods.
The holders of common shares are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors, subject to
any preferential dividend rights of any outstanding preferred securities.
Dividends on common stock declared and paid for each of the years ended December
31, 2000, 1999, and 1998 were $458,335, $413,760, and $293,869, respectively.
There were no dividends paid for the most recent six month period ended June 30,
2001.
In April 2001, the Board of Directors declared a 18,666.66667-for-1 stock
split on its common stock outstanding. The result of the transaction increased
the number of authorized, issued, and outstanding common shares from 750 to 14
million. Earnings per share data has been restated for this stock split .
F-10
102
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - RELATED PARTY TRANSACTIONS
-----------------------------------
HPCI holds a 100% subparticipation interest through an agreement with
Holdings and Holdings holds a 99% participation interest in loans originated by
HNB and its subsidiaries. The participation and subparticipation interests are
in commercial, commercial mortgage, residential real estate, and consumer loans
secured by real property that were either directly underwritten by HNB and its
subsidiaries or acquired by HNB. HPCI expects to continue to purchase such
interests in the future from Holdings. See Note 3 for the amount of the
participations outstanding.
HPCI entered into servicing agreements with HNB whereby HNB performs the
servicing of the commercial, commercial mortgage, residential mortgage, and
consumer loans underlying the participations held by HPCI in accordance with
normal industry practice. The servicing fee HNB charges is .125% per year of the
outstanding principal balances of the commercial, commercial mortgage, and
consumer loans underlying the participation interests and .282% per year of the
interest income collected on the underlying residential mortgages. Servicing fee
expense paid to HNB totaled $ 4.1 million (unaudited) and $ 4.0 million
(unaudited) for the six months ended June 30, 2001 and 2000, and were $7.8
million for the years ended December 31, 2000 and 1999 and $4.5 million for the
year ended December 31, 1998.
In its capacity as servicer, HNB collects and holds the commercial and
mortgage 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 HNB in the accompanying financial
statements.
HPCI, HBI, and HNB share personnel to handle day-to-day operations of the
company such as accounting, financial analysis, tax reporting, and other
administrative functions. On a monthly basis, HPCI reimburses HNB and HBI for
the cost related to the time spent by employees for performing these functions.
. The personnel costs were $ 81,000 for each of the six months ended June 30,
2001 and 2000, and $162,000 for each of the years ended December 31, 2000 and
1999, compared with $95,000 for the year ended December 31, 1998.
At December 31, 2000, and for all previous periods presented in the
financial statements, Holdings was the owner of 100% of the outstanding common
stock of HPCI. Accordingly, Holdings was entitled to receive all common
dividends. Common dividends paid for the twelve months ended December 31, 2000
were $458,335 and, $413,760 and $293,869 for the years ended December 31, 1999
and 1998, respectively. In February 2001, HBI purchased 18,667 shares of the 14
million HPCI outstanding common shares from Holdings ( after adjusting for the
April 2001 18,666.66667-for-1 stock split). There were no common dividends
declared or paid during the most recent six-month period ended June 30, 2001.
Of the outstanding shares of Class A preferred securities, 89.9% are owned
by Holdings while present and past employees of HBI and its subsidiaries own
10.1%. The Class A preferred securities are non-voting and have a dividend rate
of $80.00 per share per year. All of the Class B preferred securities owned by
HPC Holdings-II, Inc., a subsidiary of HBI. The Class B preferred securities
have a variable dividend rate based on London Interbank Offered Rate (LIBOR)
which is determined quarterly. Dividends paid on Class A preferred securities
were $80,000 for each of the years ended December 31, 2000 and 1999.
HPCI maintains and transacts all of its cash activity through a
non-interest bearing demand deposit account with HNB. In addition, HPCI invests
available funds in Eurodollar deposits with HNB for a term of not more than 30
days. the following amounts were on deposit with HNB:
----------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
------------------------------ ------------------------------
2001 2000 2000 1999
----------------------------------------------------------------------------------------------------------
(Unaudited)
Non-interest bearing $ 64,193 $ 167,844 $ 61,403 $167,135
Interest bearing 633,003 449,224 818,872 67,071
-------------- -------------- -------------- --------------
$ 697,196 $ 617,068 $ 880,275 $ 234,206
============== ============== ============== ==============
F-11
103
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HNB is eligible to obtain advances from various federal agencies such as
the Federal Home Loan Bank of Cincinnati, or FHLBC. In the future, HPCI may be
asked to act as co-borrower or guarantee HNB's obligations under such advances
and/or pledge all or a portion of its assets in connection with those advances.
Any such borrowing, guarantee, or pledge would rank senior to the Series C
preferred securities upon liquidation. To date, HPCI has never acted as
co-borrower or guarantor of any of HNB's obligations under such advances and has
never pledged any assets. HNB, however, intends to obtain a line of credit or
one or more advances prior to the end of 2001. This line of credit or advances
is not to exceed at any one time $800 million in the aggregate from the FHLBC.
HPCI may have up to 25% of its assets serve as collateral for such advances. Any
such borrowing, guarantee, and/or pledge will not require HPCI to obtain the
consent of the holders of its Class C preferred securities in order to complete
HNB's transaction.
--------------------------------------------------------------------------------
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------
The following methods and assumptions were used by HPCI to estimate the
fair value of the classes of financial instruments:
Cash and due from banks and interest bearing deposits in banks - The
carrying value approximates the fair value for cash and short-term investments.
Loan participations purchased - Variable rate loans that reprice frequently
are based on carrying amounts, as adjusted for estimated credit losses. The fair
values for other loans are estimated using discounted cash flow analyses and
employ interest rates currently being offered for loans with similar terms. The
rates take into account the position of the yield curve, as well as an
adjustment for prepayment risk, operating costs, and profit. This value is also
reduced by an estimate of probable losses in the loan portfolio. Based upon the
calculations, the carrying values disclosed in the accompanying financial
statements approximate fair value.
F-12
104
HUNTINGTON PREFERRED CAPITAL, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma consolidated financial statements give effect to
the sale of loans underlying HPCI's participation interests as a result of sale
of HBI's Florida operations to SunTrust Banks, Inc. HPCI believes that up to
$1.2 billion of loans underlying its participation interests, representing 18%
of its total assets, may be included in this sale. These unaudited pro forma
consolidated financial statements reflect the sale based on preliminary
accounting adjustments. Estimates relating to the carrying values of certain
assets, liabilities and other items have been made as more fully described in
the Notes to the Unaudited Pro Forma Consolidated Financial Statements. Actual
adjustments, which may include adjustments to additional assets, liabilities
and other items, will be made on the basis of appraisals and evaluations as of
the effective date of the sale and, therefore, may differ from those reflected
in these unaudited pro forma consolidated financial statements.
It is anticipated that HPCI will receive cash for the sale of its
participation interests at net book value to Holdings and ultimately to HNB. It
is HPCI's current intention to then return capital to its common shareholders,
after setting aside the appropriate amount of dividends for preferred
shareholders, so that HPCI will continue to qualify as a REIT for federal income
tax purposes. HPCI does not anticipate that any proceeds received from the sale
of its participation interests will be distributed to its preferred security
holders. The sale of HBI's Florida operations is expected to close in the first
quarter 2002.
The unaudited pro forma consolidated financial statements on the following
pages present:
- the historical consolidated balance sheet of HPCI as of June 30, 2001,
giving effect to the sale of the Florida-related loans underlying its
participation interests as if it had occurred on that date; and
- the issuance of HPCI Class C and Class D preferred securities for loan
participations and other assets, and
- the historical consolidated statements of income of HPCI for the six
months ended June 30, 2001, and for the twelve months ended December
31, 2000, in each case giving effect to the sale of the
Florida-related loans underlying its participation interests, return
of capital to HPCI's common shareholders and estimated preferred
dividends on all HPCI's classes of HPCI preferred securities as if it
had been effected at the beginning of the periods presented.
These unaudited pro forma results include management's best estimate of the
impact of the sale of the Florida loans underlying HPCI's participation
interests and the issuance of its Class C and Class D preferred securities in
exchange for loan participations and other assets. The unaudited pro forma
consolidated financial statements may not be indicative of the financial
position or results of operations that actually would have occurred had the
transactions been consummated during the periods or as of the dates indicated,
or which will be attained in the future. The unaudited pro forma consolidated
financial statements should be read in conjunction with the historical
financial statements, which appear elsewhere in this prospectus.
F-13
105
HUNTINGTON PREFERRED CAPITAL, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2001
(UNAUDITED)
HUNTINGTON HUNTINGTON
SALE OF PREFERRED PREFERRED
HUNTINGTON HPCI CAPITAL, SALE OF CAPITAL,
PREFERRED PREFERRED INC. FLORIDA RETURN OF INC. PRO
(in thousands of dollars) CAPITAL, INC. SECURITIES PRO FORMA PARTICIPATIONS CAPITAL FORMA
---------------- ------------ ----------- -------------- ------------- --------------
(A) (B)
ASSETS
Cash and due from banks $ 64,193 $ 64,193 $ 64,193
Interest bearing deposits in banks 633,003 633,003 $1,248,671 $(1,248,671) 633,003
Due from Huntington Preferred
Capital Holdings, Inc. 157,033 157,033 157,033
Loan participations purchased 6,271,596 $ 371,000 6,642,596 (1,248,957) 5,393,639
Less allowance for loan losses 90,724 5,380 96,104 (10,366) 85,738
---------------- ------------ ------------- ------------- -------------
Net loan participations purchased 6,180,872 365,620 6,546,492 (1,238,591) 5,307,901
---------------- ------------ ------------- ------------- -------------
Premises and equipment 789 31,000 31,789 31,789
Accrued income and other assets 51,189 3,380 54,569 (10,080) 44,489
---------------- ------------ ------------- ------------- ------------- -------------
TOTAL ASSETS $7,087,079 $ 400,000 $7,487,079 $ --- $(1,248,671) $ 6,238,408
================ ============ ============= ============= ============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to Huntington Preferred
Capital Holdings, Inc. $ --- $ --- $ --- $ ---
---------------- ------------- ------------- --------------
Total Liabilities --- --- --- ---
---------------- ------------- ------------- --------------
Shareholders' equity
Preferred shares, $25 par value --- ---
Class A Preferred stock,
$1,000 par value 1,000 1,000 1,000
Class B Preferred stock,
$1,000 par value 400,000 400,000 400,000
Class C preferred shares, $25
par value --- $ 50,000 50,000 50,000
Class D preferred shares, $25
par value --- 350,000 350,000 350,000
Common stock - without par
value 6,349,149 6,349,149 $(1,248,671) 5,100,478
Retained earnings 336,930 336,930 336,930
---------------- ------------ ------------- ------------- ------------- -------------
Total Shareholders' Equity 7,087,079 400,000 7,487,079 --- (1,248,671) 6,238,408
---------------- ------------ ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $7,087,079 $ 400,000 $7,487,079 $ --- $(1,248,671) $ 6,238,408
================ ============ ============= ============= ============= ==============
ASSET QUALITY DATA
Non-performing assets $ 71,284 $ 158,449 $ 155,744
Non-performing loans as a % of
total loan participations 1.14% 2.39% 2.89%
Non-performing loans as a % of
total assets 1.01% 2.12% 2.50%
Allowance for loan losses as a
% of non-performing loans
underlying participations 127.27% 60.65% 55.05%
Allowance for loan losses as a
% of total loan
participations 1.45% 1.45% 1.59%
See Notes to Unaudited Pro Forma Consolidated Financial Statements
F-14
106
HUNTINGTON PREFERRED CAPITAL, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
HUNTINGTON
HUNTINGTON PREFERRED
HUNTINGTON SALE OF HPCI PREFERRED SALE OF CAPITAL,
(in thousands of dollars, PREFERRED PREFERRED CAPITAL, INC. FLORIDA INC. PRO
except per share amounts) CAPITAL, INC. SECURITIES PRO FORMA PARTICIPATIONS FORMA
-------------- -------------- --------------- -------------- --------------
(A) (B)
Interest and fee income
Interest on loan participations purchased $ 229,492 $ 15,707 $ 245,199 $ (50,393) $ 194,806
Fees 3,750 257 4,007 (823) 3,184
Interest bearing deposits in banks 17,311 --- 17,311 --- 17,311
-------------- -------------- --------------- -------------- --------------
TOTAL INTEREST AND FEE INCOME 250,553 15,964 266,517 (51,216) 215,301
-------------- -------------- --------------- -------------- --------------
NET INTEREST INCOME 250,553 15,964 266,517 (51,216) 215,301
Provision for loan losses 371 --- 371 --- 371
-------------- -------------- --------------- -------------- --------------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 250,182 15,964 266,146 (51,216) 214,930
-------------- -------------- --------------- -------------- --------------
Non-interest income 28 2,310 2,338 --- 2,338
Non-interest expense 4,187 2,583 6,770 (897) 5,873
-------------- -------------- --------------- -------------- --------------
INCOME BEFORE INCOME TAXES 246,023 15,691 261,714 (50,319) 211,395
Provision for income taxes --- --- --- --- ---
-------------- -------------- --------------- -------------- --------------
NET INCOME $ 246,023 $ 15,691 $ 261,714 (50,319) $ 211,395
============== ============== =============== ============== ==============
NET INCOME APPLICABLE TO
PREFERRED SHARES $ 19,790 $ 19,790
=============== ==============
NET INCOME APPLICABLE TO
COMMON SHARES $ 241,924 $ 191,605
=============== ==============
PER COMMON SHARE(1)
Net Income
Basic and diluted $ 17.57 $ 17.28 $ 13.69
Cash Dividends $ --- $ -- $ ---
AVERAGE COMMON SHARES(1)
Basic and diluted 14,000,000 14,000,000 14,000,000
(1) Adjusted for the 18,666.66667-to-1 stock split in April 2001.
See Notes to Unaudited Pro Forma Consolidated Financial Statements
F-15
107
HUNTINGTON PREFERRED CAPITAL, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
HUNTINGTON
HUNTINGTON PREFERRED
HUNTINGTON SALE OF HPCI PREFERRED SALE OF CAPITAL,
(in thousands of dollars, PREFERRED PREFERRED CAPITAL, INC. FLORIDA INC. PRO
except per share amounts) CAPITAL, INC. SECURITIES PRO FORMA PARTICIPATIONS FORMA
-------------- -------------- --------------- -------------- --------------
(A) (B)
Interest and fee income
Interest on loan participations purchased $ 451,913 $ 31,688 $ 483,601 $ (95,261) $ 388,340
Fees 4,092 287 4,379 (863) 3,516
Interest bearing deposits in banks 33,095 --- 33,095 --- 33,095
-------------- -------------- --------------- -------------- --------------
TOTAL INTEREST AND FEE INCOME 489,100 31,75 521,075 (96,124) 424,951
-------------- -------------- --------------- -------------- --------------
NET INTEREST INCOME 489,100 31,975 521,075 (96,124) 424,951
Provision for loan losses --- --- --- --- ---
-------------- -------------- --------------- -------------- --------------
NET INTEREST INCOME 489,100 31,975 521,075 (96,124) 424,951
AFTER PROVISION FOR LOAN LOSSES
-------------- -------------- --------------- -------------- --------------
Non-interest income --- 4,100 4,100 --- 4,100
Non-interest expense 7,983 4,641 12,624 (1,649) 10,975
-------------- -------------- --------------- -------------- --------------
INCOME BEFORE INCOME TAXES 481,117 31,434 512,551 (94,475) 418,076
Provision for income taxes --- --- --- --- ---
-------------- -------------- --------------- -------------- --------------
NET INCOME $ 481,117 $ 31,434 $ 512,551 $ (94,475) $ 418,076
============== ============== =============== ============== ==============
NET INCOME APPLICABLE TO
PREFERRED SHARES $ 39,580 $ 39,580
=============== ==============
NET INCOME APPLICABLE TO
COMMON SHARES $ 472,971 $ 378,496
=============== ==============
PER COMMON SHARE(1)
Net Income
Basic and diluted $ 34.36 $ 33.78 $ 27.04
Cash dividends $ -- $ -- $ --
AVERAGE COMMON SHARES(1)
Basic and diluted 14,000,000 14,000,000 14,000,000
(1) Adjusted for the 18,666.66667-to-1 stock split in April 2001.
See Notes to Unaudited Pro Forma Consolidated Financial Statements
F-16
108
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(A) Assumes the issuance of Noncummulative Exchangeable Perpetual Preferred
Securities, Class C, at $25 par value, and Noncummulative Exchangeable
Perpetual Preferred Securities, Class D, at $25 par value, to Holdings. For
pro forma presentation purposes, it has been assumed that net income
attributable to preferred shares will be $80,000 per year on the Class A
preferred securities, 5.00% on the Class B preferred securities, 7.50% on
the Class C preferred securities, and 4.50% on the Class D preferred
securities.
The following has also been assumed: Holdings, HPCI's parent company, will
pay $25 per Class C and Class D preferred security. Holdings' payment for
the two classes of preferred securities will be in the form of additional
participation interests in the fair market value of commercial loans,
including commercial real estate loans, and consumer loans not secured by
real estate, as well as leasehold interests. The consumer loans not secured
by real estate will include a combination of automobile, truck, and
equipment loans. HPCI intends to hold these participation interests as long
term investments and transfer the leasehold improvements to HPCI's wholly
owned subsidiary, HPCLI, Inc. in exchange for common shares of HPCLI, Inc.
A portion, assumed to be 24% for purposes of these pro forma financial
statements, of these assets purchased from Holdings in exchange for the
issuance of the preferred stock is expected to be non-performing in nature.
The pro forma financial results include estimated income from these assets
assumed under performing status, which may not be indicative of future
results.
These pro forma financial statements assumes Holdings purchases all
2,000,000 Class C preferred securities and all 14,000,000 Class D preferred
securities in exchange for the fair market value of the participation
interests and leasehold improvements, which approximates $400 million, paid
to HPCI by Holdings.
Holdings, a statutory underwriter, intends to sell the Class C preferred
securities through an underwriting syndicate to the public for cash
consideration of $25 per share. HPCI will not receive any of Holdings'
proceeds from the sale of HPCI's Class C preferred securities owned by
Holdings. The proceeds, before expenses and commissions to be received by
Holdings from the sale of the Class C preferred securities, are expected to
be $50 million.
Holdings also intends to sell the Class D preferred securities to HNB for
cash consideration of $25 per share. The proceeds, before expenses and
commissions to be received by Holdings from the sale of the Class D
preferred securities, are expected to be $350 million. Holdings will
deposit the proceeds received from the sale of the Class C and D preferred
securities in an interest-bearing deposit account or product with HNB or
lend the proceeds to HNB. Holdings will not use the proceeds to purchase
additional assets for contribution to HPCI.
Holdings will pay all expenses and underwriting discounts and commissions
involved with the offering to the public. The pro forma result of
operations for the six and twelve month periods include the interest income
and servicing expense impacts of the participations purchased and
depreciation for the leasehold improvements assuming the assets were
transferred at the beginning of the period presented.
F-17
109
HUNTINGTON PREFERRED CAPITAL, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(B) On July 12, 2001, HBI announced a comprehensive strategic and financial
restructuring plan. Under the plan, HBI signed a definitive agreement on
September 26, 2001, to divest its Florida retail and corporate banking
business. It is expected that up to $1.2 billion of loans underlying HPCI's
participation interests, representing 18% of HPCI's total assets, may be
included in this sale. It is anticipated that HPCI will receive cash for
the sale of its participation interests at net book value to Holdings and
ultimately to HNB. It is HPCI's current intention to then return capital to
our common shareholders, after the appropriate accrual for preferred
dividends. The sale is expected to close in the first quarter 2002.
These pro forma results include management's best estimate of the impact of
the sale of the Florida loans underlying HPCI's participation interests.
These estimates may not be indicative of the financial position or results
of operations that actually would have occurred had the transaction been
consummated during the periods or as of the dates indicated, or which will
be attained in the future.
F-18
110
The information in this prospectus is not complete and may be amended. We may
not sell these securities until the registration statement filed with the
Office of the Controller of the Currency is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION,
preliminary prospectus dated October 11, 2001 ANNEX I
BANK PROSPECTUS
2,000,000 PREFERRED SECURITIES
THE HUNTINGTON NATIONAL BANK
_____% NONCUMULATIVE PERPETUAL PREFERRED SECURITIES, CLASS C
(LIQUIDATION AMOUNT $25.00 EACH)
AVAILABLE ONLY IN EXCHANGE IN SPECIFIED CIRCUMSTANCES FOR
____% NONCUMULATIVE EXCHANGEABLE PERPETUAL PREFERRED SECURITIES, CLASS C OF
HUNTINGTON PREFERRED CAPITAL, INC.
----------------------------
Terms of our Class C preferred securities include:
- Dividends are:
- payable quarterly only if declared, and
- noncumulative, which means that you will not receive them if they are
not declared.
- Available only through an exchange for Class C preferred securities of
our affiliate, Huntington Preferred Capital, Inc., which we refer to
as our REIT affiliate, if such exchange is directed by the Office of
the Comptroller of the Currency, or the OCC, upon its determination of
the existence of the following circumstances:
- we are or may in the near term become undercapitalized, or
- we are in conservatorship or receivership.
- Have substantially equivalent terms as to dividends, liquidation
preference, and redemption as the Class C preferred securities of our
REIT affiliate except that our Class C preferred securities are not
listed and have no voting rights.
- Redeemable at our option on or after [_____], 2021, with the prior
consent of the OCC.
- Senior to our common shares and Class B preferred securities, but on a
parity with our Class D preferred securities and junior to the claims
of our depositors and creditors.
There is no public market for our Class C preferred securities. If they
are issued, we do not intend to have them listed on any national securities
exchange or national quotation system.
YOU SHOULD CAREFULLY CONSIDER THE "RISK FACTORS AND OTHER
CONSIDERATIONS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS, IN ADDITION TO THE RISK
FACTORS INCLUDED IN THE PROSPECTUS FOR THE CLASS C PREFERRED SECURITIES OF OUR
REIT AFFILIATE, BEFORE YOU INVEST IN THOSE SECURITIES. THE RISK FACTORS IN THIS
PROSPECTUS INCLUDE:
- The conditional exchange may occur at a time when we may not be able
to pay dividends.
- The conditional exchange may be based on a receivership, and others
may have liquidation claims senior to yours.
- Dividends are payable only if declared and are non-cumulative.
- You may have adverse tax consequences as a result of the conditional
exchange.
- The shares will not be listed on any stock exchange and a market for
them may never develop.
These shares are being offered in a share for share exchange, and we
will not receive any proceeds from the offering.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE OCC, THE SECURITIES AND EXCHANGE COMMISSION, NOR ANY OTHER
FEDERAL AGENCY OR STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
The date of this Prospectus is [_________, 2001].
111
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary............................................... BP-3
Risk Factors And Other Considerations............................ BP-6
Forward-Looking Statements And Cautionary Factors................ BP-10
Where You Can Find More Information.............................. BP-11
Use Of Proceeds.................................................. BP-11
Capitalization................................................... BP-12
Selected Consolidated Financial Data............................. BP-12
Business ........................................................ BP-14
Regulation....................................................... BP-16
Beneficial Ownership Of Our Stock................................ BP-19
Management....................................................... BP-20
Description Of Our Class C Preferred Securities.................. BP-30
Description Of Our Capital Stock................................. BP-34
Experts ........................................................ BP-36
Legal Matters.................................................... BP-37
The Huntington National Bank Index To Financial Statements....... BP-38
BP-2
112
PROSPECTUS SUMMARY
Before you decide to invest in the Class C preferred securities of our REIT
affiliate, you should carefully read, in addition to the prospectus of our REIT
affiliate, the following summary, together with the more detailed information
and financial statements and related notes contained elsewhere in this
prospectus, especially the risks relating to our Class C preferred securities
discussed under "Risk Factors and Other Considerations."
THE HUNTINGTON NATIONAL BANK
We are an interstate national banking association organized under the laws
of the United States and headquartered in Columbus, Ohio. At June 30, 2001, we
operated over 500 offices in Florida, Indiana, Kentucky, Maryland, Michigan, New
Jersey, Ohio, and West Virginia. In addition, we offer international banking
services through our headquarters in Columbus, as well as through our Cayman
Islands office and Hong Kong office. At June 30, 2001, we had total assets of
$27.8 billion, total deposits of $ 19.2 billion, and total shareholder's equity
of $2.1 billion. All of the financial information presented in this document is
on a consolidated basis with our direct and indirect subsidiaries and,
therefore, includes the financial information of our REIT affiliate. We are a
wholly owned subsidiary of Huntington Bancshares Incorporated.
Our deposits are fully insured by the Bank Insurance Fund, or BIF, which is
administered by the Federal Deposit Insurance Corporation, or FDIC, up to the
maximum permitted by law of $100,000 per insured depositor. We are subject to
comprehensive regulation, examination, and supervision by the OCC. At June 30,
2001, our total risk-based capital ratio was 10.57%, our Tier 1 risk-based
capital ratio was 6.65%, and our leverage ratio was 6.64%. These ratios are
sufficient for us to be qualified as "well-capitalized" under the OCC's
regulations.
Our principal executive offices are located at Huntington Center, 41 South
High Street, Columbus, Ohio 43287, and our telephone number is (614) 480-8300.
HUNTINGTON PREFERRED CAPITAL, INC.
We originally established our REIT affiliate as a direct wholly owned
operating subsidiary in 1992 for the purpose of acquiring, holding, and managing
property we acquired in foreclosure. We refer to this type of property as OREO
property. In 1998, our REIT affiliate sold the last of its OREO property,
acquired mortgage assets and certain other appropriate investments, and
qualified as a real estate investment trust, or REIT, for federal income tax
purposes. As such, it is generally not subject to federal income tax on net
income and capital gains that it distributes to its shareholders. Our REIT
affiliate has one wholly owned subsidiary, HPCLI, Inc., which was formed for the
purpose of holding certain non-interest bearing assets. At present, we hold our
REIT affiliate through a direct operating subsidiary, Huntington Preferred
Capital Holdings, Inc., or Holdings. We are the principal stockholder in
Holdings, and the remaining stock in both Holdings and our REIT affiliate is
held by our parent, Huntington Bancshares.
HUNTINGTON BANCSHARES INCORPORATED
Huntington Bancshares, our parent company, was incorporated in 1966 as a
Maryland corporation. It is a multi-state financial holding company
headquartered in Columbus, Ohio. At June 30, 2001, it had total assets of $ 27.9
billion, total deposits of $ 19.0 billion, and total shareholders' equity of
$2.4 billion.
Huntington Bancshares is a legal entity separate and distinct from us and
our affiliates. The principal source of its income is our earnings. Our
dividends to Huntington Bancshares are its principal source of cash flow.
Huntington Bancshares is a publicly held corporation which files reports and
other information with the Securities and Exchange Commission, or SEC.
PREFERRED STOCK OFFERING OF OUR REIT AFFILIATE
A registration statement has been filed by our REIT affiliate with the SEC
for the sale through Holdings as a statutory underwriter of our REIT affiliate's
___% 2,000,000 Noncumulative Exchangeable Perpetual Preferred Securities, Class
C, to third parties. The proceeds from the sale of our REIT affiliate's Class C
preferred securities
BP-3
113
are designed to qualify as part of our core, or Tier 1, capital, subject to the
regulatory capital requirements and/or limitations applicable to us. If limited
as to Tier 1, a portion of the proceeds from the sale of our REIT affiliate's
Class C preferred securities is expected to constitute Tier 2 capital for us.
If a Supervisory Event occurs and the OCC so directs in writing, the REIT
affiliate's Class C preferred securities would be exchanged for our Class C
preferred securities. A Supervisory Event occurs if:
- we become undercapitalized under prompt corrective action regulations;
- we are placed into conservatorship or receivership; or
- the OCC, in its sole discretion, anticipates that we may become
undercapitalized in the near term.
The exchange feature, which we refer to as a Conditional Exchange, was
designed to ensure that the Class C preferred securities of our REIT affiliate
provide the same level of capital support to us on a consolidated basis as other
forms of core capital by making the capital represented by our REIT affiliate's
Class C preferred securities directly available to our creditors in certain
circumstances.
Because our REIT affiliate is qualified as a REIT for federal income tax
purposes, dividends payable by it on its Class C preferred securities will be
deductible for income tax purposes. The treatment of our REIT affiliate's Class
C preferred securities as our core capital and our REIT affiliate's ability to
deduct, for income tax purposes, the dividends payable on its Class C preferred
securities will provide us with a more cost-effective means of obtaining
regulatory capital than if we were to issue preferred securities ourselves.
RECENT DEVELOPMENTS
On July 12, 2001, Huntington Bancshares announced a comprehensive strategic
and financial restructuring plan. Under the plan, Huntington Bancshares expects
to, among other things, divest its Florida retail and corporate banking business
and consolidate banking offices in its core Midwest franchise. Expense
initiatives were implemented that are expected to result in savings of
approximately $36 million in 2001. These actions are expected to free up
significant capital, which will be used to strengthen our balance sheet. In
addition, we expect to take restructuring and special charges of approximately $
122 million after tax in the second, third, and fourth quarters of 2001 related
to exited businesses, branch consolidations, asset impairment, staffing
rationalization, and credit, accounting, and legal reserves.
On September 26, 2001, Huntington Bancshares announced that it has entered
into an agreement to sell its Florida operations to Suntrust Banks, Inc. The
Florida operations include 141 branches, 456 store-based and remote ATMs, and
various other customer support and operations in Eastern and Western Florida.
Also being offered are up to $ 4.6 billion in deposits and up to $ 2.6 billion
in loans. The sale of Huntington Bancshares' Florida operations is expected to
close in the first quarter of 2002. We have included a pro forma financial
statements beginning on page BPF-49 of this prospectus to reflect the impact on
us of the sale of Huntington Bancshares' Florida operations.
On August 16, 2001, it was announced that Thomas E. Hoaglin, our President
and Chief Executive Officer, will assume the additional position of Chairman of
the Board of Huntington Bancshares and us, effective on August 16, 2001. Mr.
Hoaglin, who joined us in February 2001, succeeds Frank Wobst, who is 67 years
old. Mr. Wobst is retiring as our Chairman and as a director after serving us
for 27 years.
RISK FACTORS
See "Risk Factors and Other Considerations" for a discussion of the
risk factors and other considerations relating to us and our Class C preferred
securities.
BP-4
114
THE OFFERING
Securities Offered:....... 2,000,000 [___]% Noncumulative Perpetual Preferred
Securities, Class C.
Conditional
Exchange................Our Class C preferred securities will be issued, if
ever, in connection with an exchange for the Class C
preferred securities of our REIT affiliate at the
direction of the OCC following a Supervisory Event on
a one for one basis.
Ranking:...................Our Class C preferred securities, if issued, would
rank equal to our Class D preferred securities, if
issued, senior to our common stock and Class B
preferred securities, if issued, and junior to all
claims of our creditors, including the claims of our
depositors.
Dividends:.................Dividends on our Class C preferred securities are
payable at the rate of [__]% per annum of the
liquidation amount of $25.00 per share, if, when, and
as declared by our board of directors. If declared,
dividends are payable quarterly in arrears on March
31, June 30, September 30, and December 31 of each
year or, if any such day is not a business day, on
the next business day, unless the next business day
falls in a different calendar year, in which case the
dividend will be paid on the preceding business day.
Dividends accrue in each quarterly period from the
first day of such period, whether or not dividends
are paid with respect to the preceding period.
Dividends on our Class C preferred securities are not
cumulative and, accordingly, if we do not declare a
dividend or declare less than a full dividend on our
Class C preferred securities for a quarterly dividend
period, holders of our Class C preferred securities
will have no right to receive a dividend or the full
dividend, as the case may be, for that period, and we
will have no obligation to pay a dividend for that
period, whether or not dividends are declared and
paid for any future period with respect to either our
Class C preferred securities or our common shares. If
the full dividend is not paid on the Class C
preferred securities for a quarterly dividend period,
the payment of dividends on our common shares (100%
of which are owned by Huntington Bancshares) will be
prohibited for that period and at least the following
three quarterly dividend periods.
Upon the exchange of the Class C preferred securities
of our REIT affiliate for our Class C preferred
securities, any accrued and unpaid dividends at the
time of the exchange on the Class C preferred
securities of our REIT affiliate for the most recent
quarter will be deemed to be accrued and unpaid
dividends on our Class C preferred securities. Our
ability to pay cash dividends is subject to
regulatory and other restrictions described in this
prospectus.
Liquidation Preference:....The liquidation preference for each of our Class C
preferred securities is $25.00, plus an amount equal
to any quarterly accrued and unpaid dividends for the
then-current dividend payment.
Redemption:................Our Class C preferred securities are not redeemable
prior to [_____], 2021. On and after [_______] 2021,
our Class C preferred securities may be redeemed for
cash at our option, with the prior approval of the
OCC, in whole or in part, at any time and from time
to time, at a redemption price of $25.00 per share,
plus accrued and unpaid dividends for the most recent
quarter, if any. Our Class C preferred securities
will not be subject to any sinking fund or mandatory
redemption and will not be convertible into any of
our other securities.
Voting Rights:.............Holders of our Class C preferred securities, if any,
will not have any voting rights, except as expressly
required by law, and will not be entitled to elect
any directors.
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Absence of a
Public Market .............There is currently no public market for our Class C
preferred securities as such securities have not been
issued. We do not intend to list our Class C
preferred securities, if issued, on any national
securities exchange or national quotation system.
Use of Proceeds ...........Our Class C preferred securities will only be issued
in connection with a Conditional Exchange for the
Class C preferred securities of our REIT affiliate.
Accordingly, the exchange will produce no proceeds
for us.
RISK FACTORS AND OTHER CONSIDERATIONS
An investment in the Class C preferred securities of our REIT affiliate
involves risks commensurate with an investment in our preferred shares. You
should carefully consider the following consequences that would result from an
exchange of the Class C preferred securities of our REIT affiliate into our
Class C preferred securities, including the following risk factors associated
with our operations.
THE CONDITIONAL EXCHANGE OF CLASS C PREFERRED SECURITIES OF OUR REIT AFFILIATE
FOR OUR CLASS C PREFERRED SECURITIES WOULD OCCUR AT A TIME WHEN WE MAY NOT BE
ABLE TO PAY DIVIDENDS.
Upon the occurrence of a Supervisory Event, the OCC could direct our
REIT affiliate to exchange its Class C preferred securities for our Class C
preferred securities. As a result, you would involuntarily become a holder of
our Class C preferred securities at a time when our financial condition was
deteriorating and we may not be in a financial position to make any dividend
payments on our Class C preferred securities.
THE CONDITIONAL EXCHANGE MAY BE BASED ON OUR RECEIVERSHIP, WHICH WILL MEAN THAT
OTHERS MAY HAVE LIQUIDATION CLAIMS SENIOR TO YOURS.
In the event of our receivership, the claims of our depositors and our
secured, senior, general, and subordinated creditors would be entitled to a
priority of payment over the claims of holders of equity interests such as our
Class C preferred securities. As a result of such subordination, either if we
were to be placed into receivership after the Conditional Exchange or if the
Conditional Exchange were to occur after our receivership, the holders of our
Class C preferred securities likely would receive, if anything, substantially
less than they would have received had the Class C preferred securities of our
REIT affiliate not been exchanged for our Class C preferred securities.
DIVIDENDS ON OUR CLASS C PREFERRED SECURITIES ARE NOT CUMULATIVE AND YOU ARE NOT
ENTITLED TO RECEIVE DIVIDENDS UNLESS DECLARED BY OUR BOARD OF DIRECTORS.
Dividends on our Class C preferred securities are not cumulative.
Consequently, if our board of directors does not declare a dividend on our Class
C preferred securities for any quarterly period, the holders of our Class C
preferred securities would not be entitled to any such dividend whether or not
funds are or subsequently become available. The board of directors may
determine, in its business judgment, that it would be in our best interests to
pay less than the full amount of the stated dividends on our Class C preferred
securities or no dividends for any quarter even if funds are available. Factors
that would be considered by the board of directors in making this determination
are our financial condition and capital needs, the impact of legislation and
regulations as then in effect or as may be proposed, economic conditions, and
such other factors as the board of directors may deem relevant.
YOU MAY HAVE ADVERSE TAX CONSEQUENCES AS A RESULT OF THE CONDITIONAL EXCHANGE.
The exchange of the Class C preferred securities of our REIT affiliate
for our Class C preferred securities would be a taxable event to you under the
Internal Revenue Code, and you would incur a gain or loss, as the case may be,
measured by the difference between your basis in the Class C preferred
securities of our REIT affiliate and the fair market value of our Class C
preferred securities received in exchange.
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YOU WOULD LOSE SOME SHAREHOLDER RIGHTS YOU MAY CONSIDER IMPORTANT IN THE EVENT
OF A CONDITIONAL EXCHANGE.
While most terms of our Class C preferred securities would be the same
as those of the Class C preferred securities of our REIT affiliate, you would no
longer have any voting rights or any right to elect directors if dividends were
missed, as you had previously.
OUR CLASS C PREFERRED SECURITIES WILL NOT BE LISTED ON THE NASDAQ NATIONAL
MARKET OR ANY STOCK EXCHANGE AND A MARKET FOR THEM MAY NEVER DEVELOP.
Although the Class C preferred securities of our REIT affiliate will be
listed on the Nasdaq National Market, we do not intend to apply for listing of
our Class C preferred securities on any national securities exchange or national
quotation system in which case no active public market for our Class C preferred
securities would develop or be maintained.
THE OCC MAY IMPOSE DIVIDEND PAYMENT AND OTHER RESTRICTIONS ON US.
The OCC has the right to examine us and our activities. Under certain
circumstances, including any determination that our activities constitute an
unsafe and unsound banking practice, the OCC has the authority to restrict our
ability to transfer assets, to make distributions to our stockholders, including
dividends to the holders of our Class C preferred securities, or to redeem our
preferred securities.
Our ability to pay dividends is governed by the National Bank Act and
OCC regulations. Under such statute and regulations, all dividends by a national
bank must be paid out of current or retained net profits, after deducting
reserves for losses and bad debts. The National Bank Act further restricts the
payment of dividends out of net profits by prohibiting a national bank from
declaring a cash dividend on its common shares until the surplus fund equals the
amount of capital stock or, if the surplus fund does not equal the amount of
capital stock, until certain amounts from net profits are transferred to the
surplus fund. In addition, the prior approval of the OCC is required for the
payment of a dividend if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits for the year
combined with its net profits for the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred securities.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, we would be prohibited by federal statute and the
OCC's prompt corrective action regulations from making any capital distribution
if, after giving effect to the distribution, we would be classified as
"undercapitalized" under the OCC's regulations.
Payment of dividends on our Class C preferred securities could also be
subject to regulatory limitations if we became "undercapitalized" for purposes
of the OCC prompt corrective action regulations. "Undercapitalized" is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1
risk-based capital ratio of less than 4.0%, or a core capital, or leverage,
ratio of less than 4.0%. At June 30, 2001, we were in compliance with all of our
regulatory capital requirements. As of that date, our total risk-based capital
ratio was 10.57%, our Tier 1 risk-based capital ratio was 6.65% and our leverage
ratio was 6.64%. Such ratios, adjusted to give effect to the sale of our REIT
affiliate's Class C preferred securities in the current offering of those
securities, would be 10.75%, 6.83% and 6.82%, respectively. We currently intend
to maintain our capital ratios in excess of the "well-capitalized" levels under
the OCC's regulations, however, we cannot assure you that we will be able to do
so.
CHANGES IN INTEREST RATES COULD NEGATIVELY IMPACT OUR FINANCIAL CONDITION,
RESULTS OF OPERATIONS, AND ABILITY TO PAY DIVIDENDS.
Our results of operations depend substantially on our net interest
income, which results from the difference between interest earned on
interest-earning assets, such as investments, loans, and leases, and interest
paid on interest-bearing liabilities, such as deposits and borrowings. Interest
rates are highly sensitive to many factors, including governmental monetary
policies and domestic and international economic and political conditions.
Conditions such as inflation, recession, unemployment, money supply, and other
factors beyond our control may
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also affect interest rates. Fluctuations in market interest rates are neither
predictable nor controllable and may have a material adverse effect on our
business, financial condition, and/or results of operations.
If our interest-earning assets mature or reprice more quickly than our
interest-bearing liabilities in a given period, a decrease in market interest
rates could adversely affect our net interest income. Likewise, if our
interest-bearing liabilities mature or reprice more quickly than our
interest-earning assets in a given period, an increase in market interest rates
could adversely affect our net interest income. Fixed rate loans increase our
exposure to interest rate risk in a rising rate environment because our
interest-bearing liabilities would be subject to repricing before assets, such
as fixed rate loans, become subject to repricing.
At June 30, 2001, 47.0% of our loans, as measured by the aggregate
outstanding principal amount, bore interest at fixed rates and the remainder
bore interest at adjustable rates. Adjustable-rate loans decrease the risks to a
lender associated with changes in interest rates but involve other risks. As
interest rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, and the increased payment increases the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In a declining interest rate
environment, there may be an increase in prepayments on our loans as the
borrowers refinance their mortgages at lower interest rates. Under these
circumstances, we may find it more difficult to make additional loans with rates
sufficient to support the payment of the dividends on our Class C preferred
securities. Because the rate at which dividends are required to be paid on our
Class C preferred securities is fixed, there can be no assurance that a
declining interest rate environment would not adversely affect our ability to
pay full, or even partial, dividends on our Class C preferred securities.
Changes in interest rates also can affect the value of our loans and
other interest-earning assets and our ability to realize gains on the sale or
resolution of assets. A portion of our earnings results from transactional
income, such as accelerated interest income resulting from loan prepayments,
gains on sales of loans and leases, and gains on sales of real estate. This type
of income can vary significantly from quarter-to-quarter and year-to-year based
on a number of different factors, including the interest rate environment. An
increase in interest rates that adversely affects the ability of borrowers to
pay the principal or interest on our loans may lead to an increase in our
non-performing assets and a reduction of discount accreted into income, which
could have a material adverse effect on our results of operations.
LOCAL ECONOMIC CONDITIONS MAY AFFECT THE VALUE OF OUR LOANS.
The results of our operations will be affected by local economic
conditions and other factors which are beyond our control and which could impair
the value of our loan portfolio, such as:
- local and other economic conditions affecting real estate and
other collateral values;
- the continued financial stability of a borrower and the
borrower's ability to make loan principal and interest
payments, which may be adversely affected by job loss,
recession, divorce, illness, or personal bankruptcy;
- the ability of tenants to make lease payments;
- the ability of a property to attract and retain tenants, which
may be affected by conditions such as an oversupply of space
or a reduction in demand for rental space in the area, the
attractiveness of properties to tenants, competition from
other available space, and the ability of the owner to pay
leasing commissions, provide adequate maintenance and
insurance, pay tenant improvement costs, and make other tenant
concessions;
- interest rate levels and the availability of credit to
refinance loans at or prior to maturity; and
- increased operating costs, including energy costs, real estate
taxes, and costs of compliance with environmental controls and
regulations.
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OUR LOANS ARE CONCENTRATED IN FIVE STATES AND ADVERSE CONDITIONS IN THOSE
STATES, IN PARTICULAR, COULD NEGATIVELY IMPACT OUR OPERATIONS.
A significant portion of our loans at June 30, 2001, were located in
Ohio, Michigan, Florida, Indiana, and Kentucky. Because of the concentration of
our loans in those states, in the event of adverse economic conditions in those
states, we would likely experience higher rates of loss and delinquency on our
loans than if the loans were more geographically diversified. Additionally, our
loans may be subject to a greater risk of default than other comparable loans in
the event of adverse economic, political, or business developments or natural
hazards that may affect Ohio, Michigan, Florida, Indiana, or Kentucky and the
ability of property owners in those states to make payments of principal and
interest on the loans.
IF OUR REIT AFFILIATE FAILS TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST, WE
WILL BE SUBJECT TO A HIGHER CONSOLIDATED EFFECTIVE TAX RATE.
Our REIT affiliate is operated so as to qualify as a REIT under the
Internal Revenue Code for federal income tax purposes. Qualification as a REIT
involves application of highly technical and complex provisions of the Internal
Revenue Code for which there are only limited judicial or administrative
interpretations. If our REIT affiliate fails to meet any of the stock
distribution, stock ownership, or other requirements for REITs, it will no
longer qualify as a REIT and the resulting tax consequences would increase our
effective tax rate, which would materially and adversely effect our net income.
WE COULD BE HELD RESPONSIBLE FOR ENVIRONMENTAL LIABILITIES OF PROPERTIES WE
ACQUIRE THROUGH FORECLOSURE.
In the event that we are forced to foreclose on a defaulted mortgage
loan to recover our investment in the mortgage loan, we may be subject to
environmental liabilities in connection with the underlying real property which
could exceed the value of the real property. Although we intend to exercise due
diligence to discover potential environmental liabilities prior to the
acquisition of any property through foreclosure, hazardous substances or wastes,
contaminants, pollutants or sources thereof may be discovered on properties
during our ownership or after a sale to a third party. There can be no assurance
that we would not incur full recourse liability for the entire cost of any
removal and clean-up on an acquired property, that the cost of removal and
clean-up would not exceed the value of the property or that we could recoup any
of the costs from any third party.
WE DO NOT HAVE INSURANCE TO COVER OUR EXPOSURE TO BORROWER DEFAULTS AND
BANKRUPTCIES OR SPECIAL HAZARD LOSSES THAT ARE NOT COVERED BY STANDARD
INSURANCE.
Generally, we do not obtain credit enhancements such as borrower
bankruptcy insurance or obtain special hazard insurance for our loans, other
than standard hazard insurance which we typically require, which will in each
case only relate to individual loans. Without third party insurance, we are
subject to risks of borrower defaults and bankruptcies and special hazard losses
that are not covered by standard hazard insurance.
DELAYS IN LIQUIDATING DEFAULTED LOANS COULD OCCUR WHICH COULD CAUSE OUR BUSINESS
TO SUFFER.
Substantial delays could be encountered in connection with the
liquidation of the collateral securing defaulted loans, with corresponding
delays in our receipt of related proceeds. An action to foreclose on a mortgaged
property or repossess and sell other collateral securing a loan is regulated by
state statutes and rules. Any such action is subject to many of the delays and
expenses of lawsuits, which may impede our ability to foreclose on or sell the
collateral or to obtain proceeds sufficient to repay all amounts due on the
related loan.
WE EXPERIENCE SIGNIFICANT COMPETITION IN BOTH ATTRACTING AND RETAINING DEPOSITS
AND IN ORIGINATING LOANS.
Competition in the form of price and service from other banks and
financial companies such as savings and loans, credit unions, finance companies,
and brokerage firms is intense in most of the markets we serve. Mergers between
and the expansion of financial institutions both within and outside Ohio have
provided significant competitive pressure in our major markets. Since 1997, when
federal interstate banking legislation became effective that made it permissible
for bank holding companies in any state to acquire banks in any other state, and
for banks to
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establish interstate branches subject to certain limitations by individual
states, actual or potential competition in each of our markets has intensified.
Internet banking, offered both by established traditional institutions and by
start-up Internet-only banks, constitutes another significant form of
competitive pressure on our business.
Financial services reform legislation enacted in November 1999
eliminates the long-standing Glass-Steagall Act restrictions on securities
activities of bank holding companies and banks. The new legislation, among other
things, permits securities and insurance firms to engage in banking activities
under specified conditions. We expect to see competition intensify from this
relatively new source of competition.
WE COULD EXPERIENCE ADDITIONAL LOSSES ON OUR RESIDUAL VALUES RELATED TO OUR
AUTOMOBILE LEASE PORTFOLIO.
During the fourth quarter of 1999 and in the third quarter of 2000, we
recorded special charges of $58.2 million and $50.0 million, respectively, to
write-down residual values related to our vehicle lease portfolio. In late 2000,
we made a decision to enter into an insurance contract to insure the residual
risk inherent in our $3.1 billion automobile lease portfolio. Accordingly, in
the first quarter of 2001, we purchased two residual value insurance policies,
one for the existing portfolio, as of October 2000 and one for all new leases
originated after that date. The insurance carrier is AA rated by Standard &
Poor's and A+/XV by A.M. Best. Both policies cover the difference between the
contractual residual value and the market value of the auto at the end of the
lease term, as evidenced by Black Book valuations. Both policies provide first
dollar loss coverage, and the policy on the existing portfolio has a cap on
insured losses of $120 million. Insured losses on new originations from October
2000 to March 1, 2002 have a cap of $50 million. We remain liable for full term
leases where the sales price is less than Black Book value for the amount of the
difference between Black Book value and the sales price. We do, however, have a
$45 million reserve available as of June 30, 2001, to cover this risk. We
cannot guarantee that this reserve is sufficient to cover all potential
liabilities associated with our automobile lease portfolio.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS
We have included statements in this prospectus that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements can be identified by
the fact that they do not relate strictly to historical or current facts.
WE CAUTION YOU THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES, ASSUMPTIONS, AND OTHER FACTORS WHICH MAY CAUSE OUR ACTUAL
RESULTS, PERFORMANCE, OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THE FUTURE
RESULTS, PERFORMANCE, OR ACHIEVEMENTS WE HAVE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS.
Many of these factors are beyond our control. These factors include
changes in business and economic conditions; movements in interest rates;
competitive pressures on product pricing and services; success and timing of
business strategies; the nature, extent, and timing of governmental actions and
reforms; successful integration of acquired businesses; and extended disruption
of vital infrastructure. Thus, we encourage you to understand forward-looking
statements to be strategic objectives rather than absolute targets of future
performance.
Forward-looking statements speak only as of the date they are made. We
do not update forward-looking statements. You should assume that the information
appearing in this prospectus is accurate as of the date on the front of this
prospectus only. Our business, financial condition, results of operations, and
prospects may have changed since that date.
We have not, and the underwriters of the securities of our REIT
affiliate have not, authorized any other person to provide you with different
information from that contained in this prospectus or the prospectus for our
REIT affiliate's securities to which this prospectus is attached. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell our REIT
affiliate's securities in any jurisdiction where the offer or sale is not
permitted.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the OCC a registration statement on Form S-11 with
respect to our Class C preferred securities. This prospectus, which forms a part
of that registration statement, does not contain all of the information set
forth in the Form S-11, certain items of which have been omitted as permitted by
the rules and regulations of the OCC. Statements contained in this prospectus as
to the contents of any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Form S-11, each such
statement being qualified in all respects by such reference. For further
information regarding us and our Class C preferred securities offered by this
prospectus, you should refer to the Form S-11 and its exhibits. The Form S-11
and its exhibits may be inspected without charge and copied at prescribed rates
at the public reference facilities maintained by the OCC at 250 E Street S.W.,
Washington, D.C. 20219.
We are a wholly owned subsidiary of Huntington Bancshares. Huntington
Bancshares is a one-bank holding company which files annual, quarterly, and
current reports, proxy statements, and other information with the SEC, under the
Securities Exchange Act of 1934, as amended. Our financial statements and
Huntington Bancshares' financial statements are substantially the same and thus
you can obtain important information on an ongoing basis about Huntington
Bancshares and us by reviewing Huntington Bancshares' SEC filings. These filings
are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You can also read and copy any document filed by Huntington
Bancshares with the SEC at the SEC's public reference rooms. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. You can
also obtain copies of these SEC filings at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549.
Information that is filed by Huntington Bancshares with the SEC after
the date of this prospectus will update and supersede the information included
in this prospectus.
USE OF PROCEEDS
Our Class C preferred securities will be issued, if ever, in connection
with a Conditional Exchange of our REIT affiliate's Class C preferred securities
at the direction of the OCC following a Supervisory Event. We will not receive
any proceeds, directly or indirectly, from the subsequent exchange of our REIT
affiliate's Class C preferred securities for our Class C preferred securities.
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CAPITALIZATION
The following table sets forth our actual capital at JUNE 30, 2001, and
as adjusted as of such date to give effect to (1) the issuance of the Class C
preferred securities by our REIT affiliate to Holdings as a statutory
underwriter and the subsequent sale of the Class C preferred securities to
unaffiliated parties, (2) the issuance of the Class D preferred securities by
our REIT affiliate to Holdings, and (3) an exchange of our REIT affiliate's
Class B, Class C, and Class D preferred securities into our Class B, Class C,
and Class D preferred securities, respectively. This table should be read in
conjunction with our consolidated financial statements and the related notes
included elsewhere in this prospectus. Unaudited pro forma financial data
reflecting the impact on us of the sale of Huntington Bancshares' Florida
operations is provided on Page BPF-49.
JUNE 30, 2001
------------ ------------- --------------
ACTUAL AS ADJUSTED(1)(2) AS ADJUSTED(3)
------------ ----------------- --------------
(Dollars in thousands)
LIABILITIES:
Deposits ................................................. $ 19,168,546 $ 19,168,546 $ 19,168,546
Federal funds purchased and securities sold under
agreements to repurchase .............................. 2,454,471 2,454,471 2,454,471
Other borrowed money...................................... 2,122,208 2,122,208 2,122,208
Subordinated notes and other long-term debt............... 953,547 953,547 953,547
------------ ------------ ------------
Total liabilities.................................... 24,698,772 24,698,772 24,698,772
------------ ------------ ------------
Minority interest in consolidated subsidiaries(a) ............ 415,200 465,200 15,200
SHAREHOLDER'S EQUITY:
Preferred securities:
Class B preferred securities, $1,000 par value,
noncumulative, 500,000 shares authorized, 400,000
shares issued and outstanding as adjusted ............. -- -- 400,000
Class C preferred securities, $25 par value,
noncumulative, 2,000,000 shares authorized, issued
and outstanding as adjusted ........................... -- -- 50,000
Class D preferred securities, $25 par value,
noncumulative, 14,000,000 shares authorized, issued,
and outstanding as adjusted ........................... -- -- --
Common shares, $10 par value, 4,000,000 shares
authorized, issued, and outstanding ................... 40,000 40,000 40,000
Capital surplus........................................... 451,268 451,268 451,268
Accumulated other comprehensive income ................... (4,895) (4,895) (4,895)
Retained earnings......................................... 1,608,819 1,608,819 1,608,819
------------ ------------ ------------
Total shareholder's equity........................... 2,095,192 2,095,192 2,545,192
------------ ------------ ------------
TOTAL CAPITALIZATION...................................... $ 27,209,164 $ 27,259,164 $ 27,259,164
============ ============ ============
REGULATORY CAPITAL RATIOS:
Core (or leverage) ....................................... 6.64% 6.82% 6.82%
Tier 1 risk-based capital ................................ 6.65 6.83 6.83
Total risk-based capital ................................. 10.57 10.75 10.75
(a) Noncumulative preferred securities issued by our REIT affiliate are reported
as minority interest in consolidated subsidiaries until their exchange for
our preferred securities. The Class D preferred securities of our REIT
affiliate held by Holdings are eliminated in the consolidation. Remaining
minority interest in consolidated subsidiaries represents the Class A
preferred securities issued by our REIT affiliate to minority shareholders
and the common stock owned by Huntington Bancshares issued by our REIT
affiliate and holdings.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the three years
ended December 31, 2000, are derived from our audited financial statements. The
following selected consolidated financial data for the two years ended December
31, 1997 and 1996 and for the six months ended June 30, 2001 and 2000, are
derived from unaudited financial statements and reflect all adjustments,
consisting only of normal recurring adjustments, that, in the opinion of our
management, are necessary for a fair and consistent presentation of such data.
Operating results
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for the six months ended June 30, 2001, are not necessarily indicative of
results expected for the entire year. This data should be read in conjunction
with our financial statements, related notes, and other financial information
included elsewhere in this document. Since all of our common shares are owned by
our affiliates, per share data is not included. Unaudited pro forma financial
data reflecting the impact on us of the sale of Huntington Bancshares' Florida
operations is provided on page BPF-49.
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
(in thousands) 2001 2000 2000 1999 1998 1997 1996
----------- ------------ ------------ ----------- ----------- ------------ -------------
INCOME STATEMENT DATA: (unaudited)
Total interest income........ $1,010,289 $1,029,313 $2,096,056 $2,017,599 $1,979,193 $1,973,290 $1,771,218
Total interest expense....... 518,502 554,133 1,148,537 972,018 990,781 955,215 870,191
Net interest income.......... 491,787 475,180 947,519 1,045,581 988,412 1,018,075 901,027
Provision for loan losses.... 150,554 31,287 90,118 88,194 98,609 106,542 76,065
Securities gains (losses).... 4,787 ( 21,570) (14,971) (17,608) 28,650 7,651 17,446
Gains on sale of
credit card portfolios.... --- --- --- 108,530 9,530 --- ---
Non-interest income.......... 221,452 199,675 413,124 444,920 371,201 329,872 298,889
Non-interest expense......... 430,336 384,283 799,188 810,390 786,235 714,771 666,427
Special charges 32,755 --- 50,000 96,791 90,000 51,163 ---
Net income................... 82,453 165,566 288,745 402,970 288,937 307,872 310,550
Operating net income(1)...... 150,360 165,566 321,245 395,340 349,237 354,106 310,550
BALANCE SHEET DATA:
Total assets at period end..... $27,817,697 $28,307,094 $28,430,151 $28,760,019 $28,108,379 $26,590,074 $24,212,671
Total deposits at period end... 19,168,546 19,870,413 20,084,074 19,910,423 19,911,968 18,310,814 16,477,172
Total long-term debt at
period end.................. 953,547 926,059 926,215 878,044 767,854 849,475 613,734
Average shareholder's equity... 2,107,370 2,310,203 2,385,751 2,263,884 1,874,570 1,960,474 1,898,337
Average total assets........... 27,998,686 28,573,560 28,501,259 28,585,620 26,697,454 25,501,932 23,211,433
KEY RATIOS:
Net interest margin........... 3.99% 3.78% 3.77% 4.14% 4.15% 4.34% 4.23%
Return on:
Average total assets........ 0.59 1.17 1.01 1.41 1.08 1.21 1.34
Average total assets -
operating(1).............. 1.08 1.17 1.13 1.38 1.31 1.39 1.34
Average shareholder's
equity.................... 7.89 14.41 12.10 17.80 15.41 15.70 16.36
Average shareholder's
equity - operating(1)..... 14.39 14.41 13.47 17.46 18.63 18.06 16.36
Efficiency ratio(1)............ 61.97 53.32 55.36 51.75 55.68 51.78 54.35
Net charge-offs as a % of
average total loans........ 0.91 0.33 0.40 0.40 0.49 0.50 0.43
Non-performing assets as a %
of total loans and OREO.... 0.79 0.46 0.51 0.48 0.50 0.49 0.46
Allowance for loan losses and
OREO as a % of
non-performing assets...... 210.54 306.28 278.50 299.51 298.28 293.00 296.70
Regulatory capital ratios:
Core (or leverage)......... 6.64 6.35 6.43 5.87 5.61 5.70 6.65
Tier 1 risk-based capital.. 6.65 6.80 6.60 6.56 6.28 6.62 7.93
Total risk-based capital... 10.57 10.97 10.60 10.83 10.48 11.10 11.40
Ratio of earnings to fixed
charges(1):
Excluding interest on 2.20x 1.97x 2.29x 2.79x 2.72x 2.98x 2.66x
deposits.................
Including interest on 2.00x 1.93x 2.06x 2.42x 2.20x 2.39x 2.30x
deposits.................
(1) Excludes 1999 gain from the sale of our credit card portfolio, restructuring
and other charges, net of related taxes.
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BUSINESS
GENERAL
We are a national banking association originally formed as a private
banking house in 1866. We obtained our national banking charter in 1905. We are
headquartered in Columbus, Ohio, and offer a broad range of consumer and
commercial lending, depository, and other financial services. Our commercial
lending efforts are focused primarily on small and middle-market businesses. We
have more than 500 banking offices and a network of over 1,400 ATMs located in
Florida, Indiana, Kentucky, Michigan, New Jersey, Ohio, and West Virginia. We
also have a mortgage banking office in each of Maryland and New Jersey.
International banking services are made available through our headquarters in
Columbus and through an office located in each of the Cayman Islands and Hong
Kong. We also offer products and services online at www.huntington.com and
through our 24-hour telephone. We are the principal subsidiary of Huntington
Bancshares Incorporated, a publicly held corporation that files annual,
quarterly, and periodic reports with the SEC.
At June 30, 2001, we had consolidated assets of $27.8 billion,
deposits of $ 19.2 billion, and shareholder's equity of $2.1 billion. We had
9,421 employees as of June 30, 2001. Additional information regarding our
business can be found under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
Our principal executives offices are located at Huntington Center, 41
South High Street, Columbus, Ohio 43287 and our telephone number is
614-480-8300.
LINES OF BUSINESS
Our major business lines are Retail Banking, Corporate Banking, Dealer
Sales, and the Private Financial Group. A fifth segment includes the impact of
our Treasury function and other unallocated assets, liabilities, revenue, and
expense. Line of business results are determined based upon our business
profitability reporting system which assigns balance sheet and income statement
items to each of the business segments. This process is designed around our
organizational and management structure and, accordingly, the results are not
necessarily comparable with similar information published by other financial
institutions. Financial results for each line of business are included in this
prospectus under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in note 17 to the notes to our
consolidated financial statements included elsewhere in this prospectus.
Retail Banking
Retail Banking provides products and services to over 1.1 million
retail and business banking customers. This business unit's products include
home equity loans, first mortgage loans, installment loans, small business
loans, personal and business deposit products, as well as cash management,
investment, and insurance services. These products and services are offered
through our traditional banking office network, in-store branches, telephone
banking facility and internet banking facility. For the year 2000, the Retail
Banking segment contributed 51% of our operating earnings and comprised 30% of
our total loan portfolio and 81% of our total core deposits.
Corporate Banking
This segment represents our middle-market and large corporate banking
customers who have annual sales of $10-$250 million and who are headquartered in
our markets. These customers use a variety of products and services including,
but not limited to, commercial and industrial loans, commercial construction
financing, asset-based financing, deposit products, and international trade and
cash management services. Our capital markets division also provides alternative
financing solutions for larger business clients, including privately placed
debt, syndicated commercial lending, and the sale of interest rate protection
products. For the year 2000, Corporate Banking contributed 42% of our operating
earnings, and represented 35% of the total loan portfolio and 11% of our total
core deposits.
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Dealer Sales
Dealer Sales product offerings pertain to the automobile lending sector
and include floor plan financing, as well as indirect consumer loans and leases.
The consumer activities comprise the vast majority of the business and involve
the financing of vehicles purchased or leased by individuals through
dealerships. We have relationships with more than 3,000 automobile dealers
primarily in the six states where we have banking offices and contiguous
markets. For the year 2000, Dealer Sales comprised 26% of Huntington's operating
earnings and 31% of its outstanding loans.
Private Financial Group
Huntington's Private Financial Group, which we refer to as the PFG,
provides an array of products and services including institutional and personal
trust, asset management, investment advisory and brokerage services, and
insurance, deposit and loan products. The PFG business line is designed to
provide higher wealth customers with "one-stop shopping" for all their financial
needs. For the year 2000, this segment represented 7% of our operating earnings
and 3% of total loans.
Treasury/Other
We use a match-funded transfer pricing system to allocate interest
income and interest expense to our business segments. This approach consolidates
our interest rate risk management into our Treasury Group. As part of our
overall interest rate risk and liquidity management strategy, the Treasury Group
administers an investment portfolio of approximately $3.2 billion. Revenue and
expense associated with these activities remain within the Treasury Group.
Additionally, the Treasury/Other segment absorbs unassigned assets, liabilities,
equity, revenue, and expense that cannot be directly assigned or allocated to
one of our lines of business. Amortization expense of intangible assets is a
significant component of Treasury/Other.
SUBSIDIARIES
As of June 30, 2001, we had 23 direct and 13 indirect subsidiaries. The
most significant of these subsidiaries are:
- The Huntington Mortgage Company, an Ohio corporation, which is
engaged primarily in the mortgage banking business. Huntington
Mortgage originates, purchases, sells, and services mortgage
loans which are principally first lien, fixed or adjustable
rate mortgages loans secured by single-family residences.
- Huntington Preferred Capital Holdings, Inc., an Indiana
corporation, which holds 99.87% of our REIT affiliate's common
shares, 89.9% of its Class A preferred securities, and 100% of
its Class C and Class D preferred securities.
- Huntington Merchant Services, L.L.C., a Delaware limited
liability company, which is 50% owned by us and 50% owned by
First Data Merchant Services, and which is engaged in offering
payment transaction processing to merchants to enable them to
accept credit and debit cards for purchases.
- The Huntington Investment Company, an Ohio corporation, which
is a licensed broker/dealer that sells securities products to
customers.
- Huntington Asset Advisors, Inc., an Ohio corporation, which
provides investment advisory services to the Huntington Funds.
All of the other direct and indirect subsidiaries in the aggregate
account for approximately 5.4% of our consolidated assets and approximately 3.8%
of our consolidated income.
COMPETITION
Competition in the form of price and service from other banks and
financial companies such as savings and loans, credit unions, finance companies,
and brokerage firms is intense in most of the markets we serve. Mergers between
and the expansion of financial institutions both within and outside Ohio have
provided significant
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competitive pressure in our major markets. Since 1997, when federal interstate
banking legislation became effective that made it permissible for bank holding
companies in any state to acquire banks in any other state, and for banks to
establish interstate branches subject to certain limitations by individual
states, actual or potential competition in each of our markets has intensified.
Internet banking, offered both by established traditional institutions and by
start-up Internet-only banks, constitutes another significant form of
competitive pressure on our business.
Financial services reform legislation enacted in November 1999
eliminates the long-standing Glass-Steagall Act restrictions on securities
activities of bank holding companies and banks. The new legislation, among other
things, permits securities and insurance firms to engage in banking activities
under specified conditions. We expect to see competition intensify from this
relatively new source of competition.
PROPERTIES
Our headquarters are located in the Huntington Center, a thirty-seven
story office building in Columbus, Ohio. Of the building's total office space
available, we lease approximately 39%. The lease term expires in 2015, with nine
five-year renewal options for up to 45 years but with no purchase option. We
have an equity interest in the entity that owns the building. Our other major
properties consist of a thirteen-story and a twelve-story office building, both
of which are located adjacent to the Huntington Center; a twenty-one story
office building, known as the Huntington Building, located in Cleveland, Ohio;
an eighteen-story office building in Charleston, West Virginia; a three-story
office building located in Holland, Michigan; an office building in Lakeland,
Florida; an eleven-story office building in Sarasota, Florida, a 470,000 square
foot Business Service Center in Columbus, Ohio, which serves as our primary
operations and data center; The Huntington Mortgage Company's building, located
in the greater Columbus area; an office complex located in Troy, Michigan; and
two data processing and operations centers located in Ohio. We or our affiliates
own the thirteen-story and twelve-story office buildings, and the Business
Service Center. All of the other major properties are held under long-term
leases. The Lakeland and Sarasota, Florida, offices are expected to be sold as
part of the sale of our Florida operations.
In 1998, we entered into a sale/leaseback agreement that included the
sale of 59 properties. The transaction included a mix of branch banking offices,
regional offices, and operational facilities, including certain properties
described above, which we will continue to operate under a long-term lease.
LEGAL PROCEEDINGS
From time to time we are a party to routine legal proceedings arising
out of our general lending activities and other operations. There are no
material pending legal proceedings to which we or any of our subsidiaries is a
party, or to which any of our or their property is subject, which, if determined
adversely to us or a subsidiary of ours, would individually or in the aggregate
have a material adverse effect on our consolidated financial position.
REGULATION
GENERAL
We are a national banking association and our deposits are, subject to
statutory limits, federally insured and backed by the full faith and credit of
the United States government. We are subject to broad federal regulation and
oversight by the OCC that extends to all our operations. Our federal deposit
insurance is provided by the Bank Insurance Fund, or BIF, of the Federal Deposit
Insurance Corporation, or FDIC. The FDIC has extensive examination and
regulatory power over us. We are also subject to certain regulations
administered by the Board of Governors of the Federal Reserve System, which is
the principal federal regulator of our parent, Huntington Bancshares. In
addition, under recently adopted principles of functional regulation, certain
securities activities of our nonbank subsidiaries are regulated by the SEC.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this prospectus.
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OCC REGULATION OF NATIONAL BANKS
The OCC has extensive authority over the operations of national banks
and their subsidiaries. As part of this authority, we are required to file
periodic reports with the OCC and are subject to periodic examinations by the
OCC. Every national bank, including us, is subject to a semi-annual assessment,
based upon the bank's total assets, to fund the operations of the OCC.
The OCC also has extensive enforcement authority over all national
banks, including us. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders, and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other acts or failures to act may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OCC. Except under certain circumstances, public disclosure of final enforcement
actions by the OCC is required.
The OCC and the other federal banking agencies have adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, internal controls and audit systems, interest rate risk
exposure, compensation and other employee benefits, asset quality, and earnings.
Any institution which fails to comply with these standards must submit a
compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action. We have always met
these safety and soundness standards, which were adopted on an interagency basis
in 1995, and have never been required to submit a compliance plan.
We are subject to the capital regulations of the OCC. The OCC's
regulations establish two capital standards for national banks: a leverage
requirement and a risk-based capital requirement. In addition, the OCC may, on a
case-by-case basis, establish individual minimum capital requirements for a
national bank that vary from the requirements which would otherwise apply under
OCC regulations. We are not subject to any such individual capital requirements.
A national bank that fails to satisfy the capital requirements established under
the OCC's regulations will be subject to such administrative action or sanctions
as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of Tier
1 capital to adjusted total assets of 3% for national banks rated composite 1
under the regulatory rating system for banks. This system, known as the CAMELS
rating system, takes into account such factors as capital, asset quality,
management and earnings, and rates each factor on a scale from 1 to 5; a
"composite 1" institution is considered to be basically sound in every respect
and to give no cause for regulatory concern. National banks not rated composite
1 are required to maintain a minimum ratio of Tier 1 capital to adjusted total
assets of 4% to 5%, depending upon the level and nature of risks of their
operations. For purposes of the OCC's leverage requirement, Tier 1 capital
generally consists of common stockholders' equity and retained income and
certain noncumulative perpetual preferred stock and related income, except that
no intangibles and certain purchased mortgage servicing rights and purchased
credit card relationships may be included in capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain total capital equal to at least
8% of total risk-weighted assets. In the risk-based capital system, the assets
of a national bank, against which it must hold risk-based capital, are assigned
to one of four risk categories, each of which has a specific risk weight that
determines the percentage of the asset that is included in the national bank's
total risk weighted assets. The risk weights are zero for cash or near cash
assets; 20%, typically for claims on other depository institutions in developed
countries; 50%, typically for loans secured by first mortgages on one to four
family residential properties; and 100% for all other assets. For purposes of
the risk-based capital requirement, total capital means Tier 1 capital plus Tier
2 capital, provided that the amount of Tier 2 capital may not exceed the amount
of Tier 1 capital, less certain assets. The components of Tier 2 capital include
certain permanent and maturing capital instruments that do not qualify as core
capital and general valuation loan and lease loss allowances up to a maximum of
1.25% of risk-weighted assets.
The OCC is authorized and, under certain circumstances required, to
take certain actions against national banks that fail to meet their capital
requirements. The OCC is generally required to take action to restrict the
activities of an undercapitalized association. An undercapitalized association
is generally defined to be one with less than either a 4% core capital ratio, a
4% Tier 1 risked-based capital ratio, or an 8% risk-based capital ratio. Any
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undercapitalized association must submit a capital restoration plan and, until
such plan is approved by the OCC, may not increase its assets, acquire another
institution, establish a branch, or engage in any new activities, and generally
may not make capital distributions. The OCC is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
associations. We have never been required to submit a capital restoration plan.
Any national banking association that fails to comply with its capital
plan or is significantly undercapitalized must be made subject to one or more of
additional specified actions and operating restrictions which may cover all
aspects of its operations and include a forced merger or acquisition of the
bank. An association becomes significantly undercapitalized if it has Tier 1
risk-based or core capital ratios of less than 3% or a risk-based capital ratio
of less than 6%. An association that becomes critically undercapitalized by
having a tangible capital ratio of 2% or less is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized associations. In addition, with certain limited exceptions, the
OCC must appoint a receiver or, with the concurrence of the FDIC, a conservator
for an association within 90 days after it becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OCC, including the appointment of a conservator or a receiver.
The OCC is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
In certain of the above circumstances, the OCC could cause the
Conditional Exchange to occur to protect our levels of capital. Whether or not
the OCC caused the Conditional Exchange to occur, the imposition by the OCC of
any of these measures on us may have a substantial adverse effect on our
operations and profitability and the value of our equity securities and/or the
securities of our REIT affiliate.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Our ability to pay dividends is governed by the National Bank Act and
OCC regulations. Under such statute and regulations, all dividends by a national
bank must be paid out of current or retained net profits, after deducting
reserves for losses and bad debts. The National Bank Act further restricts the
payment of dividends out of net profits by prohibiting a national bank from
declaring a cash dividend on its shares of common stock:
- until the surplus fund equals the amount of capital stock or,
- if the surplus fund does not equal the amount of capital
stock, until one-tenth of the national bank's net profits for
the preceding half year in the case of quarterly or
semi-annual dividends, or the preceding two half-year periods
in the case of annual dividends, are transferred to the
surplus fund.
In addition, the prior approval of the OCC is required for the payment of a
dividend if the total of all dividends declared by a national bank in any
calendar year would exceed the total of its net profits for the year combined
with its net profits for the two preceding years, less any required transfers to
surplus or a fund for the retirement of any preferred stock
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, we would be prohibited by federal statute and the
OCC's prompt corrective action regulations from making any capital distribution
if, after giving effect to the distribution, we would be classified as
"undercapitalized" under the OCC's regulations.
INSURANCE OF ACCOUNTS BY THE FDIC
As insurer, the FDIC is authorized to impose deposit insurance premiums
and to conduct examinations of and require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against national banks, after giving the OCC an opportunity to take such action,
and may terminate deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
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The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized and considered of
substantial supervisory concern pay the highest premium. Under the FDIC's rules,
an institution is well capitalized if it has a core capital ratio of at least
5%, a Tier 1 risk-based capital ratio of at least 6%, and a risk-based capital
ratio of at least 10%. An institution is adequately capitalized if it has a core
or Tier 1 risk-based capital ratio of not less than 4% or a risk-based capital
ratio of not less than 8%. Risk classifications of all insured institutions are
made by the FDIC semi-annually. The basis on which the FDIC charges deposit
insurance premiums is currently under consideration in committees of the U.S.
Congress, and future insurance premium levels cannot be predicted at this time.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, known as the CRA, every FDIC
insured institution has a continuing and affirmative obligation consistent with
safe and sound banking practices to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OCC, in connection with its
examination of us, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OCC.
MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM
We are a member of the Federal Reserve System. The Federal Reserve
System requires all depository institutions to maintain non-interest bearing
reserves at specified levels against their transaction accounts, primarily
checking, NOW, and Super NOW checking accounts. At June 30, 2001, we had $14.7
million of Federal Reserve Bank stock, which was in compliance with these
reserve requirements.
National banks are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Bank regulations require associations to
exhaust other reasonable alternative sources of funds before borrowing from the
Federal Reserve Bank.
BENEFICIAL OWNERSHIP OF OUR STOCK
As of June 30, 2001, we had 4,000,000 common shares issued and
outstanding. The following table sets forth the number and percentage of
outstanding common shares beneficially owned by our parent company. We have no
other voting securities issued and outstanding.
NUMBER OF COMMON SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------------------------ ------------------ --------
Huntington Bancshares Incorporated
Huntington Center
41 South High Street 4,000,000 common shares 100%
Columbus, Ohio 43215
None of our directors or executive officers own any of our common
shares.
Although we engage in numerous transactions with our parent company,
there is no general, written management contract or agreement which governs the
provision of services or the payment of fees between us. Transactions between us
are completed in the ordinary course of business and are subject to the
restrictions imposed
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on banks by the Federal Reserve Act and related regulations. From time to time,
we will enter into a written agreement with Huntington Bancshares to cover a
specific transactions; however, all such agreements are required by the Federal
Reserve Act to be on terms and under circumstances that are substantially the
same or at least as favorable to us as those prevailing at the time for
comparable transactions with unaffiliated parties. Additionally, any purchase of
assets by a bank from a nonbank affiliate are subject to quantitative
limitations as are loans from a bank to a nonbank affiliates, including
Huntington Bancshares. Any such loans are also subject to significant
collateralization requirements. The OCC and the Federal Reserve Board regularly
examine us and our parent, respectively, for compliance with these affiliate
transaction limitations and requirements.
MANAGEMENT
DIRECTORS
All of the members of our board of directors are elected annually.
Currently, our board of directors is composed of 17 members. The directors met
six times in person and six times telephonically during 2000. There were no
committees of the board that met during 2000. Our directors are:
Friedrich K.M. Bohm, age 59, has served as Chairman of NBBJ, an
international multi-specialty architecture firm, since March 1997, and as
Managing Partner and Chief Executive Officer for NBBJ from October 1987 to March
1997. Mr. Bohm has served as one of our directors since 1989.
Douglas Borror, age 46, has served as Chairman and Chief Executive
Officer of Dominion Homes, Inc , a residential single family home building
company based in Central Ohio since June 1984. Mr. Borror has served as one of
our directors since 1995.
Peter H. Edwards, age 70, has served since 1987 as Chairman of the
Edwards Companies, a conglomerate based in Columbus, Ohio, for which the
principal activity is real estate development. Mr. Edwards has served as one of
our directors since 1990, and also served as a director from 1973 to 1986.
Douglas E. Fairbanks, age 66, has been retired since December 1991 from
the position of senior Vice President for Ameritech, a subsidiary of SBC
Communications, Inc. Mr. Fairbanks has served as one of our directors since
1987.
Ralph K. Frasier, age 62, has been of counsel to the law firm of
Porter, Wright Morris & Arthur LLP, Columbus, Ohio, since July 1998. Prior to
that time, Mr. Frasier worked for us and Huntington Bancshares in various
officer capacities from the time he joined us in November 1975 until his
retirement in June 1998. At the time of his retirement, Mr. Frasier was our
Executive Vice President, General Counsel, Secretary, and Cashier, and General
Counsel and Secretary for Huntington Bancshares. Mr. Frasier has served as one
of our directors since 1998.
Elaine H. Hairston, age 57, served from June 1990 to December 1997 as
Chancellor for the Ohio Board of Regents, which oversees colleges and
universities in the State of Ohio. Since January 1998, Ms. Hairston has served
as Chancellor Emerita of the Ohio Board of Regents, providing education
consulting. Ms. Hairston has served as one of our directors since 1990.
Edgar W. Ingram, III, age 51, has been Chief Executive Officer and
President of White Castle System, Inc, a family-owned fast food hamburger chain
with restaurants in the midwest and northeast, since January 1980. Mr. Ingram
has served as one of our directors since 1991.
Pete A. Klisares, age 65, has been the principal of Migg Capital, a
venture capital firm in Columbus, Ohio, since June 1999. From August 1997 to
June 1999, Mr. Klisares served as President and Chief Operating Officer for
Karrington Health, Inc., an assisted living facilities company. From August 1993
to December 1997, Mr. Klisares served as Executive Vice President for
Worthington Industries, a diversified metal processing company. Mr. Klisares has
served as one of our directors since 1990, and also served as a director from
1984 to 1986.
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John B. Schulze, age 64, has served as Chairman, President and Chief
Executive Officer for Lamson & Sessions, manufacturer and marketer of
thermoplastic electrical products, since January 1995. Mr. Schulze has served as
one of our directors since 1979.
John Richard Sisson, age 64, has served as Chairman of the Board of
Trustees and as a professor for The Ohio State University since September 1998.
Mr. Sisson also served as Provost and Interim President for The Ohio State
University from January 1997 to August 1998. Mr. Sisson has served as one of our
directors since 1997.
Rodney Wasserstrom, age 59, has served as President and Chief Executive
Officer of The Wasserstrom Company, a distributor and manufacturer of restaurant
supplies and equipment, since June 1979. Mr. Wasserstrom has served as one of
our directors since 1985.
William S. Williams, age 48, is a director and Chairman of The W. W.
Williams Company, providing sales and service of industrial products. Prior to
being named Chairman in April 1999, Mr. Williams served as Vice Chairman and
Chief Executive Officer for The W. W. Williams Company since January 1995. Mr.
Williams has served as one of our directors since 1997.
Helen K. Wright, age 63, is retired after more than 30 years in real
estate investment, principally as majority owner of Erie Square #1 LTD in
Cleveland, Ohio, a general partnership which has been engaged in real estate
management, since 1979. Ms. Wright has served as one of our directors since
1980.
In addition, three of our directors, Thomas E. Hoaglin, who has served
as a director since 2001, Ronald C. Baldwin, who has served as a director since
2001, and Ronald J. Seiffert, who has served as a director since 1996, also
serve as our executive officers. Their executive positions are described below
under the subheading "Executive Officers". We currently have one vacancy on the
Board.
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives $1,500 for each board or
committee meeting the director attends and $150 for each teleconference meeting
the director attends. In addition, each of our non-employee directors receives
retainer payments at an annual rate of $15,000. All or any portion of the
compensation otherwise payable to a director may be deferred if such director
elects to participate in the Huntington Deferred Compensation Plan, which we
refer to as the Directors' Plan.
The Directors' Plan allows the members of our board of directors to
elect to defer receipt of all or a portion of the compensation payable to them
in the future for services as directors. Such deferred amounts are not included
in the gross income of the directors until such time as the deferred amounts are
distributed from the Directors' Plan. We transfer cash equal to 125% of the
deferred compensation to a trust fund where it is allocated to the accounts of
the participating directors.
The trustee of the Directors' Plan has broad investment discretion over
the trust fund and is authorized to invest in many forms of securities and other
instruments, including common shares of our parent, Huntington Bancshares. The
trustee may hold some assets of the Directors' Plan in the form of cash to the
extent the trustee deems necessary. During 2000, the trustee invested the trust
fund primarily in common shares of Huntington Bancshares. The trustee maintains
a separate account for each participating director. Amounts contributed to the
Directors' Plan are credited to the account of each director in the ratio that
the amount deferred by each director bears to the total amount deferred by all
directors. Distribution of a director's account will be made either in a lump
sum or in equal annual installments over a period of not more than ten years, as
elected by each director. Such lump sum distribution will be made or the
installments will commence upon the earlier of 30 days after the attainment of
an age specified by the director at the time the deferral election was made, or
within 30 days of the director's termination as a director.
All of the assets of the Directors' Plan are subject to the claims of
the creditors of Huntington Bancshares and the rights of a director or his or
her beneficiaries to any of the assets of the Directors' Plan are no greater
than
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the rights of an unsecured general creditor of Huntington Bancshares. Directors
who are also our employees do not receive compensation as directors and,
therefore, are ineligible to participate in the Directors' Plan.
EXECUTIVE OFFICERS
Each of our executive officers is listed below, together with a
statement of the business experience of that officer during at least the last
five years. Executive officers are elected annually by our board of directors
and serve at the pleasure of the board.
RONALD C. BALDWIN, age 54, has served as our Vice Chairman, one of our
directors, Vice Chairman of Huntington Bancshares, and President and a director
of our REIT affiliate since April 2001. He oversees the corporate and retail
lines of business. Mr. Baldwin served as President of Retail Delivery for the
Retail Banking Group of Bank One Corporation, managing branches, telephone call
centers, ATM's, and internet banking across a multi-state network from December
1997 to December 2000. Prior thereto, Mr. Baldwin served as Bank One
Corporation's president of Business Banking from January 1996 to December 1997
and as Chairman and Chief Executive Officer of Bank One Wisconsin Corporation
from April 1994 to January 1996.
DANIEL B. BENHASE, age 42, has served as Executive Vice President of
our Private Financial Group since June 2000. Prior to joining us, Mr. Benhase
served as Executive Vice President for Firstar Bank, N.A. from 1992 to 1994, and
as Executive Vice President for Firstar Corporation from 1994 to June 2000,
responsible for managing trust, investment management, private banking, and
brokerage activities.
RICHARD A. CHEAP, age 50, has served as our Executive Vice President,
General Counsel, Secretary, and Cashier and as General Counsel and Secretary for
Huntington Bancshares since May 1998. Mr. Cheap has also served as Vice
President and Secretary and as a director of our REIT affiliate since April
2001. Prior to joining us, Mr. Cheap practiced law with the law firm of Porter,
Wright, Morris & Arthur LLP, Columbus, Ohio, from 1981, and as a partner from
1987 to May 1998. Mr. Cheap concentrated in the areas of general business,
corporate finance, mergers and acquisitions, and business taxation. While with
Porter, Wright, Morris & Arthur LLP, Mr. Cheap represented us in a variety of
matters, including acting as lead attorney in negotiating the terms and
documentation of most of Huntington Bancshares' bank acquisitions during the
preceding nine years.
THOMAS E. HOAGLIN, age 52, has served as our Chief Executive Officer
and President and as Chief Executive Officer and President of Huntington
Bancshares since February 2001 and as our Chairman and Chairman of Huntington
Bancshares since August 2001. Mr. Hoaglin served as Vice Chairman of AmSouth
Bancorporation from February 2000 to August 2000. Mr. Hoaglin served as an
officer in various positions during his 26 year career at Bank One Corporation
until March 1999, including, as Executive Vice President of Private Banking from
October 1998 to March 1999, as Chairman and Chief Executive Officer of Banc One
Services Corp. from June 1997 to October 1998, as Chairman of Project One from
January 1996 to December 1998, as Chairman and Chief Executive Officer of Bank
One Ohio Corporation from 1992 to 1995, and as President and Chief Operating
Officer of Bank One Texas from 1989 to 1992.
MICHAEL J. MCMENNAMIN, age 56, has served as our Executive Vice
President since June 2000 and as Vice Chairman and Chief Financial Officer for
Huntington Bancshares since October 2000. Mr. McMennamin has served our REIT
affiliate as an Executive Vice President since June 2000, as a director since
December 2000, and as Vice President and Treasurer since April 2001. Mr.
McMennamin has also served as President of Huntington Capital Corp. from the
time he joined us in 2000. From November 1998 to February 2000, Mr. McMennamin
served as Group Executive Vice President and Chief Financial Officer of Citizens
Financial Corp. in Providence, Rhode Island. Prior thereto, Mr. McMennamin
served as Executive Vice President and Chief Financial Officer for Bank One
Corporation from May 1995 to November 1998.
RONALD J. SEIFFERT, age 44, has served as our Vice Chairman and
director and as Vice Chairman of Huntington Bancshares since December 1996. He
served as Huntington Bancshares' Executive Vice President and Executive Director
of Commercial Services from January 1996 to December 1996. Prior to that time,
Mr. Seiffert served as our Executive Vice President and Group Manager of the
Commercial Banking Group for the Northern Region from February 1994. Mr.
Seiffert joined us in 1979 and served in various other capacities prior to
February 1994.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us and our
affiliates to our Chief Executive Officer during 2000 and each of the next four
most highly compensated executive officers, for each of the last three fiscal
years ended December 31, 2000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------
OTHER
ANNUAL SECURITIES ALL OTHER
COMPEN- UNDERLYING LTIP COMPEN-
SALARY BONUS SATION OPTIONS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) ($)(2) (#)(3) ($)(4) ($)(5)
-------------------------------------------------------------------------------------------------------------
FRANK WOBST (6) 2000 990,000 -0- (2) 440,000 (4) 39,600
Former Chairman 1999 977,308 1,143,450 109,093 441,045 -0- 39,092
1998 957,500 273,240 88,790 332,750 217,010 39,456
RONALD J. SEIFFERT 2000 395,000 -0- (2) 82,499 (4) 19,800
Vice Chairman 1999 374,936 442,538 (2) 103,695 -0- 18,731
1998 337,500 108,675 (2) 66,550 82,200 13,875
RICHARD A. CHEAP (7) 2000 218,846 -0- (2) 13,200 (4) 9,554
Executive Vice President, 1999 207,308 196,163 (2) 14,639 -0- 8,978
General Counsel, 1998 128,447 41,790 (2) 9,982 N/A -0-
and Secretary
MARTIN MAHAN (8) 2000 205,000 -0- 82,547 27,499 (4) 8,200
Former Executive Vice 1999 177,115 147,151 (2) 14,036 N/A 7,084
President 1998 160,341 49,564 79,233 12,705 N/A 2,833
PETER GEIER (9) 2000 475,000 -0- (2) 137,499 (4) 19,000
Former President and 1999 385,897 556,854 (2) 103,695 -0- 15,436
Chief Operating Officer 1998 337,500 108,675 (2) 66,550 82,200 13,875
-------------------
(1) Includes amounts deferred pursuant to the Huntington Investment and
Tax Savings Plan and the Supplemental Stock Purchase and Tax Savings
Plan. Mr. Wobst's base salary did not change between 1999 and 2000;
the difference in the amounts reported for these years is
attributable to a mid-year change in 1999 from semi-monthly to
bi-weekly earnings periods.
(2) During 1999 and 1998, Mr. Wobst received other annual compensation in
the amounts indicated, including executive life insurance premiums in
the amounts of $79,599 and $67,498, respectively. Payment of
executive life insurance premiums was discontinued in 2000. During
2000, Mr. Mahan received other annual compensation in the amount
indicated including $53,448 for moving expenses plus taxes incurred
on such expenses, and a $25,000 relocation allowance. During 1998,
Mr. Mahan received other annual compensation in the amount indicated
for moving expenses plus taxes incurred on such expenses. Other
annual compensation for Mr. Wobst for 2000, for Mr. Mahan for 1999,
and for each of the other named executive officers for each year
indicated was less than $50,000 and less than 10% of the total of
annual salary and bonus reported for the named executive.
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133
(3) Represents common shares of Huntington Bancshares, adjusted for stock
dividends and stock splits paid after the date of grant.
(4) The Huntington Long-Term Incentive Compensation Plan measures
Huntington Bancshares' performance over multiple-year, overlapping
cycles. Messrs. Wobst, Seiffert, Cheap, and Geier were selected by
the Compensation and Stock Option Committee of the Huntington
Bancshares' board of directors to participate in a cycle which ended
on December 31, 2000; however, the awards are not determinable until
year-end results are published for a peer group of financial
institutions.
(5) Figures represent amounts contributed for each named executive
officer by Huntington Bancshares to the Huntington Investment and Tax
Savings Plan and the Supplemental Stock Purchase and Tax Savings
Plan. For 2000, $6,800 was contributed for each of the named
executive officers under the Huntington Investment and Tax Savings
Plan, and the amounts of $32,800, $13,000, $2,754, $1,400, and
$12,200 were contributed for Messrs. Wobst, Seiffert, Cheap, Mahan,
and Geier, respectively, under the Supplemental Stock Purchase and
Tax Savings Plan.
(6) Mr. Wobst also served as Chief Executive Officer of Huntington
Bancshares from February 1981 until February 2001. Mr. Wobst resigned
as Chairman of Huntington Bancshares and us on August 16, 2001, but
is included in the table because he served as an executive officer
during the year ended December 31, 2000.
(7) Mr. Cheap joined Huntington Bancshares as an executive officer in May
1998.
(8) Mr. Mahan joined Huntington Bancshares in January 1998 and was
designated an executive officer in September 2000. Mr. Mahan resigned
effective June 30, 2001, but is included in the table because he
served as an executive officer during the year ended December 31,
2000.
(9) Mr. Geier resigned as an officer of Huntington Bancshares and us on
January 17, 2001, but is included in the table because he served as
an executive officer during the year ended December 31, 2000.
----------------
EMPLOYMENT AND EXECUTIVE AGREEMENTS
Huntington Bancshares has entered into executive agreements with
Messrs. Seiffert and Cheap. The executive agreements were entered into as part
of Huntington Bancshares' corporate strategy to provide protection for, and thus
retain, its well-qualified executive officers notwithstanding any actual or
threatened change in control of Huntington Bancshares. A "Change in Control"
generally includes:
- the acquisition by any person of beneficial ownership of 25%
or more of Huntington Bancshares' outstanding voting
securities;
- a change in the composition of the board of directors if a
majority of the new directors were not appointed or nominated
by the directors currently sitting on the Board of Directors
or their subsequent nominees;
- a merger involving Huntington Bancshares where Huntington
Bancshares' shareholders immediately prior to the merger own
less than 51% of the combined voting power of the surviving
entity immediately after the merger;
- the dissolution of Huntington Bancshares; and
- a disposition of assets, reorganization, or other corporate
event involving Huntington Bancshares which would have the
same effect as any of the above-described events.
Under each executive agreement, Huntington Bancshares or its successor
must provide severance benefits to the executive officer if his or her
employment is terminated (other than on account of the officer's death or
disability or for cause):
- by Huntington Bancshares, at any time within 36 months after a
Change in Control;
- by Huntington Bancshares, at any time prior to a Change in
Control but after commencement of any discussions with a third
party relating to a possible Change in Control involving such
third party
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("Change in Control Discussions") if the officer's termination
is in contemplation of such possible Change in Control and
such Change in Control is actually consummated within 12
months after the date of such officer's termination;
- by the executive officer voluntarily with Good Reason at any
time within 36 months after a Change in Control of Huntington
Bancshares; or
- by the executive officer voluntarily with Good Reason at any
time after commencement of Change in Control Discussions if
such Change in Control is actually consummated within 12
months after the date of such officer's termination.
"Good Reason" generally means the assignment to the executive officer
of duties which are materially (and, in the case of Mr. Cheap, adversely)
different from such duties prior to the Change in Control, a reduction in such
officer's salary or benefits, or a demand to relocate to an unacceptable
location, made by Huntington Bancshares or its successor either after a Change
in Control or after the commencement of Change in Control Discussions if such
change or reduction is made in contemplation of a Change in Control and such
Change in Control is actually consummated within 12 months after such change or
reduction. An executive officer's determination of Good Reason will be
conclusive and binding upon the parties if made in good faith, except that, if
the executive officer is serving as Chief Executive Officer of Huntington
Bancshares immediately prior to a Change in Control, the occurrence of a Change
in Control will be conclusively deemed to constitute Good Reason.
In addition to accrued compensation, bonuses, and vested benefits and
stock options, the executive officer's severance benefits payable under his
executive agreement include:
- a lump-sum cash payment equal to three times (or, in the case
of Mr. Cheap, two and one-half times) the officer's highest
base annual salary in effect during the 12-month period prior
to the Change in Control;
- a lump-sum cash payment equal to three times (or, in the case
of Mr. Cheap, two and one-half times) the highest annual
incentive compensation, as defined in the executive agreement,
to which the officer would be entitled;
- a lump sum cash payment equal to one and one-half times the
highest long-term incentive compensation to which the officer
would be entitled;
- thirty-six months of continued insurance benefits; and
- thirty-six months of additional service credited for purposes
of retirement benefits.
Each executive agreement also provides that Huntington Bancshares will
pay the executive officer such amounts as would be necessary to compensate such
officer for any excise tax paid or incurred due to any severance payment or
other benefit provided under the executive agreement. However, if Mr. Cheap's
severance payments and benefits would be subject to any excise tax, but would
not be subject to such tax if the total of such payments and benefits were
reduced by 10% or less, then such payments and benefits will be reduced by the
minimum amount necessary (not to exceed 10% of such payments and benefits) so
that Huntington Bancshares will not have to pay an excess severance payment and
the executive officer will not be subject to an excise tax.
The executive agreements provide that, for a period of five years after
any termination of the executive's employment, Huntington Bancshares will
provide the executive with coverage under a standard directors' and officers'
liability insurance policy at its expense, and will indemnify, hold harmless,
and defend the executive to the fullest extent permitted under Maryland law
against all expenses and liabilities reasonably incurred by the executive in
connection with or arising out of any action, suit, or proceeding in which he or
she may be involved by reason of having been a director or officer of Huntington
Bancshares or any subsidiary.
Huntington Bancshares must pay the cost of counsel (legal and
accounting) for an executive officer in the event such officer is required to
enforce any of the rights granted under his or her executive agreement. In
addition, the executive officer is entitled to prejudgment interest on any
amounts found to be due to him or her in connection with any action taken to
enforce such officer's rights under the executive agreement at a rate equal to
our prime commercial rate, or our successor's prime commercial rate, in effect
from time to time plus 4%.
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The executive agreements are in effect through December 31, 2001,
subject to automatic two year renewals and to an extension for thirty-six months
after any month in which a Change of Control occurs. An executive agreement will
terminate if the employment of the executive officer terminates other than under
circumstances which trigger the severance benefits.
Huntington Bancshares has entered into an agreement with Mr. Wobst
governing his relationship with Huntington Bancshares following his retirement
as an employee on May 1, 2001. The agreement provides that Mr. Wobst will remain
as a non-employee Chairman of the Board of Directors of us and of Huntington
Bancshares through December 31, 2002; however, Mr. Wobst retired from these
positions on August 15, 2001. Through December 31, 2002, Mr. Wobst will provide
consulting services for which he will be paid $20,000 per month. The agreement
also provides for certain benefits following his retirement in addition to the
benefits he receives under Huntington's Retirement Plan and other retiree
benefits, and the Supplemental Executive Retirement Plan. These benefits include
eligibility to receive an award for the cycle of the Long-Term Incentive Plan
which ended on December 31, 2000, and to receive pro-rated awards under the
Management Incentive Plan for the year 2001 and the Long-Term Incentive Plan for
the cycle that began on January 1, 2001, and ends on December 31, 2002, and
certain other benefits afforded to the executive officers and directors.
Mr. Geier has entered into a severance agreement with Huntington
Bancshares. It provides for resignation of any directorships and executive
officer positions with Huntington Bancshares and its affiliates as of January
17, 2001, and it provides for a transition period from April 1, 2001, through
March 31, 2002. During this transition period, Huntington Bancshares will pay
Mr. Geier his base salary at the time of entering into the severance agreement
and will provide him certain employee benefits. The severance agreement also
provides for a lump-sum payment to Mr. Geier of $150,000. Furthermore,
Huntington Bancshares will pay Mr. Geier additional lump-sum payments provided
he remains in compliance with the severance agreement.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL GRANT DATE
OPTIONS OPTIONS GRANTED EXERCISE PRESENT
GRANTED TO EMPLOYEES IN PRICE EXPIRATION VALUE
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE ($)(3)
--------------------------------------------------------------------------------------------------------
Frank Wobst 440,000 18.38 15.48 5/17/10 2,807,200
Ronald J. Seiffert 82,499 3.45 15.48 5/17/10 526,344
Richard A. Cheap 13,200 .55 15.48 5/17/10 84,216
Martin Mahan 27,499 1.15 15.48 5/17/10 175,444
Peter Geier 137,499 5.74 15.48 5/17/10 877,244
---------------------
(1) Each of the named executive officers received grants of Huntington
Bancshares options on May 17, 2000. All options granted expire ten years
from the date of grant. Figures have been adjusted to reflect the effect of
a ten percent stock dividend paid on Huntington Bancshares common shares on
July 31, 2000. The options granted to each named executive officer become
exercisable in equal increments on each of the first three anniversaries of
the date of grant. Options not yet exercised are canceled upon a
termination of employment for any reason other than death, retirement under
one or more of Huntington Bancshares' retirement plans, termination
following a change in control of Huntington Bancshares, or a disposition
(other than a change in control) of substantially all of the stock or
assets of Huntington Bancshares, in which case all options become
exercisable immediately as of such termination date and remain exercisable
for a specified period following the termination. Generally, the exercise
price of options may be paid for in cash or in common shares of Huntington
Bancshares. In addition, any tax which Huntington Bancshares withholds in
connection with the exercise of any stock option may be satisfied by the
option holder by electing to have the number of shares to be delivered on
the exercise of the option reduced by, or otherwise by delivering to
Huntington Bancshares, such number of common shares
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136
having a fair market value equal to the amount of the withholding. None
of the options granted in 2000 has a reload feature.
(2) In all cases, the exercise price was equal to the average of the high and
low market price of the underlying shares of Huntington Bancshares on the
date of grant. The exercise price has been adjusted to reflect the effect
of the ten percent stock dividend paid July 31, 2000.
(3) The dollar amounts in this column are the result of calculations made using
the Black-Scholes model, a theoretical method for estimating the present
value of stock options based on complex assumptions about the stock's price
volatility and dividend rate as well as interest rates. Because of the
unpredictability of the assumptions required, the Black-Scholes model, or
any other valuation model, is incapable of accurately predicting Huntington
Bancshares' stock price or of placing an accurate present value on options
to purchase its stock. In performing the calculations it was assumed that:
the options were exercised at the end of their ten-year terms; the
volatility of the stock price was equal to 44.8%, which volatility was
calculated on a natural logarithmic basis of Huntington Bancshares' stock
price for the twelve-month period preceding the date of grant; the
risk-free rate of return was equal to the ten-year United States Treasury
Note Rate effective on the date of the grant, to correspond to the term of
the options; and the dividend yield was equal to Huntington Bancshares'
annualized dividend yield at the end of the calendar quarter preceding the
option grant, which was 3.58%. No adjustments were made for vesting
requirements, non-transferability, or risk of forfeiture. In spite of any
theoretical value which may be placed on a stock option grant, no increase
of the stock option's value is possible without an increase in the market
value of the underlying stock. Any appreciation in the market value of
Huntington Bancshares' stock would benefit all shareholders and would be
dependent in part upon the efforts of the named executive officers. The
total of the grant date values indicated in the table for all stock options
granted in 2000 to the named executive officers was $4,470,448 representing
approximately .12% of the value of all shares of Huntington Bancshares
outstanding on May 17, 2000.
----------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY(3)
AT FISCAL OPTIONS AT FISCAL
YEAR-END (#)(2) YEAR-END ($)
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#)(1) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
--------------------------------------------------------------------------------------------------------
Frank Wobst 109,717 1,131,565 1,704,028 5,656,376
918,150 228,800
Ronald J. Seiffert 3,047 39,215 190,481 224,223
188,451 42,899
Richard A. Cheap -0- -0- 11,535 -0-
26,286 6,864
Martin Mahan -0- -0- 12,041 -0-
42,199 14,299
Peter Geier 14,966 90,469 184,414 224,773
243,451 71,499
----------------
(1) Figures in this column reflect the number of securities underlying the
options exercised, which may be greater than the number of shares
actually received.
(2) Adjusted for stock splits and stock dividends paid on common shares of
Huntington Bancshares after the date of grant.
(3) An option is in-the-money if the fair market value of the underlying
common shares exceeds the exercise price of the option.
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Long-Term Incentive Plan - Awards in Last Fiscal Year
Estimated Future Payouts under Non-Stock
Price-Based Plan (2)
Number of Shares, Performance or -----------------------------------------------
Other Period Until
Units, or Other Maturation or
Name Rights Payout Threshold Target Maximum
-------------------------------------------------------------------------------------------------------------------
Frank Wobst (1) (2) $99,000 $2,475,000
Ronald J. Seiffert (1) (2) 39,500 $197,500 790,000
Richard A. Cheap (1) (2) 22,000 88,000 352,000
Martin Mahan (1) (2) (1) (1) (1)
Peter Geier (1) (2) 47,500 237,500 950,000
-----------------
(1) Messrs. Wobst, Seiffert, Cheap, and Geier were selected by the Compensation
and Stock Option Committee of the Board of Directors to participate in the
cycle of the Long-Term Incentive Compensation Plan which began on January
1, 1999 and ended on December 31, 2000, or the 1999 Cycle. Mr. Mahan did
not participate in the 1999 Cycle.
(2) The Long-Term Incentive Compensation Plan measures Huntington Bancshares'
performance over two-, three-, or four-year cycles. Huntington Bancshares'
performance goals for the 1999 Cycle were based on a comparison of return
on average shareholders' equity to a peer group. Huntington Bancshares
compares itself to the fifty largest United States banking organizations,
minus the ten largest, based on assets at the end of the cycle. Awards
based on a percentage of base salary will be paid if Huntington Bancshares'
performance achieves the established threshold or higher. Any awards for
the 1999 Cycle will be paid in May 2001 when Huntington Bancshares can
determine relative performance for the cycle. No awards will be paid if
Huntington Bancshares' performance is below the threshold level. The
figures in the table are based on salaries as of December 31, 2000.
----------------
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------------------------------------
REMUNERATION 15 20 25 30 35 40
----------------------------------------------------------------------------------------------------
$ 225,000 $63,175 $84,359 $105,543 $117,169 $128,419 $139,669
250,000 70,631 94,315 117,999 130,919 143,419 155,919
300,000 85,544 114,228 142,911 158,419 173,419 188,419
350,000 100,456 134,140 167,824 185,919 203,419 220,919
400,000 115,369 154,053 192,736 213,419 233,419 253,419
450,000 130,281 173,965 217,649 240,919 263,419 285,919
500,000 145,194 193,878 242,561 268,419 293,419 318,419
750,000 219,756 293,440 367,124 405,919 443,419 480,919
1,000,000 294,319 393,003 491,686 543,419 593,419 643,419
1,200,000 353,969 472,653 591,336 653,419 713,419 773,419
The table above illustrates the operation of Huntington Bancshares'
Retirement Plan and Supplemental Retirement Income Plan, or the SRIP, by showing
various annual benefits assuming various levels of final average compensation
and years of credited service. The SRIP provides benefits according to the same
benefit formula as the Retirement Plan, except that benefits under the SRIP are
not limited by Sections 401(a)(17) and 415 of the Internal Revenue Code. Code
Section 401(a)(17) limits the annual amount of compensation that may be taken
into account when calculating benefits under the Retirement Plan. For 2000, this
limit was $170,000. Code Section 415 limits the annual benefit amount that a
participant may receive under the Retirement Plan. For 2000, this amount was
$135,000. An employee who: (a) has completed two years of continuous service
with Huntington Bancshares (or an affiliated company); (b) has been nominated by
the Compensation and Stock Option Committee; and (c) earns
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138
compensation in excess of the limitation imposed by Section 401(a)(17) of the
Internal Revenue Code or whose benefit exceeds the limitation of Section 415(b)
of the Code, is eligible to participate in the SRIP. During 2000, Messrs. Mahan,
Seiffert, and Geier were eligible to participate in the SRIP. After completing
two years of service, Mr. Cheap was nominated for participation in the SRIP
effective January 1, 2001. Mr. Wobst, although he does not participate in the
SRIP, participates in Huntington Bancshares' Supplemental Executive Retirement
Plan, or the SERP, which is described below.
The maximum years of credited service recognized by the Retirement Plan
and the SRIP is 40. Years of service and credited service in addition to those
actually earned by a participant can be granted by the Pension Review Committee
for the purposes of determining benefits under the SRIP. Benefit figures shown
are computed on the assumption that participants retire at age 65. The normal
form of benefit under both the Retirement Plan and the SRIP is a life annuity.
During 2000, Mr. Wobst was the only named executive officer who
participated in the SERP. Only those executive officers selected by the
Compensation and Stock Option Committee, in the Committee's sole discretion, may
participate in the SERP. The SERP ensures that each participating executive
officer who retires at or after age 65 receives a level of retirement benefits,
without respect to years of service, equal to at least 65% of the officer's
average monthly earnings. Average monthly earnings is defined as the officer's
highest consecutive twelve months' base salary and 50% of bonuses and incentive
or commission compensation paid or deferred pursuant to incentive plans with a
one year measurement period or less within the previous sixty months. Benefits
under the SERP are paid in the form of a life annuity with 120 months certain.
At the time a participating officer retires, the benefit the participant is
entitled to through the SERP is calculated, and then funds from the following
sources are deducted to determine the amount, if any, of the payment due from
Huntington Bancshares under the SERP:
- Social Security benefits payable;
- the benefit under the Retirement Plan; and
- any benefits under retirement plans of prior employers.
If the sum of the payments due from Social Security, the Retirement Plan, and
retirement plans of prior employers exceeds 65% of the executive officer's
highest consecutive twelve months' base salary, then no payment will be due from
Huntington Bancshares under the SERP.
The SERP generally has the effect of equalizing a participant's
combined retirement benefits for a particular level of covered compensation for
all years of service. Thus, the total annual benefits payable by Huntington
Bancshares pursuant to the Retirement Plan and the SERP would be the same for an
executive officer with 15 years of service as for an executive officer with 40
years of service, assuming each had the same level of covered compensation, the
only difference being that the fifteen year executive officer, having a smaller
benefit from the Retirement Plan, will receive a greater portion of his benefit
from the SERP. Monthly benefits received by participants under the SERP may be
increased annually, if indicated, to reflect increases in the United States
Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and
Clerical Workers. The estimated annual benefits payable upon Mr. Wobst's
retirement under the Retirement Plan and the SERP, reduced by Social Security
benefits payable, is $995,021.
The compensation covered for the named executive officers by the
Retirement Plan and the SRIP is the average of the total paid, in the five
consecutive highest years of the executive officer's career with Huntington
Bancshares, of base salary and, beginning January 1, 2000, 50% of bonus. The
compensation covered by the Retirement Plan and the SERP, effective for
compensation paid on and after January 1, 2000, is base salary and 50% of bonus
paid in the highest twelve month period out of the previous 60 months. Mr.
Wobst's covered compensation does not include his post-retirement consulting
income. Bonuses are taken into account for the year in which paid rather than
earned. The estimated credited years of service for each of the executive
officers named in the Summary Compensation Table are 26.5 for Mr. Wobst, 21.58
for Mr. Seiffert, 3.00 for Mr. Mahan, 2.67 for Mr. Cheap, and 16.83 for Mr.
Geier.
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TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Some of our directors and executive officers are our customers or
customers of our affiliates and have transactions with us or such affiliates in
the ordinary course of business. Our directors and executive officers also may
be affiliated with entities which are our customers or customers of our
affiliates and which enter into transactions with us or such affiliates in the
ordinary course of business. Transactions with directors, executive officers,
and their affiliates have been on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the time for
comparable transactions with others and did not involve more than the normal
risk of collectibility or present other unfavorable features.
DESCRIPTION OF OUR CLASS C PREFERRED SECURITIES
The following summary describes the material terms and provisions of
our Class C preferred securities. This description is qualified in its entirety
by reference to the terms and provisions of our articles of association. We have
filed our articles of association with the OCC as an exhibit to our registration
statement which was filed with the OCC in connection with the offering of
preferred securities by our REIT affiliate.
GENERAL
If and when issued, our Class C preferred securities will be validly
issued, fully paid, and nonassessable. The holders of our Class C preferred
securities will have no preemptive rights with respect to any shares of our
capital stock or any of our other securities convertible into or carrying rights
or options to purchase any such capital stock. Our Class C preferred securities
are perpetual and will not be convertible into common shares or any other class
or series of our capital stock, and will not be subject to any sinking fund or
other obligation for their repurchase or retirement.
RANK
Our Class C preferred securities would rank senior to our common shares
and our Class B preferred securities, if issued, and to any other securities
which we may issue in the future that are subordinate to our Class C preferred
securities. As of the date of this prospectus, there are no shares of securities
that would rank senior to our Class C preferred securities authorized, issued,
or outstanding. Our Class D preferred securities, if issued, would be on a
parity with our Class C preferred securities as to dividend rights and rights
upon liquidation, winding up, and/or dissolution. As of the date of this
prospectus, there are no other securities authorized or issued that would rank
on a parity with our Class C and Class D preferred securities.
DIVIDENDS
Holders of our Class C preferred securities will be entitled to
receive, if, when, and, as declared by our board of directors out of our legally
available assets, noncumulative cash dividends at the rate of [__]% per annum of
the initial liquidation preference which is $25.00 per share. If authorized and
declared, dividends on our Class C preferred securities will be payable
quarterly in arrears on March 31, June 30, September 30, and December 31 of each
year or, if any such day is not a business day, on the next business day, unless
the next business day falls in a different calendar year, in which case the
dividend will be paid on the preceding business day. We refer to each such
quarter of a calendar year as a "dividend period." Dividends in each quarterly
period will accrue from the first day of such period. Each authorized and
declared dividend will be payable to holders of record as they appear on our
stock register on such record dates as will be fixed by our board of directors
or a duly authorized committee of our board. Such record dates, however, will
not be more than 45 days nor less than 10 days before the dividend payment
dates. Upon the exchange of our REIT affiliate Class C preferred securities for
our Class C preferred securities, any accrued and unpaid dividends for the most
recent quarter on the REIT affiliate Class C preferred securities at the time of
the exchange will be deemed to be accrued and unpaid dividends for the most
recent quarter on our Class C preferred securities.
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The right of holders of Class C preferred securities to receive
dividends is noncumulative. If our board of directors does not declare a
dividend on our Class C preferred securities or declares less than a full
dividend in respect of any dividend period, the holders of our Class C preferred
securities will have no right to receive any dividend or a full dividend, as the
case may be, for that dividend period, and we will have no obligation to pay a
dividend or to pay full dividends for that dividend period, whether or not
dividends are declared and paid for any future dividend period with respect to
the Class C preferred securities or the common shares.
If full dividends on our Class C preferred securities for any dividend
period shall not have been declared and paid, or declared and a sum sufficient
for the payment thereof shall not have been set apart for such payments:
- no dividends will be declared and paid or set aside for
payment and no other distribution will be declared or made or
set aside for payment upon our common shares or any other of
our capital stock ranking junior to or on a parity with our
Class C preferred securities as to dividends or amounts upon
liquidation for that dividend period, except by conversion
into, or exchange for, other shares of our capital stock of
ranking junior to our Class C preferred securities as to
dividends and amounts upon liquidation,
- no common shares or any other of our capital stock ranking
junior to or on a parity with our Class C preferred securities
as to dividends or amounts upon liquidation will be redeemed,
purchased, or otherwise acquired for any consideration,
- no monies will be paid to or made available for a sinking fund
for the redemption of any such stock by us,
until such time as dividends on all of our outstanding Class C preferred
securities have been:
- declared and paid for three consecutive dividend periods, and
- declared and paid or declared and a sum sufficient for such
payment has been set apart for payment for the fourth
consecutive dividend period.
When dividends are not paid in full on, or a sum sufficient for such
full payment is not set apart for, our Class C preferred securities, our Class D
preferred securities, and any other parity stock, all dividends declared upon
our Class C preferred securities, our Class D preferred securities, and any
other parity stock will be declared pro rata. Thus, the amount of dividends
declared per Class C preferred security and such other parity stock will in all
cases bear to each other the same ratio that (a) full dividends per Class C
preferred security for the then-current dividend period, which will not include
any accumulation in respect of unpaid dividends for prior dividend period, and
(b) full dividends, including required or permitted accumulations, if any, on
such other series of capital stock, bear to each other.
The OCC has issued risk-based capital ratio and leverage ratio
guidelines. Generally, a financial institution's capital is divided into two
tiers. Tier 1 capital includes common equity, noncumulative perpetual preferred
stock, and minority interests in equity accounts of consolidated subsidiaries,
less non-qualifying intangible assets such as goodwill and nonqualifying
mortgage and non-mortgage servicing assets. Tier 2 capital includes, among other
things, cumulative and limited-life preferred stock, hybrid capital instruments,
mandatory convertible securities, qualifying subordinated debt, and the
allowance for loan and lease losses, subject to certain limitations. Total
capital is the sum of Tier 1 capital plus Tier 2 capital. The leverage ratio is
the ratio of Tier 1 capital to adjusted average total assets.
Regulations of the OCC prohibit institutions like us from making a
"capital distribution," unless the institution will be at least "adequately
capitalized" after the distribution. Capital distributions are defined to
include a transaction that the OCC determines, by order or regulation, to be "in
substance a distribution of capital." The OCC could seek to restrict our payment
of dividends on our Class C preferred securities under this provision if we were
to fail to be "adequately capitalized."
Currently, an institution is considered "adequately capitalized" if it
has a total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based
capital ratio of at least 4.0% and a leverage, or core capital, ratio of at
least 4.0% or at least 3% if the institution has been awarded the highest
supervisory rating. An institution is considered "well
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capitalized" if the foregoing ratios are at least 10.0%, 6.0%, and 5.0%,
respectively. At June 30, 2001, our total risk-based capital ratio was 10.57%,
our Tier 1 risk-based capital ratio was 6.65%, and our leverage ratio was 6.64%.
We currently intend to maintain our capital ratios in excess of the "well
capitalized" levels under the prompt corrective action regulations. However,
there can be no assurance that we will be able to maintain such capital levels.
REDEMPTION
Our Class C preferred securities will not be redeemable prior to
[_____], 2021. On or after such date, we may redeem our Class C preferred
securities for cash, in whole or in part, at any time and from time to time at
our option with the prior approval of the OCC at the redemption price of $25.00
per share, plus authorized, declared, and unpaid dividends to the date of
redemption, without interest. If our board of directors determines that we
should redeem fewer than all the outstanding Class C preferred securities, the
securities to be redeemed will be determined by lot, pro rata, or by such other
method as our board of directors in its sole discretion determines to be
equitable. Any such partial redemption can only be made with the prior approval
of the OCC.
Dividends will cease to accrue on our Class C preferred securities
called for redemption on and as of the date fixed for redemption and such Class
C preferred securities will be deemed to cease to be outstanding, provided that
the redemption price, including any authorized and declared but unpaid dividends
to the date fixed for redemption, without interest, has been duly paid or
provision has been made for such payment.
Notice of any redemption will be mailed at least 30 days, but not more
than 60 days, prior to any redemption date to each holder of our Class C
preferred securities to be redeemed at such holder's registered address.
Our ability to redeem any of our Class C preferred securities is
subject to compliance with applicable regulatory requirements, including the
prior approval of the OCC, relating to the redemption of capital instruments.
Under current policies of the OCC, such approval would be granted only if the
redemption were to be made out of the proceeds of the issuance of another
capital instrument or if the OCC were to determine that our conditions and
circumstances, and those of Huntington Bancshares, warrant the reduction of a
source of permanent capital.
RIGHTS UPON LIQUIDATION
In the event we voluntarily or involuntarily liquidate, dissolve, or
wind up, the holders of our Class C preferred securities at the time outstanding
will be entitled to receive liquidating distributions in the amount of $25.00
per share, plus any authorized, declared, and unpaid dividends for the current
period to the date of liquidation, out of our assets legally available for
distribution to our shareholders, before any distribution of assets is made to
holders of our common shares or any securities ranking junior to our Class C
preferred securities and subject to the rights of the holders of any class or
series of securities ranking senior to or on a parity with our Class C preferred
securities upon liquidation and the rights of our depositors and creditors.
After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of our Class C preferred securities will
have no right or claim to any of our remaining assets. In the event that, upon
any such voluntary or involuntary liquidation, dissolution, or winding up, our
available assets are insufficient to pay the amount of the liquidation
distributions on all outstanding Class C preferred securities and the
corresponding amounts payable on any other securities of equal ranking, then the
holders of our Class C preferred securities and any other securities of equal
ranking will share ratably in any such distribution of assets in proportion to
the full liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, our consolidation or merger with or into any other
entity, the consolidation or merger of any other entity with or into us, or the
sale of all or substantially all of our property or business, will not be deemed
to constitute our liquidation, dissolution, or winding up.
VOTING RIGHTS
Holders of our Class C preferred securities will not have any voting
rights, except as required by law, and will not be entitled to elect any
directors.
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CONDITIONAL EXCHANGE
Our Class C preferred securities are to be issued, if ever, only in
connection with a Conditional Exchange, on a share for share basis, for all
outstanding Class C preferred securities of our REIT affiliate. The exchange
will take place if, and only if, a Supervisory Event occurs and the OCC directs
in writing the exchange of our REIT affiliate Class C preferred securities for
our Class C preferred securities. A Supervisory Event occurs when:
- we become "undercapitalized" under prompt corrective action
regulations;
- we are placed into conservatorship or receivership; or
- the OCC, in its sole discretion, anticipates that we will
become "undercapitalized" in the near term.
We have registered with the OCC a total of 2,000,000 shares of our
Class C preferred securities to cover a Conditional Exchange, if necessary, of
the 2,000,000 shares of Class C preferred securities of our REIT affiliate.
In the event of an OCC-directed Conditional Exchange, each holder of
our REIT affiliate Class C preferred securities will be unconditionally
obligated to surrender to us the certificates representing the Class C preferred
securities of such holder, and we will be unconditionally obligated to issue to
such holder in exchange for such REIT affiliate Class C preferred securities a
certificate representing our Class C preferred securities on a share-for-share
basis. Any of our REIT affiliate's Class C preferred securities purchased or
redeemed by our REIT affiliate prior to the time of exchange will not be deemed
outstanding and will not be subject to the Conditional Exchange.
The exchange will occur as of 8:00 a.m. Eastern Time on the date for
such exchange set forth in the applicable OCC directive, or, if such date is not
set forth in the directive, as of 8:00 a.m. on the earliest possible date such
exchange could occur consistent with the directive, as evidenced by the issuance
by us of a press release prior to such time. As of the time of exchange, all of
the REIT affiliate Class C preferred securities will be deemed cancelled and
exchanged for our Class C preferred securities without any further action by us;
all rights of the holders of our REIT affiliate Class C preferred securities as
shareholders of our REIT affiliate will cease; and we will give notice of the
exchange to the OCC. As a result of such exchange, each holder of our REIT
affiliate Class C preferred securities will then be a holder of our Class C
preferred securities.
We will mail notice of the issuance of an OCC directive after the
occurrence of a Supervisory Event to each holder of REIT affiliate Class C
preferred securities within 30 days, and we will deliver to each such holder
certificates for our Class C preferred securities upon surrender of certificates
for our REIT affiliate Class C preferred securities. Until such replacement
share certificates are delivered, or in the event such replacement certificates
are not delivered, certificates previously representing our REIT affiliate Class
C preferred securities shall be deemed for all purposes to represent our Class C
preferred securities. All corporate approvals necessary for us to issue our
Class C preferred securities as of the time of exchange will be completed prior
to or upon completion of our REIT affiliate's offering of Class C preferred
securities. Accordingly, once the OCC directs a Conditional Exchange after the
occurrence of a Supervisory Event, no action will be required to be taken by our
REIT affiliate, by the holders of our REIT affiliate's Class C preferred
securities, or by us (other than to provide notice of the exchange to the OCC)
in order to effect the exchange as of the time of exchange.
Holders of our REIT affiliate Class C preferred securities, by
purchasing such securities, whether in the initial offering or in the secondary
market after that initial offering, were deemed to have agreed to be bound by
the unconditional obligation to exchange such Class C preferred securities for
our Class C preferred securities upon the OCC's direction after the occurrence
of a Supervisory Event. The articles of incorporation of our REIT affiliate
provide that the holders of our REIT affiliate Class C preferred securities were
unconditionally obligated to surrender such securities. In accordance with a
Conversion Agreement, dated December 31, 2000, between us, Holdings, and our
REIT affiliate, we are unconditionally obligated to issue our Class C preferred
securities in exchange for our REIT affiliate Class C preferred securities upon
the OCC's direction after the occurrence of a Supervisory Event.
Holders of our REIT affiliate Class C preferred securities cannot
exchange their REIT affiliate Class C preferred securities for our Class C
preferred
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securities voluntarily. Absent an OCC directive after the occurrence of a
Supervisory Event, no exchange of our REIT affiliate's Class C preferred
securities for our Class C preferred securities will occur. Upon the issuance of
an OCC directive after the occurrence of a Supervisory Event, our Class C
preferred securities to be issued as part of the Conditional Exchange would
constitute a newly issued class of our preferred securities, and would have the
same terms and provisions with respect to dividends, liquidation, and
redemption, except with respect to a Special Event, as our REIT affiliate Class
C preferred securities, except that:
- our Class C preferred securities would not be listed on any
national securities exchange or national quotation system;
- our Class C preferred securities do not have any voting
rights; and
- our Class C preferred securities do not have any right to
elect any directors if dividends are missed.
Any accrued and unpaid dividends on our REIT affiliate Class C
preferred securities as of the time of exchange would be deemed to be accrued
and unpaid dividends on our Class C preferred securities. Our Class C preferred
securities would rank on an equal basis in terms of dividend payment and
liquidation preference with our Class D preferred securities and any of our
then-outstanding preferred securities that rank on a parity with the Class C
preferred securities. Although we have registered our Class C preferred
securities with the OCC, those shares will not be registered with the SEC and
will be offered pursuant to an exemption from SEC registration under Section
3(a)(2) of the Securities Act. Absent an OCC directive after the occurrence of a
Supervisory Event, however, we will not issue any of our Class C preferred
securities, although we will be able to issue preferred securities in classes or
series other than our Class C preferred securities. There can be no assurance as
to the liquidity of our Class C preferred securities, if issued, or that an
active public market for our preferred securities would develop or be
maintained.
DESCRIPTION OF OUR CAPITAL STOCK
The following summary of the material terms of our capital stock does
not purport to be complete and is subject in all respects to the applicable
provisions of United States banking law, our articles of association, as amended
and restated, and our bylaws.
Authorized and Outstanding Capital Stock
Our authorized capital stock consists of:
- 4,000,000 common shares, par value $10.00 each, all of which
are outstanding,
- 500,000 Class B noncumulative perpetual preferred securities,
par value $1,000.00 each, none of which are outstanding,
- 2,000,000 Class C noncumulative perpetual preferred
securities, par value $25.00 each, none of which are
outstanding, and
- 14,000,000 Class D noncumulative perpetual preferred
securities, par value $25.00 each, none of which are
outstanding.
COMMON SHARES
General. All outstanding common shares are fully paid and
non-assessable. There is no established trading market for our common shares,
all of which are owned by Huntington Bancshares. Holders of common shares have
no preemptive or preferential rights of subscription to any shares of any class
of stock. There are no redemption or sinking fund provisions with respect to the
common shares.
Voting. Holders of common shares are entitled to one vote per share on
all matters to be voted on by shareholders. There are no cumulative voting
rights. As the holder of all of our common shares, Huntington Bancshares is able
to elect and remove directors, amend our articles of association, and approve
other actions requiring shareholder approval.
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Dividends. The holders of common shares are entitled to receive such
dividends, if any, as may be declared from time to time by the board of
directors, subject to any preferential dividend rights of any outstanding
preferred securities.
Liquidation Rights. Upon our dissolution or liquidation, holders of
common shares will be entitled to receive all of our assets which are available
for distribution to our shareholders, subject to any preferential rights of the
then outstanding preferred securities and the claims of our depositors and
creditors.
CLASS B PREFERRED SECURITIES
General. Our Class B preferred securities rank senior to our common
shares as to dividends and liquidation rights and junior to all of our Class C
and Class D preferred securities. Holders of our Class B preferred securities
have no preemptive or preferential rights of subscription with respect to any
shares of our capital stock.
Voting. Holders of our Class B preferred securities are not entitled to
vote at shareholder meetings and are not entitled to notice of such meetings,
except as otherwise required by law.
Dividends. The holders of our Class B preferred securities are entitled
to receive dividends at a variable rate based on LIBOR. Dividends on our Class B
preferred securities are declared quarterly and payable annually. Dividends are
not cumulative; however, so long as any of our Class B preferred securities
remain outstanding, no dividend, except a dividend payable in common shares, or
other distribution on the common shares and no repurchase or redemption of the
common shares may be made in a particular calendar year unless the full dividend
on our Class B preferred securities for all calendar quarters within such year
to the date of such action have been paid or declared and set apart for payment.
Liquidation Rights. If we voluntarily or involuntarily liquidate,
dissolve, or wind up, the holders of our Class B preferred securities will be
entitled to receive out of our assets available for distribution to
shareholders, and before any amount is paid or distributed to holders of common
shares, a preferential liquidation amount of $1,000 per share, plus any accrued
and unpaid dividends. Holders of our Class B preferred securities are not
entitled to any further payment with respect to those securities.
Redemption. We can redeem our Class B preferred securities at any time
at $1,000 per share, plus the full accrued but unpaid dividend for the then
current dividend period. We are obliged to provide not less than 10 nor more
than 60 days notice of a proposed redemption. If less than all our Class B
preferred securities are to be redeemed, the full current dividend must be paid
or set aside for payment on all of our outstanding Class B preferred securities,
and the securities to be redeemed must be selected, at the option of our board
of directors, either by lot or pro rata.
Conversion. By agreement, dated December 28, 2000, among our REIT
affiliate, HPC Holdings-II, Inc. which is the sole owner of the Class B
preferred securities, and us, our REIT affiliate Class B preferred securities
are convertible into our Class B preferred securities if the OCC directs us in
writing to cause the Class B preferred securities of our REIT affiliate to be
exchanged into our Class B preferred securities upon the happening of a
Supervisory Event.
In the event the OCC directs us to cause the exchange,
- the holder of Class B preferred securities of our REIT
affiliate must immediately exchange such holder's REIT
affiliate Class B preferred securities for our Class B
preferred securities, on a share for share basis,
- we must issue our Class B preferred securities to such holder,
and
- our REIT affiliate will promptly pay to the holder any and all
accrued but unpaid dividends on our REIT affiliate Class B
preferred securities through the date of the exchange.
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CLASS D PREFERRED SECURITIES
General. Our Class D preferred securities rank senior to our Class B
preferred securities and the common shares, and on parity with our Class C
preferred securities, as to dividends and liquidation. Holders of our Class D
preferred securities have no preemptive rights with respect to any shares of our
capital stock.
Voting. Holders of our Class D preferred securities are not entitled to
vote at shareholder meetings and are not entitled to notice of such meetings,
except as otherwise required by law.
Dividends. The holders of our Class D preferred securities are entitled
to receive dividends at a variable rate equal to LIBOR plus [____]. Dividends on
our Class D preferred securities will be payable, if authorized and declared,
quarterly in arrears on March 31, June 30, September 30, and December 31 or, if
such day is not a business day, the next business day, commencing on
[__________]. Dividends are not cumulative. If full dividends are not paid on
our Class D preferred securities for a quarterly dividend period, the payment of
dividends on the common shares or other shares ranking junior to our Class D
preferred securities will be prohibited for that period and at least the
following three quarterly dividend periods.
When dividends are not paid in full on, or a sum sufficient for such
full payment is not set apart for, our Class D preferred securities, our Class C
preferred securities, and any other parity stock, all dividends declared upon
our Class D preferred securities, our Class C preferred securities, and any
other parity stock will be declared pro rata. Thus, the amount of dividends
declared per Class D preferred security and such other parity stock will in all
cases bear to each other the same ratio that (a) full dividends per Class D
preferred security for the then-current dividend period, which will not include
any accumulation in respect of unpaid dividends for prior dividend period, and
(b) full dividends, including required or permitted accumulations, if any, on
such other series of capital stock, bear to each other.
Liquidation Rights. If we voluntarily or involuntarily liquidate,
dissolve, or wind up, the holders of our Class D preferred securities will be
entitled to receive out of our assets legally available for distribution to
shareholders, and before any amount is paid or distributed to holders of common
shares, our Class B preferred securities, or any other class of securities
ranking junior to our Class D preferred securities, a liquidation amount of
$25.00 per share, plus any accrued and unpaid dividends for the current period
only. Holders of our Class D preferred securities are not entitled to further
payment with respect to those shares.
Redemption. Our Class D preferred securities will not be redeemable
prior to [____________], 2006. On or after such date, we may redeem our Class D
preferred securities for cash, in whole or in part, at any time and from time to
time at our option with the prior approval of the OCC at the redemption price of
$25.00 per share, plus accrued and unpaid dividends for the current period only.
Conditional Exchange. Upon the occurrence of a Supervisory Event and at
the direction of the OCC, each Class D preferred security of our REIT affiliate
will be exchanged for one of our Class D preferred securities.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 1999, and for each of the three
years ended December 31, 2000, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
LEGAL MATTERS
The validity of our Class C preferred securities will be passed upon
for us by Porter, Wright, Morris & Arthur LLP. Mr. Frasier, one of our
directors, is of counsel with Porter, Wright, Morris & Arthur LLP. The validity
of our Class C preferred securities will be passed upon for the Underwriters by
Cleary, Gottlieb, Steen & Hamilton.
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THE HUNTINGTON NATIONAL BANK
INDEX TO FINANCIAL STATEMENTS
Page
----
Management's Discussion and Analysis of Operations and Financial Condition................................ BPF-1
Report of Ernst & Young, LLP, Independent Auditors........................................................ BPF-21
Consolidated Balance Sheets as of December 31, 2000 and 1999
and June 30, 2001 and 2000 (unaudited)............................................................... BPF-22
Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998
and the six months ended June 30, 2001 and 2000 (unaudited)......................................... BPF-23
Consolidated Statements of Changes in Shareholder's Equity for the years ended December 31,
2000, 1999, and 1998 and the six months ended June 30, 2001 (unaudited)............................ BPF-24
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998
and the six months ended June 30, 2001 and 2000 (unaudited)......................................... BPF-25
Notes to Consolidated Financial Statements................................................................ BPF-26
Pro Forma Consolidated Financial Statements (unaudited)................................................... BPF-49
Pro Forma Consolidated Balance Sheets as of June 30, 2001 (unaudited)..................................... BPF-50
Pro Forma Consolidated Statement of Income for the twelve months ended December 31, 2000 (unaudited) and
the six months ended June 30, 2001 (unaudited)......................................................... BPF-51
Notes to Unaudited Pro Forma Consolidated Financial Statements............................................ BPF-52
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THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis
--------------------------------------------------------------------------------
INTRODUCTION
The Huntington National Bank (with its subsidiaries is collectively
referred to as the "Bank") is an interstate national banking association
organized under the laws of the United States and headquartered in Columbus,
Ohio. The Bank engages in full-service commercial and consumer banking, mortgage
banking, lease financing, trust services, discount brokerage services, and the
sale of other financial products and services offered through its over 500
offices in Florida, Indiana, Kentucky, Maryland, Michigan, New Jersey, Ohio, and
West Virginia. In addition, international banking services are offered through
the Bank's headquarters office, as well as through its Cayman Islands office and
Hong Kong office. The Bank is a wholly owned subsidiary of Huntington Bancshares
Incorporated ("Huntington"). Huntington owns all of the authorized, issued and
outstanding common stock and therefore, no per share information is presented.
ACQUISITIONS
The Bank acquired The Empire National Bank of Traverse City ("Empire"),
headquartered in Traverse City, Michigan, on June 23, 2000, as part of the
acquisition by Huntington of Empire Banc Corporation, a $506 million one-bank
holding company. As part of this merger, Huntington reissued approximately 6.5
million shares of common stock, all of which were purchased on the open market
during the first quarter 2000, in exchange for all of the common stock of Empire
Banc Corporation. The Bank's total loans and deposits increased $395 million and
$435 million, respectively, at the date of the merger. The transaction was
accounted for as a purchase; accordingly, the results of Empire have been
included in the Bank's consolidated financial statements from the respective
dates of acquisition. Goodwill, which represents the excess of the cost of an
acquisition over the fair value of the assets acquired, was $105 million.
OVERVIEW
The Bank reported net income of $288.7 million in 2000, compared with
$403.0 million in 1999, and $288.9 million in 1998. These results included
after-tax special charges of $32.5 million, $62.9 million, and $60.3 million,
respectively. Excluding these items and a $70.6 million after-tax gain in 1999
on the sale of Huntington's credit card portfolio, operating earnings for 2000
were $321.2 million, versus $395.3 million and $349.2 million in 1999 and 1998,
respectively. On an operating basis, return on average assets ("ROA") was 1.13%
in 2000, 1.38% in 1999 and 1.31% in 1998. Return on average equity ("ROE")
totaled 13.47% for the recent twelve months, compared with 17.46% and 18.63% for
the two preceding years.
BPF-1
148
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
TABLE 1 CONSOLIDATED SELECTED FINANCIAL DATA
Six Months Ended
June 30, Year Ended December 31,
(in thousands of dollars, ------------------------- ---------------------------------------------------------------------
except per share amounts) 2001 2000 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS (unaudited)
Total interest income ......... $ 1,010,289 $ 1,029,313 $ 2,096,056 $ 2,017,599 $ 1,979,193 $ 1,973,290 $ 1,771,218
Total interest expense ........ 518,502 554,133 1,148,537 972,018 990,781 955,215 870,191
Net interest income ........... 491,787 475,180 947,519 1,045,581 988,412 1,018,075 901,027
Provision for loan losses ..... 150,554 31,287 90,118 88,194 98,609 106,542 76,065
Securities gains (losses) ..... 4,787 (21,570) (14,971) (17,608) 28,650 7,651 17,446
Gains on sale of
credit card portfolios ..... --- --- --- 108,530 9,530 --- ---
Net income .................... 82,453 165,566 288,745 402,970 288,937 307,872 310,550
Operating net income(1) ....... 150,360 165,566 321,245 395,340 349,237 354,106 310,550
PER COMMON SHARE
Net income
Basic and diluted ........ 20.61 41.39 72.19 100.74 72.23 76.97 77.64
Basic and diluted -
operating(1) ........... 37.59 41.39 80.31 98.84 87.31 88.53 77.64
Cash dividends declared .... 19.75 27.32 55.64 47.56 46.62 57.22 85.10
Book value at period-end ... 523.80 590.92 517.28 543.76 552.16 428.81 501.71
BALANCE SHEET HIGHLIGHTS:
Total assets at period end .... $27,817,697 $28,307,094 $28,430,151 $28,760,019 $28,108,379 $26,590,074 $24,212,671
Total long-term debt at
period end ................. 953,547 926,059 926,215 878,044 767,854 849,475 613,734
Average shareholder's equity .. 2,107,370 2,310,203 2,385,751 2,263,884 1,874,570 1,960,474 1,898,337
Average total assets .......... 27,998,686 28,573,560 28,501,259 28,585,620 26,697,454 25,501,932 23,211,433
------------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS AND STATISTICS:
------------------------------------------------------------------------------------------------------------------------------------
Margin Analysis - As a %
of average earning
assets(2)
Interest income .......... 8.19% 8.16% 8.30% 7.96% 8.26% 8.37% 8.26%
Interest expense ......... 4.20 4.38 4.53 3.82 4.11 4.03 4.03
---- ---- ---- ---- ---- ---- ----
Net interest margin ........... 3.99% 3.78% 3.77% 4.14% 4.15% 4.34% 4.23%
==== ==== ==== ==== ==== ==== ====
Return on:
Average total assets ....... 0.59% 1.17% 1.01% 1.41% 1.08% 1.21% 1.34%
Average total assets -
operating(1) ............. 1.08% 1.17% 1.13 1.38 1.31 1.39 1.34
Average shareholder's
equity ................... 7.89% 14.41% 12.10 17.80 15.41 15.70 16.36
Average shareholder's
equity - operating(1) .... 14.39% 14.41% 13.47 17.46 18.63 18.06 16.36
Dividend payout ratio ......... 95.83 66.01 77.08 47.21 64.54 74.35 109.61
Average shareholder's equity
to average total assets ... 7.53 8.09 8.37 7.92 7.02 7.69 8.18
Tier 1 risk-based capital ratio 6.65 6.80 6.60 6.56 6.28 6.62 7.93
Total risk-based capital ratio 10.57 10.97 10.60 10.83 10.48 11.10 11.40
Tier 1 leverage ratio ......... 6.64% 6.35% 6.43% 5.87% 5.61% 5.70% 6.65%
------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
------------------------------------------------------------------------------------------------------------------------------------
Full-time equivalent .......... 9,421 9,277 9,431 9,337 9,863 8,190 8,346
employees
Banking offices ............... 511 513 510 517 531 454 429
-----------------
(1)Excludes restructuring and other charges and the 1999 gain from the sale of
Huntington's credit card portfolio, net of related taxes.
(2)Presented on a fully tax equivalent basis assuming a 35% tax rate.
BPF-2
149
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
Cash basis operating ROA and ROE (which exclude the effect of amortization of
goodwill and other intangibles), which are computed using cash basis operating
earnings as a percentage of average tangible assets and average tangible equity,
were 1.25% and 20.46% in 2000. On this same basis, ROA was 1.51% and 26.26%,
respectively, in 1999 and 1998 and ROE was 1.41% and 30.63%.
Total assets were $28.4 billion at December 31, 2000, down from $28.8
billion at the end of 1999. Assets were lower, as the Bank repositioned its
balance sheet in 2000. The Bank's balance sheet repositioning included
automobile loan securitizations of $1.4 billion and the sale of approximately
$1.7 billion of lower-yielding fixed-income securities from the Bank's
investment portfolio.
Managed total loans, which include securitized loans, increased 8% from
last year, after adjusting for the impact of the Empire acquisition and the
fourth quarter 1999 sale of the Bank's credit card portfolio. Managed consumer
loans grew 12% in 2000, driven by automobile financing and home equity lending,
which grew 8% and 25%, respectively. Commercial loans increased 5% in 2000.
Average core deposits totaled $18.7 billion during 2000 and were
essentially unchanged from the levels reported last year. When combined with
other core funding sources, core deposits provide 80% of the Bank's funding
needs.
Short and medium-term borrowings declined from a year ago due to the
balance sheet efficiency program referenced above. Long-term debt increased over
last year as the Bank issued $150 million of regulatory capital qualifying
subordinated notes in the first quarter of 2000.
-----------------------------------------------------------------------------------------------------------------
TABLE 2 LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
-----------------------------------------------------------------------
(in millions of dollars) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
Commercial $ 6,611 $ 6,287 $ 6,019 $ 5,271 $ 5,130
Real Estate
Construction 1,310 1,234 919 864 699
Commercial 2,249 2,148 2,232 2,237 2,137
Consumer
Loans 6,368 6,777 6,794 6,378 6,110
Lease financing 3,069 2,692 1,911 1,542 1,183
Residential Mortgage 947 1,445 1,408 1,361 1,486
-------- -------- -------- -------- --------
Total Loans $ 20,554 $ 20,583 $ 19,283 $ 17,653 $ 16,745
======== ======== ======== ======== ========
Note: There are no loans outstanding which would be considered a concentration
of lending in any particular industry or group of industries.
-------------------------------------------------------------------------------------------------------
TABLE 3 MATURITY SCHEDULE OF SELECTED LOANS
(in millions of dollars) DECEMBER 31, 2000
-------------------------------------------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
----------- ------------ ------------- --------------
Commercial $ 3,770 $1,949 $ 892 $ 6,611
Real estate - construction 685 423 202 1,310
----------- ------------ ------------- --------------
TOTAL $ 4,455 $2,372 $ 1,094 $ 7,921
=========== ============ ============= ==============
Variable interest rates $1,441 $ 728
Fixed interest rates 931 366
------------ -------------
TOTAL $2,372 $ 1,094
============ =============
Note: Loan balances above are net of unearned income and there are no loans
outstanding which would be a concentration of lending in any particular
industry or group of industries.
BPF-3
150
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
LINES OF BUSINESS
Retail Banking, Corporate Banking, Dealer Sales, and the Private Financial
Group are the Bank's major business lines. A fifth segment includes the impact
of the Treasury function and other unallocated assets, liabilities, revenue, and
expense. Line of business results are determined based upon Huntington's
business profitability reporting system that assigns balance sheet and income
statement items to each of the business segments. This process is designed
around the Bank's organizational and management structure and, accordingly, the
results are not necessarily comparable with similar information published by
other financial institutions. Below is a brief description of each line of
business and a discussion of the business segment results. Additional
information regarding these results can be found in Note 17 to the Bank's
consolidated financial statements.
RETAIL BANKING
Retail Banking provides products and services to retail and business
banking customers. This business unit's products include home equity loans,
first mortgage loans, installment loans, business loans, personal and business
deposit products, as well as investment and insurance services. These products
and services are offered through the Bank's traditional banking network,
in-store branches, Direct Bank, and Web Bank.
Retail Banking net income totaled $164.6 million in 2000 compared with
$170.8 million in 1999 and $168.9 million in 1998. Excluding the revenue and
expenses related to the credit card portfolio that was sold in last year's
fourth quarter, the 1999 and 1998 earnings were $155.5 million and $153.0
million, respectively. On this basis, Retail Banking's net income increased 6%
from 1999. This increase was achieved despite a decline in net interest income
due to higher deposit costs and a $3.3 million increase in the provision for
loan losses in 1999. Non-interest income for 2000 was relatively unchanged
versus 1999, as a 3% increase in service charges and a 17% increase in
electronic banking fees was offset by a significant decline in mortgage banking
revenue. Mortgage loan originations were adversely impacted by higher market
interest rates throughout much of 2000. Non-interest expense improved 2% from
1999. The Retail Banking segment contributed 51% of the Bank's 2000 operating
earnings and comprised 30% of its total loan portfolio and 81% of its total core
deposits.
CORPORATE BANKING
This segment represents the middle-market and large corporate banking
customers, which use a variety of products and services including, but not
limited to, commercial loans, asset-based financing, international trade, and
cash management. The Bank's capital markets division also provides alternative
financing solutions for larger business clients, including privately placed
debt, syndicated commercial lending, and the sale of interest rate protection
products.
Corporate Banking reported net income of $134.4 million for 2000 versus
$130.3 million and $115.3 million for the previous two years. Net interest
income increased 5% in 2000 driven by loan growth. The 6% increase in
non-interest income was due in large part to increases in service charges.
Non-interest expenses increased 13% in 2000 due to investments in personnel and
technology to support revenue growth initiatives. Corporate Banking contributed
42% of the Bank's 2000 operating earnings, and represented 35% of the total loan
portfolio and 11% of its total core deposits.
DEALER SALES
Dealer Sales product offerings pertain to the automobile lending sector and
include floor plan financing, as well as indirect consumer loans and leases. The
consumer activities comprise the vast majority of the business and involve the
financing of vehicles purchased or leased by individuals through dealerships.
Net income for this segment totaled $50.4 million, $38.6 million, and $53.5
million in each of the last three years. Dealer Sales' results reflect the
impact of after-tax charges of $32.5 million in 2000 and $37.8 million in 1999
to write-down vehicle lease residual values. Excluding these charges, net income
was $82.9 million for 2000, compared with $76.6 million for 1999, and $53.5
million for 1998. Net-interest income was relatively unchanged because growth
was offset by $1.4 billion of loan securitization activity in the recent year.
The increase from 1999 in the provision for loan losses of $10.1 million
reflects higher net charge-offs of .72%, versus .59% in 1999 and .82% in 1998.
Non-interest income improved $21.8 million including $17.1 million of revenue
from the securitizations completed in 2000. Dealer Sales comprised 26% of the
Bank's operating earnings and 31% of its outstanding loans in 2000.
BPF-4
151
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
PRIVATE FINANCIAL GROUP
The Bank's Private Financial Group ("PFG") provides an array of products
and services including personal trust, asset management, investment advisory,
insurance, and deposit and loan products. The PFG business line is designed to
provide higher wealth customers with "one-stop shopping" for all their financial
needs.
PFG reported net income of $21.8 million, $20.7 million, and $13.8 million
in 2000, 1999, and 1998, respectively. Non-interest income increased in 2000 due
to higher trust and brokerage and insurance income. Related increases in sales
commissions contributed to higher non-interest expense. This segment represented
7% of the Bank's 2000 operating earnings and 3% of total loans in 2000.
TREASURY/OTHER
Huntington uses a match-funded transfer pricing system to allocate interest
income and interest expense to the Bank's business segments. This approach
consolidates the interest rate risk management of the Bank into its Treasury
Group. As part of its overall interest rate risk and liquidity management
strategy, the Treasury Group administers the Bank's $4 billion investment
portfolio. Revenue and expense associated with these activities remain within
the Treasury Group. Additionally, the Treasury/Other segment absorbs unassigned
assets, liabilities, equity, revenue, and expense that cannot be directly
assigned or allocated to one of the Bank's lines of business. Amortization
expense of intangible assets is a significant component of Treasury/Other.
Treasury/Other segment results included special charges of $38.6 million in
1999 and $90.0 million in 1998. The 1999 results also included the gain from the
credit card sale of $108.5 million. On an operating basis, this segment reported
a loss of $82.5 million for 2000, versus net losses of $9.2 million in 1999, and
$2.3 million in 1998. The decline relates to lower net interest income resulting
from rising market interest rates and the balance sheet repositioning program
mentioned earlier. As more fully discussed later, the sensitivity of net
interest income to changing interest rates is down from previous years,
consistent with the Bank's goal of a more stable revenue base. Non-interest
income included securities losses realized in 2000 from the sale of
lower-yielding investment securities and a loss realized from the first quarter
2000 automobile loan securitization.
------------------------------------------------------------------------------------------------------------------------------
TABLE 4 CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
2000 1999
---------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
From Previous From Previous
Year Due To: Year Due To:
---------------------------------- --------------------------------
Fully Tax Equivalent Basis(2) Yield/ Yield/
(in millions of dollars) Volume Rate Total Volume Rate Total
------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits in banks $ --- $ --- $ --- $(2.0) $ (0.8) $(2.8)
Trading account securities --- --- --- 0.1 (0.1) ---
Federal funds sold and securities purchased
under resale agreements 4.1 0.3 4.4 (16.3) (0.4) (16.7)
Mortgages held for sale (9.6) 2.0 (7.6) (4.0) 0.1 (3.9)
Taxable securities (36.7) 8.2 (28.5) (0.9) (11.1) (12.0)
Tax-exempt securities (1.8) (1.0) (2.8) 4.1 (2.4) 1.7
Net loans 48.2 63.7 111.9 151.2 (80.0) 71.2
--------- ----------- ---------- --------- ---------- ---------
TOTAL EARNING ASSETS 4.2 73.2 77.4 132.2 (94.7) 37.5
--------- ----------- ---------- --------- ---------- ---------
Interest bearing demand deposits 5.2 32.3 37.5 13.3 (3.2) 10.1
Savings deposits (6.2) 26.6 20.4 15.8 (3.7) 12.1
Certificates of deposit 5.2 45.0 50.2 (37.7) (31.8) (69.5)
Other domestic time deposits 16.4 2.7 19.1 3.1 (0.9) 2.2
Foreign time deposits 7.4 5.9 13.3 2.9 (0.2) 2.7
Federal funds purchased and securities sold under
agreements to repurchase (28.5) 26.4 (2.1) 18.1 (1.7) 16.4
Other borrowed money (13.6) 34.2 20.6 21.3 (9.3) 12.0
Subordinated notes and other long-term debt 9.0 8.6 17.6 (1.4) (3.3) (4.7)
--------- ----------- ---------- --------- ---------- ---------
TOTAL INTEREST BEARING LIABILITIES (5.1) 181.7 176.6 35.4 (54.1) (18.7)
--------- ----------- ---------- --------- ---------- ---------
NET INTEREST INCOME $ 9.3 $(108.5) $(99.2) $96.8 $(40.6) $56.2
========= =========== ========== ========= ========== =========
(1) The change in interest rates due to both rate and volume has been allocated
between the factors in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Calculated assuming a 35% tax rate.
BPF-5
152
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $947.5 million in 2000, versus $1,045.6 million in
1999, and $988.4 million in 1998. The net interest margin, on a fully tax
equivalent basis, was 3.77% during 2000, compared with 4.14% and 4.15% during
1999 and 1998, respectively. Higher funding costs due to rising interest rates
and changes in the mix of the Bank's core deposit base were the primary driver
of these declines. Funding costs increased 83 basis points in 2000 from 1999
while the yield on earning assets was up only 34 basis points. Core deposit
costs increased 68 basis points in 2000, as the mix shifted to higher-rate
accounts during the year. This migration accelerated in 2000 following the
introduction of new products designed to improve customer retention in the
intensely competitive market for retail deposits. To a lesser degree, the
reduction in net interest income and the margin also reflects the impact of the
fourth quarter 1999 credit card sale and the automobile loan securitizations in
2000. The Bank's interest rate risk position is further discussed under the
heading "Interest Rate Risk Management".
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the charge to pre-tax earnings necessary
to maintain the allowance for loan losses ("ALL") at a level adequate to absorb
management's estimate of inherent losses in the loan portfolio. The provision
for loan losses was $90.1 million in 2000 versus $88.2 million and $98.6 million
in the past two years.
------------------------------------------------------------------------------------------------------------------------------------
TABLE 5 SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
(in thousands of dollars) 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of year $ 298,965 $ 288,315 $ 257,012 $ 230,448 $ 222,450
LOAN LOSSES
Commercial (18,013) (16,203) (24,512) (23,047) (23,904)
Real estate
Construction (238) (638) (80) (375) ---
Commercial (1,522) (2,399) (2,676) (663) (1,476)
Consumer
Loans (65,211) (78,688) (78,480) (74,276) (59,829)
Leases (24,721) (12,959) (13,444) (9,878) (4,492)
Residential Mortgage (1,140) (1,404) (1,247) (2,012) (1,292)
------------- ------------ ------------- ------------- -------------
Total loan losses (110,845) (112,291) (120,439) (110,251) (90,993)
------------- ------------ ------------- ------------- -------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF
Commercial 4,201 5,303 4,530 4,373 4,884
Real estate
Construction 165 192 441 111 556
Commercial 268 1,260 1,812 317 1,124
Consumer
Loans 19,486 22,650 22,370 16,304 13,456
Leases 3,503 2,532 1,571 1,057 721
Residential Mortgage 133 268 367 334 278
------------- ------------ ------------- ------------- -------------
Total recoveries 27,756 32,205 31,091 22,496 21,019
------------- ------------ ------------- ------------- -------------
NET LOAN LOSSES (83,089) (80,086) (89,348) (87,755) (69,974)
------------- ------------ ------------- ------------- -------------
ALLOWANCE OF SECURITIZED LOANS (16,719) --- --- --- ---
PROVISION FOR LOAN LOSSES 90,118 88,194 98,609 106,542 76,065
ALLOWANCE ACQUIRED/OTHER 7,900 2,542 22,042 7,777 1,907
------------- ------------ ------------- ------------- -------------
ALLOWANCE FOR LOAN LOSSES, END OF YEAR $ 297,175 $ 298,965 $ 288,315 $ 257,012 $ 230,448
============= ============ ============= ============= =============
AS A % OF AVERAGE TOTAL LOANS
Net loan losses 0.40% 0.40% 0.49% 0.50% 0.44%
Provision for loan losses 0.44% 0.44% 0.54% 0.61% 0.48%
Allowance for loan losses as a %
of total loans (end of period) 1.45% 1.45% 1.50% 1.46% 1.38%
Net loan loss coverage (1) 6.58x 8.27x 6.84x 7.30x 7.87x
(1) Income before income taxes (excluding special charges and gains from sale
of credit card portfolios) and the provision for loan losses to net loan
losses.
BPF-6
153
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
Net charge-offs as a percent of average loans totaled .40% for both 2000 and
1999 and were .49% in 1998. Consistent with broader industry trends, the Bank's
charge-offs increased in the second half of 2000 reflecting the negative impact
of weakening economic conditions over the past twelve months on Huntington's
loan customers. Net charge-offs are expected to be above the 2000 levels in
2001.
The Bank allocates the ALL to each loan category based on a detailed credit
quality review performed periodically on specific commercial loans based on size
and relative risk and other relevant factors such as portfolio performance,
internal controls, and impacts from mergers and acquisitions. Loss factors are
applied on larger, commercial and industrial and commercial real estate credits
and represent management's estimate of the inherent loss. The portion of the
allowance allocated to homogeneous consumer loans is determined by applying
projected loss ratios to various segments of the loan portfolio giving
consideration to existing economic conditions and trends.
Projected loss ratios incorporate factors such as trends in past due and
non-accrual amounts, recent loan loss experience, current economic conditions,
risk characteristics, and concentrations of various loan categories. Actual loss
ratios experienced in the future, however, could vary from those projected
because a loan's performance depends not only on economic factors but also other
factors unique to each customer. The diversity in size of corporate commercial
loans can be significant as well and even if the projected number of loans
deteriorates, the dollar exposure could significantly vary from estimated
amounts. Additionally, the impact on individual customers from recent economic
events may not yet be known. To ensure adequacy to a higher degree of
confidence, a portion of the ALL is considered unallocated. For analytical
purposes, the allocation of the ALL is provided in Table 6. While amounts are
allocated to various portfolio segments, the total ALL, excluding impairment
reserves prescribed under provisions of Statement of Financial Accounting
Standard No. 114, is available to absorb losses from any segment of the
portfolio.
The ALL was $297.2 million at December 31, 2000, and $299.0 million at
year-end 1999, representing 1.45% of total loans at both dates. Non-performing
loans were covered by the ALL 3.2 times in 2000 versus 3.6 times at the end of
1999. Additional information regarding the ALL and asset quality appears in the
"Credit Risk" section.
------------------------------------------------------------------------------------------------------------------------------------
TABLE 6 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Consumer
Real Estate --------------------------------------
-------------------------- Residential
(in thousands of dollars) Comm'l Const. Comm'l Loans Leases Mortgage Unalloc. Total
------------------------------------------------------------------------------------------------------------------------------------
2000:
Amount $104,968 $13,442 $ 33,909 $ 70,639 $ 32,951 $3,575 $ 37,691 $ 297,175
% of Loans to Total Loans 32.2% 6.4% 10.9% 31.0% 14.9% 4.6% --- 100.0%
1999:
Amount $ 94,978 $15,452 $ 32,073 $ 78,655 $ 25,378 $4,804 $ 47,625 $ 298,965
% of Loans to Total Loans 30.5% 6.0% 10.4% 32.9% 13.1% 7.1% --- 100.0%
1998:
Amount $ 82,129 $11,112 $ 35,206 $104,198 $ 17,823 $4,864 $ 32,983 $ 288,315
% of Loans to Total Loans 31.2% 4.8% 11.6% 35.2% 9.9% 7.3% --- 100.0%
1997:
Amount $ 86,439 $ 8,140 $ 35,051 $ 75,405 $ 6,631 $3,547 $ 41,799 $ 257,012
% of Loans to Total Loans 29.9% 4.9% 12.7% 36.1% 8.7% 7.7% --- 100.0%
1996:
Amount $113,555 $ 2,033 $ 14,698 $ 54,564 $ 3,457 $4,289 $ 37,852 $ 230,448
% of Loans to Total Loans 30.6% 4.2% 12.8% 36.5% 7.1% 8.8% --- 100.0%
------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Non-interest income, excluding gains from loan sales and gains/losses from
investment security sales, was $413.1 million during 2000, compared with $444.9
million in 1999 and $371.2 million in 1998. Improvements in several key
non-interest income categories reported within "Other" non-interest income
offset the impact of lower mortgage banking income and the reduced level of
credit card fees following the portfolio sale last year. Brokerage and insurance
income grew 15% during 2000 due to strong mutual fund and annuity sales,
primarily during the first half of the year. Electronic banking fees grew 19% as
a result of higher customer usage of the Bank's check card product and the
expansion of the Bank's ATM network. Income from the automobile loan
securitization transactions completed in 2000 amounted to $6.9 million.
BPF-7
154
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
Investment security losses totaled $15.0 million for 2000, compared with
$17.6 million in 1999 and gains of $28.7 million in 1998. The losses in the most
recent two years were realized from the sale of lower yielding, fixed-income
investment securities.
NON-INTEREST EXPENSE
Non-interest expense, before special charges, was $799.2 million in 2000,
compared with $810.4 million and $786.2 million in 1999 and 1998, respectively.
Higher facility and equipment costs related to the new operations center, which
opened in the fall of 1999, and other expansion-related activities contributed
to the growth in expenses in the recent year. Additionally, expenses were higher
in the second half of 2000, as the Bank made investments in technology and
personnel and acquired Empire to support revenue growth and to improve its
competitive position. Because of the above-mentioned factors, management expects
that non-interest expense in 2001 will increase from the fourth quarter 2000
level.
SPECIAL CHARGES
The Bank recorded special charges totaling $50.0 million in 2000, $96.8
million in 1999, and $90.0 million in 1998. The $50.0 million charge in 2000 and
$58.2 million of the 1999 charge represent write-downs of residual values
related to the Bank's $3.0 billion vehicle lease portfolio. Of the $108.2
million total charge relating to the vehicle lease portfolio, $71.4 million
remained available at December 31, 2000, to cover estimated losses inherent in
the portfolio. Based on management's projections, the remaining amount is
adequate to absorb the estimated impairment losses in the portfolio at December
31, 2000. Additionally, the Bank has taken actions, including no longer
capitalizing the value of customer-added options that are expected to mitigate
residual value exposure on new business.
The 1999 charge also included $38.6 million related to the company's
"Huntington 2000+" program as well as other one-time expenses, which included
amounts paid for management consulting and other professional services as well
as $11 million for a special cash award to employees for achievement of the
program goals for 1999. "Huntington 2000+" was a collaborative effort among all
employees to evaluate processes and procedures and the way Huntington conducts
its business with a mission of maximizing efficiency through all aspects of the
organization. The 1998 charge related to costs for several strategic actions
that enhanced profitability, including the sale or closure of underperforming
banking offices and the termination of certain business activities.
PROVISION FOR INCOME TAXES
The provision for income taxes was $117.6 million, $183.1 million, and
$134.0 million in each of the last three years. The Bank's effective tax rate
was 28.9% in 2000 versus approximately 31% in 1999 and 1998. Based on
information currently available, Huntington expects its 2001 effective tax rate
to remain under 30%.
---------------------------------------------------------------------------------------------------------------------------------
TABLE 7 INVESTMENT SECURITIES
DECEMBER 31,
---------------------------------------------------
(in thousands of dollars) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $ --- $ --- $ 156
States and political subdivisions 16,336 18,765 24,423
------------- ------------- -------------
TOTAL INVESTMENT SECURITIES $ 16,336 $ 18,765 $ 24,579
============= ============= =============
AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 2000
---------------------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD
---------------------------------------------------------------------------------------------------------------------------------
States and political subdivisions
Under 1 year $ 3,139 $ 3,115 7.95%
1-5 years 10,536 10,578 7.66%
6-10 years 2,193 2,234 8.34%
Over 10 years 468 487 8.28%
------------- -------------
TOTAL INVESTMENT SECURITIES $ 16,336 $ 16,414
============= =============
Note: Weighted average yields were calculated on the basis of amortized cost
and have been adjusted to a fully tax equivalent basis, assuming a 35%
tax rate.
BPF-8
155
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
INTEREST RATE RISK AND LIQUIDITY MANAGEMENT
Interest Rate Risk Management
The Bank seeks to achieve consistent growth in net interest income and net
income while managing volatility arising from shifts in interest rates.
Huntington's Asset and Liability Management Committee ("ALCO") oversees
financial risk management, establishing broad policies and specific operating
limits that govern a variety of financial risks inherent in the Bank's
operations, including interest rate, liquidity, counterparty, settlement, and
market risks.
---------------------------------------------------------------------------------------------------------------------------
TABLE 8 SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
-------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $ 3,267,149 $4,154,085 $ 4,085,256
Other 729,700 607,152 647,135
----------------- ---------------- -----------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 3,996,849 $4,761,237 $ 4,732,391
================= ================ =================
AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 2000
---------------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD (1)
---------------------------------------------------------------------------------------------------------------------------
Federal Agencies
Mortgage-backed securities
6-10 years $ 22,757 $ 22,987 6.51%
Over 10 years 1,512,683 1,505,714 6.57%
----------------- ----------------
Total 1,535,440 1,528,701
----------------- ----------------
Other agencies
Under 1 year 20,000 19,913 6.62%
1-5 years 1,028,083 1,016,196 5.58%
6-10 years 144,519 142,394 6.54%
Over 10 years 566,760 559,945 6.23%
----------------- ----------------
Total 1,759,362 1,738,448
----------------- ----------------
Total U.S. Treasury and Federal Agencies 3,294,802 3,267,149
----------------- ----------------
Other
Under 1 year 18,053 18,040 9.65%
1-5 years 212,297 213,797 9.63%
6-10 years 81,776 80,394 8.28%
Over 10 years 403,730 388,731 6.55%
Marketable equity securities 28,738 28,738
----------------- ----------------
Total 744,594 729,700
----------------- ----------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 4,039,396 $3,996,849
================= ================
At December 31, 2000, the Bank had no concentrations of securities by a single
issuer in excess of 10% of shareholders' equity.
(1) Weighted average yields were calculated on the basis of amortized cost.
Marketable equity securities are excluded.
BPF-9
156
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
On and off-balance sheet strategies and tactics are reviewed and monitored
regularly by ALCO to ensure consistency with approved risk tolerances.
Interest rate risk management is a dynamic process, encompassing business
flows onto the balance sheet, wholesale investment and funding, and the changing
market and business environment. Effective management of interest rate risk
begins with appropriately diversified investments and funding sources. To
accomplish its overall balance sheet objectives, the Bank regularly accesses a
variety of global markets--money, bond, futures, and options--as well as
numerous trading exchanges. In addition, dealers in over-the-counter financial
instruments provide availability of interest rate swaps as needed.
Measurement and monitoring of interest rate risk is an ongoing process. A
key element in this process is the Bank's estimation of the amount that net
interest income will change over a twelve-month period given a gradual and
directional shift in interest rates. The income simulation model used by the
Bank captures all assets, liabilities, and off-balance sheet financial
instruments, accounting for significant variables that are believed to be
affected by interest rates. These include prepayment speeds on mortgages and
consumer installment loans, cash flows of loans and deposits, principal
amortization on revolving credit instruments, and balance sheet growth
assumptions.
The model also captures embedded options, e.g. interest rate caps/floors or
call options, and accounts for changes in rate relationships, as various rate
indices lead or lag changes in market rates. While these assumptions are
inherently uncertain, management assigns probabilities and, therefore, believes
at any point in time that the model provides a reasonably accurate estimate of
the Bank's interest rate risk exposure. Management reporting of this information
is regularly shared with the Board of Directors.
At December 31, 2000, the results of the Bank's sensitivity analysis
indicated that net interest income would be expected to decline by approximately
1.4%, if rates rose 100 basis points and would drop an estimated 3.0%, in the
event of a gradual 200 basis point increase. If rates declined 100 and 200 basis
points, the Bank's net interest income would benefit 1.3% or 2.5%, respectively.
The Bank's recent analysis shows a meaningful reduction in sensitivity to
changing interest rates compared with year-end 1999, in which the risk to net
interest income of a 200 basis point increase was 4.7%. This reduction is
indicative of the balance sheet efficiency efforts described previously.
Active interest rate risk management necessitates the use of various types
of off-balance sheet financial instruments, primarily interest rate swaps. Risk
that is created by different indices on products, by unequal terms to maturity
of assets and liabilities, and by products that are appealing to customers but
incompatible with current risk limits can be eliminated or decreased in a cost
efficient manner by utilizing interest rate swaps. Often, the swap strategy has
enabled the Bank to lower the overall cost of raising wholesale funds.
Similarly, financial futures, interest rate caps and floors, options, and
forward rate agreements are used to control financial risk effectively.
Off-balance sheet instruments are often preferable to similar cash instruments
because, though performing identically, they require less capital while
preserving access to the marketplace.
Table 9 illustrates the approximate market values, estimated maturities and
weighted average rates of the interest rate swaps used by the Bank in its
interest rate risk management program at December 31, 2000. As is the case with
cash securities, the market value of interest rate swaps is largely a function
of the financial market's expectations regarding the future direction of
interest rates. Accordingly, current market values are not necessarily
---------------------------------------------------------------------------------------------------------------------------------
TABLE 9 INTEREST RATE SWAP PORTFOLIO AT DECEMBER 31, 2000
ASSET CONVERSION SWAPS LIABILITY CONVERSION SWAPS
-------------------------------------- ------------------------------------------ BASIS
Receive- Pay- Receive- Pay- PROTECTION
(in millions of dollars) fixed fixed Total fixed fixed Total SWAPS
---------------------------------------------------------------------------------------------------------------------------------
Notional value $1,275 $200 $ 1,475 $ 1,410 $3,410 $ 4,820 $ 200
Average maturity (years) 1.7 0.7 1.6 5.0 0.6 1.9 0.7
Market value $ (2.0) $ (0.3) $ (2.3) $ 22.3 $ (14.5) $ 7.8 $ 0.6
Average rate:
Receive 6.02% 6.65% 6.11% 6.51% 6.71% 6.65% 6.55%
Pay 6.72% 6.31% 6.67% 6.81% 6.71% 6.74% 6.60%
BPF-10
157
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
indicative of the future impact of the swaps on net interest income. This will
depend, in large part, on the shape of the yield curve as well as interest rate
levels. With respect to the variable rate information presented in Table 9,
management made no assumptions regarding future changes in interest rates.
The pay rates on the Bank's receive-fixed swaps vary based on movements in
the applicable London interbank offered rate ("LIBOR"). Receive-fixed asset
conversion swaps with notional values of $155 million have embedded written
LIBOR-based call options. Basis swaps are contracts that provide for both
parties to receive interest payments according to different rate indices and are
used to protect against changes in spreads between market rates.
The contractual amounts of interest payments to be exchanged are based on
the notional values of the swap portfolio. These notional values do not
represent direct credit exposures. At December 31, 2000, the Bank's credit risk
from interest rate swaps used for asset/liability management purposes was $41.7
million, which represents the sum of the aggregate fair value of positions that
have become favorable to the Bank, including any accrued interest receivable due
from counterparties. In order to minimize the risk that a swap counterparty will
not satisfy its interest payment obligation under the terms of the contract, the
Bank performs credit reviews on all counterparties, restricts the number of
counterparties used to a select group of high quality institutions, obtains
collateral, and enters into formal netting arrangements. The Bank has never
experienced any past due amounts from a swap counterparty and does not
anticipate nonperformance in the future by any such counterparties.
At December 31, 2000, the total notional amount of off-balance sheet
instruments used by the Bank on behalf of customers (for which the related
interest rate risk is offset by third party contracts) was $1.1 billion. The
credit exposure from these contracts is not material and furthermore, these
separate activities, which are accounted for at fair value, are not a
significant part of the Bank's operations. Accordingly, they have been excluded
from the above discussion of off-balance sheet financial instruments and the
related table.
LIQUIDITY MANAGEMENT
Liquidity management is also a significant responsibility of ALCO. The
objective of ALCO in this regard is to maintain an optimum balance of maturities
among the Bank's assets and liabilities such that sufficient cash, or access to
cash, is available at all times to meet the needs of borrowers, depositors, and
creditors, as well as to fund corporate expansion and other activities.
A chief source of the Bank's liquidity is derived from the large retail
deposit base accessible by its network of geographically dispersed banking
offices. This core funding is supplemented by the Bank's demonstrated ability to
raise funds in capital markets and to access funds nationwide. The $6 billion
domestic bank note and $2 billion European bank note programs are significant
sources of wholesale funding. Under these programs unsecured senior and
subordinated notes are issuable with maturities ranging from one month to thirty
years. At December 31, 2000, approximately $3.2 billion of notes were available
under these programs to fund the Bank's future activities.
While liability sources are many, significant liquidity is also available
from the Bank's investment and loan portfolios. ALCO regularly monitors the
overall liquidity position of the business and ensures that various alternative
strategies exist to cover unanticipated events. At the end of the recent year,
management believes sufficient liquidity was available to meet estimated
short-term and long-term funding needs.
----------------------------------------------------------------
TABLE 10 MATURITY OF DOMESTIC CERTIFICATES
OF DEPOSIT OF $100,000 OR MORE
----------------------------------------------------------------
(in thousands of dollars) December 31, 2000
----------------------------------------------------------------
Three months or less $ 697,551
Over three through six months 284,293
Over six through twelve months 360,035
Over twelve months 434,774
-----------------
Total $1,776,653
=================
BPF-11
158
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
TABLE 11 SHORT-TERM BORROWINGS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
(in thousands of dollars) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
Balance at year-end $ 1,672,480 $1,871,392 $ 2,126,716
Weighted average interest rate at year-end 5.85% 4.60% 4.04%
Maximum amount outstanding at month-end during the year $ 1,999,827 $2,891,060 $ 2,717,586
Average amount outstanding during the year $ 1,690,240 $2,241,163 $ 1,843,737
Weighted average interest rate during the year 5.92% 4.55% 4.65%
---------------------------------------------------------------------------------------------------------------------
CREDIT RISK
The Bank's exposure to credit risk is managed through the use of consistent
underwriting standards that emphasize "in-market" lending while avoiding highly
leveraged transactions as well as excessive industry and other concentrations.
The credit administration function employs extensive risk management techniques,
including forecasting, to ensure that loans adhere to corporate policy and
problem loans are promptly identified. These procedures provide executive
management with the information necessary to implement policy adjustments where
necessary, and take corrective actions on a proactive basis.
Non-performing assets ("NPAs") consist of loans that are no longer accruing
interest, loans that have been renegotiated based upon financial difficulties of
the borrower, and real estate acquired through foreclosure. Commercial and 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 loan is 90
days past due. 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, which is generally no more than 120 days. A charge-off may be delayed
in circumstances when collateral is repossessed and anticipated to be sold at a
future date.
Total NPAs were $105.4 million at December 31, 2000, compared with $98.2
million at year-end 1999. As of the same dates, NPAs as a percent of total loans
and other real estate were .51% and .48%. Total NPAs are expected to increase
further in 2001 as deteriorating economic conditions adversely impact corporate
borrowers. Recent increases in NPAs were seen from the construction,
transportation, and manufacturing industries. The recent economic slowdown has
adversely impacted the construction and transportation industries, with the
latter hurt also by rising energy costs. Loans past due ninety days or more but
continuing to accrue interest increased to $80.3 million at December 31, 2000,
versus $61.3 million last year. This increase was approximately evenly
distributed between commercial and consumer lending.
CAPITAL AND DIVIDENDS
The Bank places significant emphasis on the maintenance of strong capital,
which provides access to the national markets under favorable terms, and
enhances business growth and acquisition opportunities. The Bank manages capital
based upon the respective risks and growth opportunities, as well as regulatory
requirements.
Average shareholder's equity was $2.4 billion for the year ended December
31, 2000, compared with $2.3 billion in 1999. The Bank's ratio of average equity
to average assets in 2000 was 8.37% versus 7.92% in 1999. On a period-end basis,
the ratios were 7.28% and 7.56%. Excluding the unrealized losses on securities
available for sale, tangible equity to assets was 4.99% in 2000, compared with
5.86% in 1999.
Risk-based capital guidelines established by the OCC set minimum capital
requirements and require institutions to calculate risk-based capital ratios by
assigning risk weightings to assets and off-balance sheet items, such as
interest rate swaps, loan commitments, and securitizations. These guidelines
further define "well-capitalized" levels for Tier 1, total capital, and leverage
ratio purposes at 6%, 10%, and 5%, respectively. At December 31, 2000, the
Bank's Tier 1 risk-based capital ratio was 6.60%, its total risk-based capital
ratio was 10.60%, and its leverage ratio was 6.43%.
BPF-12
159
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
TABLE 12 NON-PERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31,
-------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans
Commercial $ 55,804 $ 42,958 $ 34,586 $ 36,459 $ 25,621 $ 28,282
Real Estate
Construction 8,687 10,785 10,181 5,916 1,741 1,894
Commercial 18,015 16,131 13,243 10,212 14,843 13,276
Residential 10,174 11,866 14,419 13,394 12,835 11,971
-------- -------- -------- -------- -------- --------
Total Non-accrual Loans 92,680 81,740 72,429 65,981 55,040 55,423
Renegotiated loans 1,304 1,330 4,706 5,822 4,422 5,320
-------- -------- -------- -------- -------- --------
TOTAL NON-PERFORMING LOANS 93,984 83,070 77,135 71,803 59,462 60,743
-------- -------- -------- -------- -------- --------
Other real estate, net 11,413 15,171 18,964 15,343 17,208 23,598
-------- -------- -------- -------- -------- --------
TOTAL NON-PERFORMING ASSETS $105,397 $ 98,241 $ 96,099 $ 87,146 $ 76,670 $ 84,341
======== ======== ======== ======== ======== ========
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 80,306 $ 61,287 $ 51,037 $ 49,608 $ 39,267 $ 30,937
======== ======== ======== ======== ======== ========
NON-PERFORMING LOANS AS A % OF TOTAL LOANS 0.46% 0.40% 0.40% 0.41% 0.36% 0.39%
NON-PERFORMING ASSETS AS A % OF TOTAL
LOANS AND OTHER REAL ESTATE 0.51% 0.48% 0.50% 0.49% 0.46% 0.54%
ALLOWANCE FOR LOAN LOSSES AS A % OF NON-
PERFORMING LOANS 316.20% 359.90% 373.78% 357.94% 387.56% 366.28%
ALLOWANCE FOR LOAN LOSSES AND OTHER REAL
ESTATE AS A % OF NON-PERFORMING ASSETS 278.50% 299.51% 298.28% 293.00% 296.70% 250.06%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE TO
TOTAL LOANS 0.39% 0.30% 0.26% 0.28% 0.23% 0.20%
Note: For 2000, the amount of interest income which would have been recorded
under the original terms for total loans classified as non-accrual or
renegotiated was $6.5 million. Amounts actually collected and recorded as
interest income for these loans totaled $3.9 million.
--------------------------------------------------------------------------------
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001
The Bank reported net income of $82.5 million for the first six months of
2001 compared with $165.6 million for the same period last year. The current
year's results include special charges related to Huntington's comprehensive
restructuring and strategic refocus on its core Midwest markets announced July
12, 2001. This restructuring includes the intended sale of Huntington's Florida
operations, the planned consolidation of forty-three branches in other states,
and actions taken to strengthen Huntington's balance sheet. In conjunction with
the restructuring, the Bank expects to record pre-tax restructuring and other
charges of approximately $188 million ($122 million after-tax) to be taken in
the second, third, and fourth quarters of 2001. The portion of the total pre-tax
charge recorded in the second quarter of 2001 was $104.5 million ($67.9 million
after tax).
The following table reconciles the Bank's reported results to its operating
results for the six month period ending June 30, 2001:
BPF-13
160
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
----------------------------------------------------------------
(in thousands of dollars) 2001 2000
---------------------------------------------- ----------------
Restructuring
Reported and Other Operating Reported
Earnings Charges Earnings Earnings
-------------- -------------- -------------- ----------------
Net interest income $491,787 $ - $491,787 $ 475,180
Provision for loan losses 150,554 71,718 78,836 31,287
Non-interest income 226,239 - 226,239 178,105
Non-interest expense 463,091 32,755 430,336 384,283
-------------- -------------- -------------- ----------------
Pre-tax income 104,381 (104,473) 208,854 237,715
Income taxes 21,928 (36,566) 58,494 72,149
-------------- -------------- -------------- ----------------
Net income $ 82,453 $(67,907) $150,360 $ 165,566
============== ============== ============== ================
The second quarter charges consisted of the following (pre-tax):
Provision for Loan Losses:
- $25.8 million to recognize the estimated increased
losses resulting from Huntington's decision to exit
certain lending businesses. These businesses consist
of sub-prime automobile lending and truck and
equipment leasing.
- $23.3 million to charge-off delinquent consumer and
small business loans more than 120 days past due
reflecting a more conservative interpretation of
regulatory guidelines for charge-offs.
- $17.6 million to increase reserves for consumer
bankruptcies.
- $5.0 million to increase commercial loan reserves.
Non-interest Expense:
- $20.0 million charge to increase the reserve for auto
lease residual values.
- $12.0 million charge to write-down the value of
assets representing Huntington's retained interest in
automobile loans securitized in 2000. Credit losses
on these loans have increased beyond the levels
anticipated when the retained interest assets were
recorded.
- $0.8 million in other charges.
The remainder of this discussion focuses on operating results.
Excluding the restructuring and other charges, net income for the first six
months of 2001 was $150.4 million. On this same basis, the Bank's ROA was 1.08%
and ROE was 14.39% for the first half of 2001 versus 1.17% and 14.41%,
respectively, in the same period last year. Cash basis ROA and ROE were 1.22%
and 23.73%, respectively, for the first six months 2001.
Total assets at June 30, 2001, were $27.8 billion, down 2% from the end of
2000. This trend reflects the sale of $900 million in investment securities and
$107 million in residential mortgages during the first half of 2001 as the Bank
continued to sell low margin investments as part of its balance sheet
repositioning efforts.
Managed total loans, which include securitized loans, increased 6% versus
the first half of 2000. The growth rate in the current year is down from
increases of 8-9% during the second half of 2000. The recent slowdown in the
United States economy continues to have a significant adverse impact on consumer
loan growth.
Core deposits totaled $18.6 billion during the first half, relatively
unchanged from the same period last year. When combined with other core funding
sources, core deposits provide 80% of Huntington's funding needs. In the first
half of 2000, the Bank issued $150 million of regulatory capital qualifying
subordinated notes.
Net interest income for six months ended June 30, 2001 was $491.8 million
and the net interest margin was 3.99%. Compared with same period of 2000, net
interest income increased $16.6 million in the first six months. The net
interest margin also increased 21 basis points compared to last year's first
half. Huntington was slightly liability sensitive at the end of 2000 and
accordingly benefited from the decline in short-term rates during the first half
of this year. Additionally, the aforementioned sale of low margin investment
securities contributed to the increase in the net interest margin versus a year
ago.
On an operating basis, the provision for loan losses was $78.8 million for
the first six months of 2001, representing a significant increase versus the
same period of 2000 due to increased charge-offs. On the same basis, annualized
net charge-offs for the first half of 2001 increased to .64% from .33% for the
first six months one year
BPF-14
161
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
ago. Charge-offs increased in both the commercial and consumer loan portfolios
and reflect the negative impacts of weakening economic conditions over the past
year on Huntington's loan customers. Commercial charge-offs increased to .54% in
the recent six months versus .16% in the same period last year. Consumer
charge-offs also increased significantly to .87% in the first half, up 36 basis
points from the first six months of 2000. The increases were primarily due to
higher indirect automobile loan and lease losses. A lower quality origination
mix in the fourth quarter of 1999 through the second quarter of 2000, the
economic slowdown, and an increase in the average loss per vehicle due to lower
used car prices all contributed to the unfavorable trend.
Non-interest income, excluding securities gains, totaled $221.5 million
for the recent six months representing an increase of 11% compared with the same
period a year ago. Income from fiduciary activities improved 10% indicative of
increased revenue from Huntington's proprietary mutual funds as five new funds
were added in addition to price increases. Categories included in the "Other"
component of non-interest income showing improvement were led by mortgage
banking income, up 73% due to strong mortgage origination volume in the
prevailing lower interest rate environment. Mortgage banking results in 2001
also included a $2.0 million gain on the sale of $107 million of portfolio
loans. Electronic banking income also improved 11% as a result of higher
customer usage of the Bank's check card product. Securitization income increased
$7.3 million versus the first half of 2000 as last year's results included a
$10.2 million loss as the Bank securitized lower-coupon loans as part of its
balance sheet repositioning.
Non-interest expense, excluding restructuring and other charges, totaled
$430.3 million in the first six months versus $384.3 million in the same period
last year. The increase was due to several factors, including accrual
adjustments made in 2000 totaling $9.8 million that resulted in an unusually low
expense base in the first half of last year. The remaining increase was
primarily due to higher sales commissions consistent with the growth in fee
income and other personnel related costs. Additionally, $4 million of premium
expense for insurance on the Bank's auto lease residual values and the impact of
purchase acquisitions also drove expenses higher in the first half of 2001.
The $4 million premium expense reflects the Bank's decision, late in 2000,
to insure the residual risk inherent in its $3.1 billion automobile lease
portfolio. Accordingly, in the first quarter of 2001, the Bank purchased two
residual value insurance policies, one for the existing portfolio, as of
October, 2000 and one for all new leases originated after that date. The
insurance carrier is AA rated by Standard & Poor's and A+/XV by A.M. Best. Both
policies cover the difference between the contractual residual value and the
market value of the car at the end of the lease term, as evidenced by Black Book
valuations. Neither policy has a deductible, but the policies on the existing
portfolio and the new originations have caps of $120 million and $50 million,
respectively. The Bank remains liable for full term leases where the sales price
is less than Black Book value for the amount of the difference between Black
Book value and the sales price and has a $45 million reserve available to cover
this risk.
The results of the Bank's recent sensitivity analysis indicated that net
interest income would increase .3% if rates gradually declined 100 basis points
from June 30, 2001 levels and would drop .5% if rates rose 100 basis points. If
rates declined 200 basis points, the Bank would benefit .8%. If rates increased
200 basis points, net interest income would be expected to decline 1.1%, versus
the year-end 2000 sensitivity of 3.0% to a 200 basis point increase. The decline
in sensitivity over the past year was primarily due to the previously mentioned
sales of low margin fixed rate investment securities. These sales were part of
management's effort to restructure the balance sheet and reduce sensitivity to
interest rate changes stabilizing the Bank's revenue base.
Total NPAs were $166.0 million at June 30, 2001, compared with $124.9
million at March 31, 2001, and $95.1 million a year ago. As of the same dates,
NPAs as a percent of total loans and other real estate were .79%, .60%, and
.46%. The increase in the recent quarter was due in large part to two credits,
$16 million related to an assisted living/healthcare operation and $14 million
to a retailer of farm and agricultural equipment.
Loans past due ninety days or more but continuing to accrue interest
declined to $67.1 million at June 30, 2001, from $102.7 million at March 31,
2001. This represented .32% and .49% of total loans, respectively. Approximately
ten basis points of this decline were attributable to the acceleration of
charge-offs in the consumer portfolio taken as part of the special charge as
mentioned previously.
The ALL reserve ratio was 1.67% at the recent quarter end versus 1.45% at
the most recent year-end and second quarter of last year. As of June 30, 2001,
the ALL covered non-performing loans approximately 2.2 times and when combined
with the allowance for other real estate owned, was 211% of total nonperforming
assets. Total unallocated reserves were 11% at June 30, 2001, versus 17% one
year ago.
The Bank's average equity to average assets declined to 7.53% in the recent
six months from 8.09% in the period of 2000. Excluding unrealized losses on
securities available for sale and derivatives, tangible equity to assets was
5.18% at June 30, 2001 versus 6.33% a year ago. At the recent quarter-end, the
Bank's Tier 1 risk-based capital ratio was 6.65%, total risk-based capital ratio
was 10.57%, and the leverage ratio was 6.64%.
BPF-15
162
THE HUNTINGTON NATIONAL BANK
Management's Discussion and Analysis (continued)
--------------------------------------------------------------------------------
The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" on January
1, 2001. SFAS No. 133 requires that derivatives be recognized as either assets
or liabilities in the balance sheet at their fair value. The accounting for
gains or losses resulting from changes in fair value depends on the intended use
of the derivative. For derivatives designated as hedges of changes in the fair
value of recognized assets or liabilities, or unrecognized firm commitments,
gains or losses on the derivative are recognized in earnings together with the
offsetting losses or gains on the hedged items. This results in earnings only
being impacted to the extent that the hedge is ineffective in achieving
offsetting changes in fair value. For derivatives used to hedge changes in cash
flows associated with forecasted transactions, gains or losses on the effective
portion of the derivatives are deferred, and reported as accumulated other
comprehensive income ("AOCI"), a component of shareholders' equity, until the
period in which the hedged transactions affect earnings. Changes in the fair
value of derivative instruments not designated as hedges are recognized in
earnings.
The Bank uses derivative instruments to assist in the management of its
interest rate risk. Active interest rate risk management necessitates the use of
various types of off-balance sheet financial instruments, primarily interest
rate swaps. Risk that is created by different indices on products, by unequal
terms to maturity of assets and liabilities, and by products that are appealing
to customers but incompatible with current risk limits can be eliminated or
decreased in a cost efficient manner by utilizing interest rate swaps. Often,
the swap strategy has enabled the Bank to lower the overall cost of raising
wholesale funds. Similarly, financial futures, interest rate caps and floors,
options, and forward rate agreements are used to control financial risk
effectively. Off-balance sheet instruments are often preferable to similar cash
instruments because, though performing identically, they require less capital
while preserving access to the marketplace.
FAIR VALUE HEDGES: These derivative instruments consist generally of
interest rate swaps. The interest rate swaps effectively modify the Bank's
exposure to interest rate risk by converting fixed liabilities, primarily time
deposits, medium-term notes, and long-term debt, to a floating rate. These
interest rate swaps involve the receipt of fixed rate amounts in exchange for
floating rate interest payments over the life of the agreements without an
exchange of the underlying notional amounts.
As the changes in fair value of the hedged items substantially offset the
changes in fair value of the derivatives, no material impact to earnings was
recognized at the time of adoption of SFAS No. 133 or for the six months ended
June 30, 2001.
CASH FLOW HEDGES: These derivative instruments also consist primarily of
interest rate swaps. The swaps were entered into to reduce the impact of
interest rate changes on future net interest income. The swaps generally convert
floating rate medium-term notes and loans to a fixed rate basis with maturities
up to May 2004.
Upon the adoption of SFAS No. 133, the Bank recorded a reduction in AOCI of
$9.1 million. For the six months ended June 30, 2001, the Bank recorded an
increase in AOCI of $5.4 million. During the next twelve months, the Bank
expects to reclassify $9.8 million of net losses on derivative instruments from
AOCI to earnings due to the payment of variable interest payments on floating
rate medium term notes and the receipt of variable interest payments on floating
rate loans.
BPF-16
163
THE HUNTINGTON NATIONAL BANK
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
2000 1999 1998
----------------------------- ----------------------------- ----------------------------
INTEREST INTEREST INTEREST
Fully Tax Equivalent Basis (1) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(in millions of dollars) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------- --------- ---------- ------- --------- ---------- -------
ASSETS
Interest bearing deposits in
banks $ 2 $ 0.1 5.92% $ 3 $ 0.1 5.72% $ 56 $ 2.9 5.15%
Trading account securities 3 0.1 4.93 4 0.1 1.81 1 0.1 ---
Federal funds sold and
securities purchased under
resale agreements 90 5.7 6.28 24 1.3 5.31 324 18.0 5.57
Mortgages held for sale 109 8.7 7.96 232 16.3 7.03 289 20.2 6.99
Securities:
Taxable 4,242 265.0 6.25 4,833 293.5 6.07 4,848 305.5 6.30
Tax exempt 273 20.7 7.61 297 23.5 7.90 247 21.8 8.84
---------- -------- --------- ---------- --------- ----------
Total Securities 4,515 285.7 6.33 5,130 317.0 6.18 5,095 327.3 6.42
---------- -------- --------- ---------- --------- ----------
Loans:
Commercial 6,427 551.2 8.58 6,119 482.5 7.89 5,627 468.9 8.33
Real Estate
Construction 1,264 110.0 8.71 1,061 85.8 8.08 829 71.7 8.65
Commercial 2,183 185.3 8.49 2,235 181.6 8.13 2,304 199.6 8.66
Consumer
Loans 6,546 562.4 8.59 6,938 575.7 8.30 6,558 577.4 8.81
Leases 2,924 197.9 6.77 2,299 154.5 6.72 1,693 120.1 7.09
Residential Mortgage 1,295 99.6 7.69 1,424 107.0 7.51 1,300 104.6 8.04
---------- -------- --------- ---------- --------- ----------
Total Consumer 10,765 859.9 7.99 10,661 837.2 7.85 9,551 802.1 8.40
---------- -------- --------- ---------- --------- ----------
Total Loans 20,639 1,706.4 8.27 20,076 1,587.1 7.91 18,311 1,542.3 8.42
---------- -------- --------- ---------- --------- ----------
Allowance for loan losses/loan
fees 302 97.5 301 104.9 278 78.5
---------- -------- --------- ---------- --------- ----------
Net loans (2) 20,337 1,803.9 8.74 19,775 1,692.0 8.43 18,033 1,620.8 8.85
---------- -------- --------- ---------- --------- ----------
Total earning assets 25,358 2,104.2 8.30% 25,469 2,026.8 7.96% 24,076 1,989.3 8.26%
---------- -------- --------- ---------- --------- ----------
Cash and due from banks 1,008 1,051 975
All other assets 2,437 2,366 1,924
---------- --------- ---------
TOTAL ASSETS $ 28,501 $28,585 $26,697
========== ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Core deposits
Non-interest bearing deposits $ 3,435 $ 3,508 $3,287
Interest bearing demand
deposits 4,291 144.0 3.36% 4,097 106.5 2.60% 3,587 96.4 2.69%
Savings deposits 3,563 146.4 4.11 3,740 126.0 3.37 3,274 113.9 3.48
Certificates of deposit 7,374 425.8 5.78 7,274 375.6 5.16 7,978 445.1 5.58
---------- -------- --------- ---------- --------- ----------
Total core deposits 18,663 716.2 4.70 18,619 608.1 4.02 18,126 655.4 4.42
---------- -------- --------- ---------- --------- ----------
Other domestic time deposits 502 31.9 6.35 238 12.8 5.40 182 10.6 5.82
Foreign time deposits 616 36.9 6.00 481 23.6 4.90 421 20.9 4.97
---------- -------- --------- ---------- --------- ----------
Total deposits 19,781 785.0 4.80 19,338 644.5 4.07 18,729 686.9 4.45
---------- -------- --------- ---------- --------- ----------
Federal funds purchased and
securities sold under
agreements to repurchase 1,690 100.0 5.92 2,241 102.1 4.55 1,844 85.7 4.65
Other borrowed money 3,140 200.5 6.38 3,383 179.9 5.32 2,988 167.9 5.62
Subordinated notes and other
long-term debt, including
capital securities 906 63.2 6.96 767 45.6 5.92 789 50.3 6.38
---------- -------- --------- ---------- --------- ----------
Total interest bearing
liabilities 22,082 1,148.7 5.20% 22,221 972.1 4.37% 21,063 990.8 4.70%
---------- -------- --------- ---------- --------- ----------
All other liabilities 598 592 473
Shareholder's equity 2,386 2,264 1,874
---------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 28,501 $ 28,585 $26,697
========== ========= =========
Net interest rate spread 3.10% 3.59% 3.56%
Impact of non-interest bearing
funds on margin 0.67% 0.55% 0.59%
NET INTEREST MARGIN $ 955.5 3.77 % $1,054.7 4.14% $ 998.5 4.15%
======== ========== ==========
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Net loan rate includes loan fees, whereas individual loan components above
are shown exclusive of fees. Individual components include non-accrual loan
balances and related interest received.
BPF-17
164
THE HUNTINGTON NATIONAL BANK
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS (CONTINUED)
1997 1996
----------------------------- -----------------------------
INTEREST INTEREST
Fully Tax Equivalent Basis (1) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(in millions of dollars) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- --------- ------- --------- --------- -------
ASSETS
Interest bearing deposits in banks $ 11 $ 0.6 5.51% $ 13 $ 0.8 5.85%
Trading account securities 3 --- --- 5 --- ---
Federal funds sold and securities
purchased under resale agreements 460 25.3 5.50 45 3.1 6.94
Mortgages held for sale 131 10.2 7.75 113 8.8 7.74
Securities:
Taxable 5,315 337.5 6.35 5,160 331.5 6.42
Tax exempt 265 25.3 9.55 291 27.9 9.61
---------- --------- --------- ---------
Total Securities 5,580 362.8 6.50 5,451 359.4 6.59
---------- --------- --------- ---------
Loans:
Commercial 5,301 456.5 8.61 4,955 396.9 8.01
Real Estate
Construction 813 73.8 9.08 580 50.7 8.75
Commercial 2,251 200.6 8.91 2,129 189.3 8.89
Consumer
Loans 6,251 568.6 9.10 5,874 527.7 8.98
Leases 1,406 106.7 7.59 950 74.8 7.87
Residential Mortgage 1,510 126.3 8.36 1,485 123.0 8.28
---------- --------- --------- ---------
Total Consumer 9,167 801.6 8.75 8,309 725.5 8.73
---------- --------- --------- ---------
Total Loans 17,532 1,532.5 8.74 15,973 1,362.4 8.53
---------- --------- --------- ---------
Allowance for loan losses/loan fees 252 53.5 231 48.9
---------- --------- --------- ---------
Net loans (2) 17,280 1,586.0 9.05 15,742 1,411.3 8.84
---------- --------- --------- ---------
Total earning assets 23,717 1,984.9 8.37% 21,600 1,783.4 8.26%
---------- --------- --------- ---------
Cash and due from banks 912 890
All other assets 1,125 952
---------- ---------
TOTAL ASSETS $ 25,502 $23,211
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Core deposits
Non-interest bearing deposits $ 2,700 $ 2,586
Interest bearing demand deposits 3,209 84.9 2.65% 3,072 80.1 2.61%
Savings deposits 3,164 100.3 3.17 2,942 86.2 2.93
Certificates of deposit 7,413 417.4 5.63 6,975 394.1 5.65
---------- --------- --------- ---------
Total core deposits 16,486 602.6 4.37 15,575 560.4 4.31
---------- --------- --------- ---------
Other domestic time deposits 365 21.8 5.98 28 1.5 5.37
Foreign time deposits 460 26.4 5.74 373 22.1 5.91
---------- --------- --------- ---------
Total deposits 17,311 650.8 4.45 15,976 584.0 4.36
---------- --------- --------- ---------
Federal funds purchased and securities
sold under agreements to repurchase 2,184 92.2 4.22 1,722 81.0 4.70
Other borrowed money 3,188 182.9 5.74 2,922 185.9 6.36
Subordinated notes and other long-term
debt, including capital securities 467 29.3 6.28 315 19.3 6.12
---------- --------- --------- ---------
Total interest bearing liabilities 20,450 955.2 4.67% 18,349 870.2 4.74%
---------- --------- --------- ---------
All other liabilities 392 378
Shareholder's equity 1,960 1,898
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 25,502 $23,211
========== =========
Net interest rate spread 3.70% 3.52%
Impact of non-interest bearing funds on
margin 0.64% 0.71%
NET INTEREST MARGIN 1,029.7 4.34% $ 913.2 4.23%
========= =========
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Net loan rate includes loan fees, whereas individual loan components above
are shown exclusive of fees. Individual components include non-accrual loan
balances and related interest received.
BPF-18
165
THE HUNTINGTON NATIONAL BANK
SELECTED ANNUAL INCOME STATEMENTS
(in thousands of dollars) Year Ended December 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------- ------------
TOTAL INTEREST INCOME $2,096,056 $2,017,599 $1,979,193 $1,973,290 $1,771,218
TOTAL INTEREST EXPENSE 1,148,537 972,018 990,781 955,215 870,191
------------ ------------ ------------ ------------- ------------
NET INTEREST INCOME 947,519 1,045,581 988,412 1,018,075 901,027
Provision for loan losses 90,118 88,194 98,609 106,542 76,065
------------ ------------ ------------ ------------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 857,401 957,387 889,803 911,533 824,962
------------ ------------ ------------ ------------- ------------
Service charges on deposit accounts 158,802 157,612 126,379 117,852 107,647
Trust services 53,613 52,030 50,754 49,952 42,237
Bank Owned Life Insurance income 39,544 37,560 28,712 --- ---
Other 161,165 197,718 165,356 162,068 149,005
------------ ------------ ------------ ------------- ------------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES
AND CREDIT CARD PORTFOLIO SALE GAINS 413,124 444,920 371,201 329,872 298,889
------------ ------------ ------------ ------------- ------------
Securities (losses) gains (14,971) (17,608) 28,650 7,651 17,446
Gains on sale of credit card portfolios --- 108,530 9,530 --- ---
------------ ------------ ------------ ------------- ------------
TOTAL NON-INTEREST INCOME 398,153 535,842 409,381 337,523 316,335
------------ ------------ ------------ ------------- ------------
Personnel and related costs 364,781 385,489 378,667 312,978 306,044
Expenses of premises and fixed assets 149,372 124,845 111,077 85,425 83,360
Amortization of intangible assets 35,742 34,354 23,562 10,786 7,636
Other 249,293 265,702 272,929 305,582 269,387
------------ ------------ ------------ ------------- ------------
TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL
CHARGES 799,188 810,390 786,235 714,771 666,427
Special charges 50,000 96,791 90,000 51,163 ---
------------ ------------ ------------ ------------- ------------
TOTAL NON-INTEREST EXPENSE 849,188 907,181 876,235 765,934 666,427
------------ ------------ ------------ ------------- ------------
Income Before Income Taxes 406,366 586,048 422,949 483,122 474,870
Provision for income taxes 117,621 183,078 134,012 175,250 164,320
------------ ------------ ------------ ------------- ------------
NET INCOME $ 288,745 $ 402,970 $ 288,937 $ 307,872 $ 310,550
============ ============ ============ ============= ============
FULLY TAX EQUIVALENT MARGIN:
Net Interest Income $ 947,519 $1,045,581 $ 988,412 $1,018,075 $ 901,027
Tax Equivalent Adjustment (1) 8,115 9,165 10,065 11,658 12,156
------------ ------------ ------------ ------------- ------------
Tax Equivalent Net Interest Income $ 955,634 $ 1,054,746 $ 998,477 $1,029,733 $ 913,183
============ ============ ============ ============= ============
(1) Calculated assuming a 35% tax rate.
BPF-19
166
THE HUNTINGTON NATIONAL BANK
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
2ND QUARTER 2001 1ST QUARTER 2001 4TH QUARTER 2000 3RD QUARTER 2000 2ND QUARTER 2000
---------------- ---------------- ---------------- ---------------- -----------------
Fully Tax Equivalent Basis (1) AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(in millions of dollars) BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------ -------- ------ ------- ------ -------- ------ -------- -------
ASSETS
Interest bearing deposits
in banks $ 1 4.50% $ 1 5.56% $ 1 5.84% $ 1 7.72% $ 1 5.27%
Trading account securities 28 5.16 40 5.38 --- --- --- --- 4 10.79
Federal funds sold and
securities purchased
under resale agreements 97 4.22 164 5.78 92 6.49 133 6.39 108 6.07
Loans held for sale 420 6.96 240 7.19 129 7.74 99 8.51 99 8.11
Securities:
Taxable 3,263 6.30 3,504 6.76 4,319 6.29 4,185 6.33 4,006 6.21
Tax exempt 201 7.25 248 7.54 264 7.53 270 7.57 276 7.63
-------- -------- ------- -------- --------
Total Securities 3,464 6.36 3,752 6.82 4,583 6.37 4,455 6.41 4,282 6.30
-------- -------- ------- -------- --------
Loans:
Commercial 6,711 7.42 6,653 8.18 6,524 8.65 6,435 8.71 6,421 8.64
Real Estate
Construction 1,295 7.41 1,254 8.30 1,298 8.86 1,275 8.88 1,246 8.71
Commercial 2,289 7.92 2,320 8.39 2,223 8.64 2,189 8.60 2,168 8.51
Consumer
Loans 6,553 8.57 6,397 8.95 6,425 8.90 6,392 8.82 6,530 8.38
Leases 3,189 6.71 3,082 6.90 3,049 6.92 2,976 6.79 2,895 6.71
Residential Mortgage 941 7.73 960 7.91 940 7.94 1,325 7.64 1,473 7.62
-------- -------- ------- -------- --------
Total Consumer 10,683 7.94 10,439 8.25 10,414 8.24 10,693 8.11 10,898 7.83
-------- -------- ------- -------- --------
Total Loans 20,978 7.74 20,666 8.25 20,459 8.45 20,592 8.40 20,733 8.21
-------- -------- ------- -------- --------
Allowance for loan
losses/loan fees 315 307 302 302 302
-------- -------- ------- -------- --------
Net loans (2) 20,663 8.28 20,359 8.85 20,157 8.94 20,290 9.01 20,431 8.79
-------- -------- ------- -------- --------
Total earning assets 24,988 7.97% 24,863 8.39% 25,264 8.46% 25,280 8.42% 25,227 8.25%
-------- -------- ------- -------- --------
Cash and due from banks 902 948 958 967 1,047
All other assets 2,468 2,450 2,486 2,508 2,402
-------- -------- ------- -------- --------
TOTAL ASSETS $28,043 $27,954 $28,406 $28,453 $ 28,374
======== ======== ======= ======== ========
LIABILITIES AND SHAREHOLDER'S
EQUITY
Core deposits
Non-interest bearing
deposits $ 3,274 $3,225 $3,319 $3,437 $3,497
Interest bearing demand
deposits 4,799 2.87% 4,597 3.29% 4,496 3.62% 4,385 3.47% 4,228 3.32%
Savings deposits 3,547 3.42 3,505 3.85 3,498 4.28 3,528 4.14 3,583 4.21
Certificates of deposit 7,011 5.74 7,318 6.01 7,521 6.07 7,450 5.94 7,247 5.64
-------- -------- ------- -------- --------
Total core deposits 18,631 3.55 18,645 4.70 18,834 4.96 18,800 4.82 18,555 4.65
-------- -------- ------- -------- --------
Other domestic time
deposits 118 5.57 167 6.37 365 6.68 433 6.55 506 6.28
Foreign time deposits 425 4.07 398 4.94 433 5.67 639 6.29 675 6.47
-------- -------- ------- -------- --------
Total deposits 19,174 3.57 19,210 4.73 19,632 5.01 19,872 4.92 19,736 4.77
-------- -------- ------- -------- --------
Federal funds purchased
and securities sold
under agreements to
repurchase 2,597 4.31 2,205 5.27 1,780 5.84 1,635 5.96 1,607 5.67
Other borrowed money 2,156 6.51 2,500 6.58 2,987 6.84 2,938 6.81 3,158 6.47
Subordinated notes and
other long-term debt 942 5.93 927 6.59 926 7.05 926 7.09 926 6.82
-------- -------- ------- -------- --------
Total interest bearing
liabilities 21,595 4.60% 21,617 5.08% 22,006 5.41% 21,934 5.34% 21,930 5.17%
-------- -------- ------- -------- --------
All other liabilities 1,049 1,023 618 624 616
Shareholder's equity 2,125 2,089 2,463 2,458 2,331
-------- -------- ------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $28,043 $27,954 $28,406 $28,453 $28,374
======== ======== ======= ======== ========
Net interest rate spread 3.37% 3.31% 3.05% 3.08% 3.08%
Impact of non-interest
bearing funds on margin 0.63% 0.67% 0.69% 0.71% 0.68%
NET INTEREST MARGIN 4.00% 3.98% 3.74% 3.79% 3.76%
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Net loan rate includes loan fees, whereas individual loan components above
are shown exclusive of fees.
BPF-20
167
THE HUNTINGTON NATIONAL BANK
SELECTED QUARTERLY INCOME STATEMENT DATA
(in thousands of dollars) 2000 1999
---------------------------------------------- ----------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL INTEREST INCOME $ 534,063 $ 532,680 $ 516,213 $ 513,100 $ 512,941 $ 514,268 $ 496,050 $ 494,340
TOTAL INTEREST EXPENSE 299,600 294,804 282,013 272,120 258,793 244,913 234,750 233,562
--------- --------- --------- --------- --------- --------- --------- ---------
NET INTEREST INCOME 234,463 237,876 234,200 240,980 254,148 269,355 261,300 260,778
Provision for loan losses 32,454 26,377 15,834 15,453 19,953 21,910 21,026 25,305
--------- --------- --------- --------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 202,009 211,499 218,366 225,527 234,195 247,445 240,274 235,473
--------- --------- --------- --------- --------- --------- --------- ---------
Service charges on deposit
accounts 38,156 39,294 40,045 41,307 41,710 42,082 36,785 37,035
Trust services 14,404 12,979 13,367 12,863 12,828 12,625 13,144 13,433
Bank Owned Life Insurance
income 11,086 9,785 9,486 9,186 9,390 9,391 9,390 9,390
Other 49,047 38,698 39,181 34,240 47,912 50,699 53,737 45,369
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST INCOME
BEFORE SECURITIES AND CREDIT
CARD PORTFOLIO SALE GAINS 112,693 100,756 102,079 97,596 111,840 114,797 113,056 105,227
--------- --------- --------- --------- --------- --------- --------- ---------
Securities (losses) gains 4,924 1,675 (13,834) (7,736) 587 530 (21,055) 2,330
Gains on sale of credit
card portfolios --- --- --- --- 108,530 --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 117,617 102,431 88,245 89,860 220,957 115,327 92,001 107,557
--------- --------- --------- --------- --------- --------- --------- ---------
Personnel and related costs 92,485 93,498 88,293 90,505 96,482 96,162 96,459 96,386
Expenses of premises
and fixed assets 37,980 37,426 36,267 37,699 34,925 31,857 28,167 29,896
Amortization of intangible assets 9,456 9,456 8,388 8,442 8,571 8,590 8,601 8,592
Other 73,638 60,966 55,024 59,665 67,142 68,789 65,786 63,985
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE
BEFORE SPECIAL CHARGES 213,559 201,346 187,972 196,311 207,120 205,398 199,013 198,859
Special charges --- 50,000 --- --- 96,791 --- --- ---
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 213,559 251,346 187,972 196,311 303,911 205,398 199,013 198,859
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 106,067 62,584 118,639 119,076 151,241 157,374 133,262 144,171
Provision for income taxes 30,033 15,439 36,644 35,505 42,026 51,063 42,943 47,046
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME $ 76,034 $ 47,145 $ 81,995 $ 83,571 $ 109,215 $ 106,311 $ 90,319 $ 97,125
========= ========= ========= ========= ========= ========= ========= =========
FULLY TAX EQUIVALENT MARGIN:
Net Interest Income $ 234,463 $ 237,876 $ 234,200 $ 240,980 $ 254,148 $ 269,355 $ 261,300 $ 260,778
Tax Equivalent Adjustment (1) 2,013 1,970 2,023 2,109 2,191 2,226 2,334 2,414
--------- --------- --------- --------- --------- --------- --------- ---------
Tax Equivalent Net Interest $ 236,476 $ 239,846 $ 236,223 $ 243,089 $ 256,339 $ 271,581 $ 263,634 $ 263,192
========= ========= ========= ========= ========= ========= ========= =========
(1) Calculated assuming a 35% tax rate.
BPF-21
168
THE HUNTINGTON NATIONAL BANK
REPORT OF ERNST & Young LLP,
INDEPENDENT AUDITORS
To the Board of Directors and Shareholder
The Huntington National Bank and Subsidiaries
We have audited the accompanying consolidated balance sheets of The
Huntington National Bank and Subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Huntington
National Bank and Subsidiaries at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Columbus, Ohio
January 18, 2001
BPF-22
169
THE HUNTINGTON NATIONAL BANK
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars) JUNE 30, DECEMBER 31,
------------------------------- --------------------------------
2001 2000 2000 1999
-------------- -------------- ---------------- --------------
(UNAUDITED) (UNAUDITED)
ASSETS
$
Cash and due from banks $ 886,195 $ 1,103,730 $ 1,282,806 1,197,421
Interest bearing deposits in banks 1,322 1,557 1,457 1,693
Trading account securities 1,640 3,999 --- 5,743
Federal funds sold and securities
purchased under resale agreements 54,696 136,005 132,034 17,754
Mortgages held for sale 376,671 100,897 155,104 141,723
Securities available for sale - at fair value 3,088,779 4,267,709 3,996,849 4,761,237
Investment securities - fair value $15,159,
$17,254 $16,414, and $18,662, respectively 14,978 17,609 16,336 18,765
Total loans, net of unearned income 21,047,712 20,469,045 20,553,890 20,582,517
Less allowance for loan losses 351,133 296,300 297,175 298,965
-------------- -------------- ---------------- --------------
Net loans 20,696,579 20,172,745 20,256,715 20,283,552
-------------- -------------- ---------------- --------------
Bank owned life insurance 824,062 784,070 804,941 765,399
Premises and equipment 450,553 433,480 448,222 436,601
Customers' acceptance liability 15,335 13,532 17,366 17,167
Accrued income and other assets 1,406,887 1,271,761 1,318,321 1,112,964
-------------- -------------- ---------------- --------------
TOTAL ASSETS $ 27,817,697 $ 28,307,094 $ 28,430,151 $ 28,760,019
============== ============== ================ ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Deposits
Interest bearing $ 15,326,703 $ 16,937,567 $ 16,944,379 $ 16,270,728
Non-interest bearing 3,841,843 2,932,846 3,139,695 3,639,695
-------------- -------------- ---------------- --------------
Total Deposits 19,168,546 19,870,413 20,084,074 19,910,423
-------------- -------------- ---------------- --------------
Federal funds purchased and securities sold
under agreements to repurchase 2,454,471 1,625,911 1,672,480 1,871,392
Bank acceptances outstanding 15,335 13,532 17,366 17,167
Other borrowed money 2,122,208 2,993,313 2,684,550 3,490,563
Subordinated notes and other long-term debt 953,547 926,059 926,215 878,044
Accrued expenses and other liabilities 1,008,398 514,177 976,339 417,371
-------------- -------------- ---------------- --------------
Total Liabilities 25,722,505 25,943,405 26,361,024 26,584,960
-------------- -------------- ---------------- --------------
Shareholder's equity
Preferred stock - authorized 500,000 shares;
none issued or outstanding --- --- --- ---
Common stock - $10 per share par value;
4,000,000 shares authorized, issued and
outstanding 40,000 40,000 40,000 40,000
Surplus 451,268 851,268 451,268 722,836
Accumulated other comprehensive loss (4,895) (123,042) (27,503) (130,205)
Retained earnings 1,608,819 1,595,463 1,605,362 1,542,428
-------------- -------------- ---------------- --------------
Total Shareholder's Equity 2,095,192 2,363,689 2,069,127 2,175,059
-------------- -------------- ---------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 27,817,697 $ 28,307,094 $ 28,430,151 $ 28,760,019
============== ============== ================ ==============
See notes to consolidated financial statements.
BPF-23
170
THE HUNTINGTON NATIONAL BANK
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars) SIX MONTHS ENDED JUNE 30, TWELVE MONTHS ENDED DECEMBER 31,
--------------------------- --------------------------------------------
2001 2000 2000 1999 1998
------------ ------------ ------------- ------------ -------------
(Unaudited) (Unaudited)
Interest and fee income
Loans $ 889,835 $ 888,789 $1,809,953 $1,705,383 $1,641,726
Securities 116,156 138,354 280,343 310,832 320,494
Other 4,298 2,170 5,760 1,384 16,973
------------ ------------ ------------- ------------ -------------
TOTAL INTEREST INCOME 1,010,289 1,029,313 2,096,056 2,017,599 1,979,193
------------ ------------ ------------- ------------ -------------
Interest expense
Deposits 357,099 376,071 785,062 644,533 686,922
Federal funds purchased and securities
sold under agreements to repurchase 56,566 44,396 100,009 102,065 85,650
Other borrowed money 75,550 103,923 200,455 179,929 167,861
Subordinated notes and other long-term
debt 29,287 29,743 63,011 45,491 50,348
------------ ------------ ------------- ------------ -------------
TOTAL INTEREST EXPENSE 518,502 554,133 1,148,537 972,018 990,781
------------ ------------ ------------- ------------ -------------
NET INTEREST INCOME 491,787 475,180 947,519 1,045,581 988,412
Provision for loan losses 150,554 31,287 90,118 88,194 98,609
------------ ------------ ------------- ------------ -------------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 341,233 443,893 857,401 957,387 889,803
------------ ------------ ------------- ------------ -------------
Non-interest income
Service charges on deposit accounts 78,694 81,352 158,802 157,612 126,379
Income from fiduciary activities 28,869 26,230 53,613 52,030 50,754
Bank Owned Life Insurance income 19,121 18,672 39,544 37,560 28,712
Securities (losses) gains 4,787 (21,570) (14,971) (17,608) 28,650
Gains on sale of credit card portfolios --- --- --- 108,530 9,530
Other 94,768 73,421 161,165 197,718 165,356
------------ ------------ ------------- ------------ -------------
Total non-interest income 226,239 178,105 398,153 535,842 409,381
------------ ------------ ------------- ------------ -------------
Non-interest expense
Personnel and related costs 203,737 178,798 364,781 385,489 378,667
Expenses of premises and fixed assets 74,734 73,966 149,372 124,845 111,077
Amortization of intangible assets 18,918 16,830 35,742 34,354 23,562
Special charges 32,755 --- 50,000 96,791 90,000
Other 132,947 114,689 249,293 265,702 272,929
------------ ------------ ------------- ------------ -------------
Total non-interest expense 463,091 384,283 849,188 907,181 876,235
------------ ------------ ------------- ------------ -------------
INCOME BEFORE INCOME TAXES 104,381 237,715 406,366 586,048 422,949
Provision for income taxes 21,928 72,149 117,621 183,078 134,012
------------ ------------ ------------- ------------ -------------
NET INCOME $ 82,453 $ 165,566 $ 288,745 $ 402,970 $ 288,937
============ ============ ============= ============ =============
See notes to consolidated financial statements.
BPF-24
171
THE HUNTINGTON NATIONAL BANK
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(in thousands of dollars)
ACCUMULATED
COMMON OTHER
------------------- COMPREHENSIVE RETAINED
SHARES STOCK SURPLUS INCOME EARNINGS TOTAL
-------- ---------- ----------- --------------- ------------ -------------
BALANCE -- JANUARY 1, 1998 4,000 $40,000 $ 435,891 $ 14,765 $1,224,603 $ 1,715,259
Comprehensive Income:
Net income 288,937 288,937
Unrealized net holding gains on securities
available for sale arising during the
period 9,765 9,765
-------------
Total comprehensive income 298,702
-------------
Change incident to business combinations 2,398 (1,256) 1,142
Recapitalization of debt with parent company 380,000 380,000
Cash dividends declared (186,479) (186,479)
-------- ---------- ----------- --------------- ------------ -------------
BALANCE -- DECEMBER 31, 1998 4,000 40,000 818,289 24,530 1,325,805 2,208,624
-------- ---------- ----------- --------------- ------------ -------------
Comprehensive Income:
Net income 402,970 402,970
Unrealized net holding losses on
securities available for sale arising
during the period (154,735) (154,735)
-------------
Total comprehensive income 248,235
-------------
Change incident to business combination 14,547 3,908 18,455
Distribution of capital to parent company in
exchange for capital qualifying
subordinated debt (110,000) (110,000)
Cash dividends declared (190,255) (190,255)
-------- ---------- ----------- --------------- ------------ -------------
BALANCE -- DECEMBER 31, 1999 4,000 40,000 722,836 (130,205) 1,542,428 2,175,059
-------- ---------- ----------- --------------- ------------ -------------
Comprehensive Income:
Net income 288,745 288,745
Unrealized net holding gains on securities
available for sale arising during the
period 102,702 102,702
-------------
Total comprehensive income 391,447
-------------
Change incident to business combinations 128,432 (3,244) 125,188
Distribution of capital to parent company in
exchange for capital qualifying REIT
preferred securities (400,000) (400,000)
Cash dividends declared (222,567) (222,567)
-------- ---------- ----------- --------------- ------------ -------------
BALANCE -- DECEMBER 31, 2000 4,000 40,000 451,268 (27,503) 1,605,362 2,069,127
-------- ---------- ----------- --------------- ------------ -------------
Comprehensive Income:
Net income* 82,453 82,453
Change in accounting method for
derivatives* (9,113) (9,113)
Unrealized net holding gains on securities
available for sale arising during the
period* 26,369 26,369
Unrealized gains on derivatives* 5,352 5,352
-------------
Total comprehensive income* 105,061
-------------
Cash dividends declared* (78,996) (78,996)
-------- ---------- ----------- --------------- ------------ -------------
BALANCE - JUNE 30, 2001* 4,000 $40,000 $ 451,268 $ (4,895) $1,608,819 $ 2,095,192
======== ========== =========== =============== ============ =============
* Unaudited.
See notes to consolidated financial statements.
BPF-25
172
THE HUNTINGTON NATIONAL BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) SIX MONTHS ENDED
JUNE 30, TWELVE MONTHS ENDED DECEMBER 31,
------------------------- ------------------------------------------
2001 2000 2000 1999 1998
------------ ------------ ------------- ------------ -------------
OPERATING ACTIVITIES (UNAUDITED)
Net Income $ 82,453 $ 165,566 $ 288,745 $ 402,970 $ 288,937
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 150,554 31,287 90,118 88,194 98,609
Provision for depreciation and amortization 48,192 52,203 109,553 107,603 78,883
Deferred income tax expense 14,424 40,043 238,668 70,415 38,506
(Increase) decrease in trading account
securities (1,640) 1,744 5,743 (4,270) 2,019
(Increase) decrease in mortgages held for sale (221,567) 40,826 (13,381) 324,941 (273,716)
Net securities (gains) losses (4,787) 21,570 14,971 17,608 (28,650)
(Gains) losses on sales of loans and loan
securitizations (4,869) 4,118 5,355 (108,623) (9,903)
Decrease (increase) in accrued income receivable 14,771 (13,478) (24,966) (33,970) (35,266)
(Increase) decrease in other assets (107,137) (67,968) (163,237) (57,692) 6,424
(Decrease) increase in accrued expenses (56,842) 63,512 (146,965) (64,105) (16,392)
Increase (decrease) in other liabilities 26,748 19,301 (8,848) (89,613) (36,367)
Special charges 32,755 --- 50,000 96,791 90,000
------------ ------------- -------------- ------------- --------------
NET CASH (USED FOR) PROVIDED BY
OPERATING ACTIVITIES (26,945) 358,724 445,756 750,249 203,084
------------ ------------- -------------- ------------- --------------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in
banks 135 136 236 100,000 (51,643)
Proceeds from :
Maturities and calls of investment securities 990 1,140 2,408 5,789 8,348
Maturities and calls of securities available for
sale 633,121 114,696 404,166 651,716 1,353,772
Sales of securities available for sale 943,301 900,166 1,697,107 1,742,149 3,747,147
Purchases of securities available for sale (617,597) (73,961) (190,012) (2,681,106) (4,041,561)
Proceeds from sales of loans held for sale and loan
securitizations 303,240 984,041 1,556,093 686,548 142,801
Net loan originations, excluding sales (938,931) (920,463) (2,182,716) (1,841,126) (597,928)
Proceeds from sale of premises and equipment 717 2,014 3,504 17,111 176,513
Purchases of premises and equipment (29,683) (19,350) (59,786) (58,128) (156,142)
Proceeds from sales of other real estate 8,271 6,461 13,766 12,570 13,856
Purchase of bank owned life insurance --- --- --- --- (300,000)
Net cash received in purchase acquisitions --- 14,147 14,147 2,090 418,173
Proceeds from sale of Huntington Preferred Capital
Holdings, Inc. and Huntington Preferred Capital,
Inc. common stock to parent company 15,087 --- --- --- ---
------------ ------------- -------------- ------------- --------------
NET CASH PROVIDED BY (USED FOR) INVESTING 318,651 1,009,027 1,258,913 (1,362,387) 713,336
ACTIVITIES ------------ ------------- -------------- ------------- --------------
FINANCING ACTIVITIES
Decrease in total deposits (914,855) (506,173) (292,512) (13,647) (633,688)
Increase (decrease) in Federal funds purchased and
securities sold under agreements to repurchase 706,991 (438,481) (208,912) (380,503) (576,829)
Proceeds from issuance of long-term debt --- 150,000 150,000 --- 300,000
Payment and maturity of long-term debt (8,000) (100,000) (100,000) --- ---
Proceeds from issuance of medium-term notes
and other borrowed money 379,205 250,750 580,000 2,509,765 1,398,980
Payment and maturity of medium-term notes and
other borrowed money (850,000) (590,000) (1,411,013) (1,557,750) (1,462,891)
Dividends paid on common stock to parent company (78,996) (109,287) (222,567) (190,255) (186,479)
------------ ------------- -------------- ------------- --------------
NET CASH (USED FOR) PROVIDED BY
FINANCING ACTIVITIES (765,655) (1,343,191) (1,505,004) 367,610 (1,160,907)
-------------------------- -------------- ------------- --------------
CHANGE IN CASH AND CASH EQUIVALENTS (473,949) 24,560 199,665 (244,528) (244,487)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,414,840 1,215,175 1,215,175 1,459,703 1,704,190
------------ ------------- -------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 940,891 $1,239,735 $ 1,414,840 $ 1,215,175 $ 1,459,703
========================== ============== ============= ==============
See notes to consolidated financial statements.
BPF-26
173
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The Huntington National Bank (and its subsidiaries
are collectively referred to as `the Bank") is an interstate national banking
association organized under the laws of the United States and headquartered in
Columbus, Ohio. The Bank engages in full-service commercial and consumer
banking, mortgage banking, lease financing, trust services, discount brokerage
services, and the sale of other financial products and services offered through
its over 500 offices in Florida, Indiana, Kentucky, Maryland, Michigan, New
Jersey, Ohio, and West Virginia. In addition, international banking services are
offered through the Bank's headquarters office, as well as through its Cayman
Islands office and Hong Kong office. The Bank is a wholly owned subsidiary of
Huntington Bancshares Incorporated (Huntington).
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Bank and its subsidiaries and are presented in conformity with
accounting principles generally accepted in the United States (GAAP). All
significant intercompany accounts and transactions have been eliminated in
consolidation. The unaudited interim financial statements reflect all
adjustments, consisting of normal recurring accruals, which management of the
Bank considers necessary for a fair presentation of the financial position and
the results of operations for these periods.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
financial statements. Actual results could differ from those estimates.
Huntington owns all of the authorized, issued and outstanding common shares
of the Bank and therefore per share information is not presented.
SEGMENT RESULTS: Accounting policies for the lines of business are the same
as those used in the preparation of the consolidated financial statements with
respect to activities specifically attributable to each business line. However,
the preparation of business line results requires management to establish
methodologies to allocate funding costs and benefits, expenses, and other
financial elements to each line of business.
SECURITIES: Securities purchased with the intention of recognizing
short-term profits are classified as trading account securities and reported at
fair value. Unrealized gains or losses on trading securities are reported in
earnings. Debt securities that the Bank has both the positive intent and ability
to hold to maturity are classified as investment securities and are reported at
amortized cost. Securities not classified as trading or investments are
designated available for sale and reported at fair value. Unrealized gains or
losses on securities available for sale are reported as a separate component of
accumulated other comprehensive income in shareholder's equity. The amortized
cost of specific securities sold is used to compute realized gains and losses.
LOANS: Loans are reported net of unearned income at the principal amount
outstanding. Interest income is primarily accrued based on unpaid principal
balances as earned. Net direct loan origination costs/fees, when material, are
deferred and amortized over the term of the loan as a yield adjustment.
LEASES: Leases are stated at the sum of all minimum lease payments and
estimated residual values less unearned income. Unearned income is recognized in
interest income on a basis to achieve a constant periodic rate of return on the
outstanding investment.
NONACCRUAL LOANS: Commercial and real estate loans are placed on
non-accrual status and stop accruing interest when collection of principal or
interest is in doubt. 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. The Bank uses the cost recovery method in accounting for cash received
on non-accrual loans. Under this method, cash receipts are applied entirely
against principal until the loan has been collected in full, after which time
any additional cash receipts are recognized as interest income.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses reflects
management's judgment as to the level considered appropriate to absorb inherent
losses in the loan portfolio. This judgment is based on a review of individual
loans, historical loss experience, economic conditions, portfolio trends, and
other factors. The allowance is increased by provisions charged to earnings and
reduced by charge-offs, net of recoveries.
The portion of the allowance for loan losses related to impaired loans
(non-accruing and restructured credits, exclusive of smaller, homogeneous loans)
is based on discounted cash flows using the loans initial effective interest
rate or the fair value of the collateral for collateral-dependent loans.
MORTGAGE BANKING ACTIVITIES: Mortgages held for sale are primarily composed
of 1-to-4-family residential mortgage loans and are carried at the lower of cost
or market as determined on an aggregate basis by type of loan. Market value is
determined primarily by outstanding commitments from investors.
BPF-26
174
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capitalized mortgage servicing rights (MSRs) are evaluated for impairment
based on the fair value of those rights, using a disaggregated approach. MSRs
are amortized on an accelerated basis over the estimated period of net servicing
revenue.
OTHER REAL ESTATE: Other real estate acquired through partial or total
satisfaction of loans, is included in other assets and carried at the lower of
cost or fair value less estimated costs of disposition. At the date of
acquisition, any losses are charged to the allowance for loan losses. Subsequent
write-downs are included in non-interest expense. Realized losses from
disposition of the property and declines in fair value that are considered
permanent are charged to the reserve for other real estate, as applicable.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the related assets.
Estimated useful lives employed are on average 30 years for buildings, 10 to 20
years for building improvements, 10 years for land improvements, 3 to 7 years
for equipment, and 10 years for furniture and fixtures.
BUSINESS COMBINATIONS: Net assets of entities acquired, for which the
purchase method of accounting was used by the Bank, were recorded at their
estimated fair value at the date of acquisition. The excess of cost over the
fair value of net assets acquired (goodwill) is being amortized over periods
generally up to 25 years. Core deposits and other identifiable acquired
intangible assets are amortized over their estimated useful lives. Management
reviews goodwill and other intangible assets arising from business combinations
for impairment whenever a significant event occurs that adversely affects
operations or when changes in circumstances indicate that the carrying value may
not be recoverable. Such reviews for impairment are measured using estimates of
the discounted future earnings potential of the entity or assets acquired.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Bank will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The majority of the
Bank's goodwill and other intangible assets relate to its operations located in
Florida. In July 2001, Huntington announced that it expects to sell its Florida
operations before the end of 2001. The application of the nonamortization
provisions of the Statement to the goodwill not impacted by the sale is expected
to result in an increase in net income of $8.9 Million per year. During 2002,
the bank will perform the first of the required impairment tests of the
remaining goodwill as of January 1, 2002 and has not yet determined what the
effect of these tests will be on the bank's earnings and financial position.
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined as "Cash and
due from banks" and "Federal funds sold and securities purchased under resale
agreements." Interest payments made by the Bank were $1.2 billion, $971 million,
and $937 million in 2000, 1999, and 1998, respectively. Federal income tax
payments were $10.6 million in 2000, $181.5 million in 1999, and $68.6 million
in 1998.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES: Statement of Financial Accounting Standard No.
140 (SFAS No. 140), Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, was issued in September 2000 and replaced
Statement of Financial Accounting Standard No. 125 (SFAS No. 125). While not
changing most of the guidance originally issued in SFAS No. 125, guidance in
SFAS No. 140 revised the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain additional
disclosures related to transferred assets.
Certain provisions of the new standard, which became effective for the Bank
for 2000 year-end reporting, related to the recognition, reclassification, and
disclosure of collateral, as well as the disclosure of securitization
transactions. Other provisions, which became effective for transactions
occurring after March 31, 2001, related to the transfer and servicing of
financial assets and extinguishments of liabilities. Based on current
circumstances, management believes the application of the new rules DO not have
a material impact on the Bank's financial position, results of operations, or
liquidity.
BPF-27
175
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" on January
1, 2001. SFAS No. 133 requires that derivatives be recognized as either assets
or liabilities in the balance sheet at their fair value. The accounting for
gains or losses resulting from changes in fair value depends on the intended use
of the derivative. For derivatives designated as hedges of changes in the fair
value of recognized assets or liabilities, or unrecognized firm commitments,
gains or losses on the derivative are recognized in earnings together with the
offsetting losses or gains on the hedged items. This results in earnings only
being impacted to the extent that the hedge is ineffective in achieving
offsetting changes in fair value. For derivatives used to hedge changes in cash
flows associated with forecasted transactions, gains or losses on the effective
portion of the derivatives are deferred, and reported as accumulated other
comprehensive income ("AOCI"), a component of shareholders' equity, until the
period in which the hedged transactions affect earnings. Changes in the fair
value of derivative instruments not designated as hedges are recognized in
earnings.
The Bank uses derivative instruments to assist in the management of its
interest rate risk. Active interest rate risk management necessitates the use of
various types of off-balance sheet financial instruments, primarily interest
rate swaps. Risk that is created by different indices on products, by unequal
terms to maturity of assets and liabilities, and by products that are appealing
to customers but incompatible with current risk limits can be eliminated or
decreased in a cost efficient manner by utilizing interest rate swaps. Often,
the swap strategy has enabled the Bank to lower the overall cost of raising
wholesale funds. Similarly, financial futures, interest rate caps and floors,
options, and forward rate agreements are used to control financial risk
effectively. Off-balance sheet instruments are often preferable to similar cash
instruments because, though performing identically, they require less capital
while preserving access to the marketplace.
FAIR VALUE HEDGES: These derivative instruments consist generally of
interest rate swaps. The interest rate swaps effectively modify the Bank's
exposure to interest rate risk by converting fixed liabilities, primarily time
deposits, medium-term notes, and long-term debt, to a floating rate. These
interest rate swaps involve the receipt of fixed rate amounts in exchange for
floating rate interest payments over the life of the agreements without an
exchange of the underlying notional amounts.
As the changes in fair value of the hedged items substantially offset the
changes in fair value of the derivatives, no material impact to earnings was
recognized at the time of adoption of SFAS No. 133 or for the six months ended
June 30, 2001.
CASH FLOW HEDGES: These derivative instruments also consist primarily of
interest rate swaps. The swaps were entered into to reduce the impact of
interest rate changes on future net interest income. The swaps generally convert
floating rate medium-term notes and loans to a fixed rate basis with maturities
up to May 2004.
Upon the adoption of SFAS No. 133, the Bank recorded a reduction in AOCI of
$9.1 million. For the six months ended June 30, 2001, the Bank recorded an
increase in AOCI of $5.4 million (unaudited). During the next twelve months, the
Bank expects to reclassify $9.8 million of net losses on derivative instruments
from AOCI to earnings due to the payment of variable interest payments on
floating rate medium term notes and the receipt of variable interest payments on
floating rate loans.
BPF-28
176
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 SECURITIES
Amortized cost, unrealized gains and losses, and fair values of securities
available for sale as of December 31, 2000 and 1999, were:
----------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
---------------------------------------------------------------------
AMORTIZED GROSS GROSS FAIR
(in thousands of dollars) COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2000
U.S. Treasury $ -- $ -- $ -- $ --
Federal Agencies
Mortgage-backed securities 1,535,440 7,072 13,811 1,528,701
Other agencies 1,759,362 1,046 21,960 1,738,448
------------ ------------ ------------ ------------
Total U.S. Treasury and Federal Agencies 3,294,802 8,118 35,771 3,267,149
Other Securities 744,594 3,137 18,031 729,700
------------ ------------ ------------ ------------
Total securities available for sale $ 4,039,396 $ 11,255 $ 53,802 $ 3,996,849
============ ============ ============ ============
AT DECEMBER 31, 1999
U.S. Treasury $ 519,020 $ -- $ 29,611 $ 489,409
Federal Agencies
Mortgage-backed securities 1,664,445 -- 64,081 1,600,364
Other agencies 2,154,062 27 88,493 2,065,596
------------ ------------ ------------ ------------
Total U.S. Treasury and Federal Agencies 4,337,527 27 182,185 4,155,369
Other Securities 625,137 -- 19,269 605,868
------------ ------------ ------------ ------------
Total securities available for sale $ 4,962,664 $ 27 $ 201,454 $ 4,761,237
============ ============ ============ ============
Contractual maturities of securities available for sale as of December 31, 2000
and 1999, were:
-------------------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(in thousands of dollars) Cost Value Cost Value
-------------------------------------------------------------------------------------------------------------------------------
Under 1 year $ 38,053 $ 37,953 $ 20,806 $ 20,833
1 - 5 years 1,240,380 1,229,993 1,089,737 1,057,462
6 - 10 years 249,053 245,775 1,117,257 1,054,570
Over 10 years 2,483,172 2,454,390 2,706,949 2,600,457
Federal Home Loan Bank and
Federal Reserve Stock 28,738 28,738 27,915 27,915
-------------- --------------- -------------- --------------
Total $4,039,396 $3,996,849 $ 4,962,664 $ 4,761,237
============== =============== ============== ==============
Gross gains from sales of securities of $4.2 million, $6.4 million, and
$33.7 million were realized in 2000, 1999, and 1998, respectively. Gross losses
totaled $19.2 million in 2000, $24.0 million in 1999, and $5.1 million in 1998.
Amortized cost, unrealized gains and losses, and fair values of investment
securities as of December 31, 2000 and 1999, were:
BPF-29
177
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------------------------------------------------------------
Unrealized
------------------------
Amortized Gross Gross Fair
(in thousands of dollars) Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2000
U.S. Treasury and Federal Agencies $ -- $ -- $ -- $ --
States and political subdivisions 16,336 140 62 16,414
--------- --------- --------- ---------
Total investment securities $ 16,336 $ 140 $ 62 $ 16,414
========= ========= ========= =========
AT DECEMBER 31, 1999
U.S. Treasury and Federal Agencies $ -- $ -- $ -- $ --
States and political subdivisions 18,765 78 181 18,662
--------- --------- --------- ---------
Total investment securities $ 18,765 $ 78 $ 181 $ 18,662
========= ========= ========= =========
Amortized cost and fair values by contractual maturity at December 31, 2000 and
1999, were:
-----------------------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(in thousands of dollars) Cost Value Cost Value
-----------------------------------------------------------------------------------------------------
Under 1 year $ 3,139 $ 3,115 $ 2,410 $ 2,389
1 - 5 years 10,536 10,578 12,911 12,855
6 - 10 years 2,193 2,234 2,872 2,859
Over 10 years 468 487 572 559
-------- -------- -------- --------
Total $ 16,336 $ 16,414 $ 18,765 $ 18,662
======== ======== ======== ========
--------------------------------------------------------------------------------
NOTE 4 LOANS
At June 30, 2001 and 2000, and December 31, 2000 and 1999, loans, net of
unearned income, were comprised of the following:
----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
-------------------------------------- -------------------------------------
(in thousands of dollars) 2001 2000 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Commercial (unearned income $1,196;
$1,958; $1,538; $2,550) $ 6,717,633 $ 6,531,365 $ 6,611,384 $ 6,287,871
Real estate
Construction 1,326,781 1,269,853 1,310,472 1,234,046
Commercial 2,300,438 2,182,603 2,249,313 2,147,508
Consumer
Loans (unearned income $3,521;
$4,933; $4,150; $5,975) 6,664,654 6,210,847 6,367,752 6,777,681
Leases (unearned income $520,564; 3,194,591 2,930,548 3,069,210 2,691,735
$470,868; $515,445; $410,239)
Residential Mortgage 843,615 1,343,829 945,759 1,443,676
----------- ----------- ----------- -----------
Total loans $21,047,712 $20,469,045 $20,553,890 $20,582,517
=========== =========== =========== ===========
During the year ended December 31, 2000, the Bank securitized $780 million
of residential mortgage loans. The Bank initially retained all of the resulting
securities and accordingly, reclassified the securitized amount from loans to
securities available for sale.
BPF-30
178
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1999, the Bank sold its credit card portfolio of approximately $541
million in receivables, resulting in a net gain of $108.5 million. In 1998, the
Bank exited its out-of-market credit card operations through the sale of
approximately $90 million of credit card receivables, resulting in a $9.5
million net gain.
RELATED PARTY TRANSACTIONS
The Bank has granted loans to Huntington's officers, directors, and their
associates. Such loans were made in the ordinary course of business under normal
credit terms, including interest rate and collateralization, and to not
represent more than the normal risk of collection. These loans to related
parties are summarized as follows:
-----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 130,090 $ 132,169
Loans made 418,088 166,064
Repayments (412,809) (146,116)
Changes due to status of executive officers and directors 10,392 (22,027)
--------- ---------
Balance, end of year $ 145,761 $ 130,090
========= =========
NOTE 5 LOAN SECURITIZATIONS
During 2000, the Bank sold $1.7 billion of automobile loans in
securitization transactions and recognized net gains of $4.9 million, which were
included in the "other" component of non-interest income. As required by SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", gains and losses on loan securitizations are
determined at the time of sale based on a present value calculation of expected
future cash flows from the underlying loans net of interest payments to security
holders. The calculation includes assumptions for market interest rates, loan
losses, and prepayment rates. These net cash flows are recorded as a retained
interest in securitized assets (retained interest) and included in securities
available for sale. An asset is also established at the time of sale equal to
the fair value of the servicing rights and recorded in other assets.
At December 31, 2000, the fair values of the retained interest and the
servicing asset related to automobile loan securitizations were $134.1 million
and $22.7 million, respectively. Management periodically reviews the assumptions
underlying these values. If these assumptions change, the related asset and
income would be affected.
The key assumptions used to measure the fair value of the retained interest
at the time of securitization included: a monthly prepayment rate of 1.54%, a
weighted average loan life of 24 months, expected annual credit losses of 0.92%,
a discount rate of 10%, and a coupon rate on variable rate securities of 6.83%
At December 31, 2000, the assumptions and the sensitivity of the current
fair value of the retained interest to immediate 10% and 20% adverse changes in
those assumptions were as follows:
---------------------------------------------------------------------------------------------------------
Decline in fair value
due to
-----------------------
10% 20%
adverse adverse
(in millions of dollars) Actual change change
---------------------------------------------------------------- ----------- ---------- ----------
Monthly prepayment rate 1.54% $ 2.1 $ 4.2
Expected annual credit losses 0.92% 2.3 4.6
Discount rate 10.00% 2.7 5.4
Interest rate on variable securities 5.78% 9.0 18.2
Caution should be used when reading these sensitivities as a change in an
individual assumption and its impact on fair value is shown independent of
changes in other assumptions. Economic factors are dynamic and may counteract or
magnify sensitivities.
Quantitative information about delinquencies, net loan losses, and
components of managed automobile loans follows:
BPF-31
179
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
---------------------------------------------------------------------------------------------------
(in millions of dollars) 2000
---------------------------------------------------------------------------------------------------
Loans held in portfolio $ 2,508
Loans securitized 1,371
-----------
Total managed loans $ 3,879
===========
Net loan losses as a % of average managed loans 0.97%
Delinquencies (30 days or more) as a percent of year-end managed loans 3.64%
NOTE 6 ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses and details
regarding impaired loans follows for the three years ended December 31:
-----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 298,965 $ 288,315 $ 257,012
Allowance of assets acquired 7,900 2,543 22,042
Loan losses (110,845) (112,283) (120,439)
Recoveries of loans previously charged off 27,756 32,196 31,091
Allowance of securitized loans (16,719) -- --
Provision for loan losses 90,118 88,194 98,609
----------- ----------- -----------
BALANCE, END OF YEAR $ 297,175 $ 298,965 $ 288,315
=========== =========== ===========
RECORDED BALANCE OF IMPAIRED LOANS,
AT END OF YEAR (1):
With related allowance for loan losses $ 51,693 $ 8,897 $ 13,277
With no related allowance for loan losses 5,261 30,594 18,340
----------- ----------- -----------
Total $ 56,954 $ 39,491 $ 31,617
=========== =========== ===========
AVERAGE BALANCE OF IMPAIRED LOANS
FOR THE YEAR (1) $ 33,705 $ 30,663 $ 32,547
=========== =========== ===========
ALLOWANCE FOR LOAN LOSS RELATED TO
IMPAIRED LOANS (1) $ 12,944 $ 4,523 $ 4,459
=========== =========== ===========
(1) Includes impaired loans with outstanding balances of greater than $500,000.
BPF-32
180
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 PREMISES AND EQUIPMENT
At December 31, 2000 and 1999, premises and equipment stated at cost were
comprised of the following:
--------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999
--------------------------------------------------------------------------------------------------------------
Land and land improvements $ 77,710 $ 73,989
Buildings 267,487 255,590
Leasehold improvements 114,385 104,624
Equipment 462,504 426,263
---------- ----------
Total premises and equipment 922,086 860,466
Less accumulated depreciation and amortization 473,864 423,865
---------- ----------
Net premises and equipment $ 448,222 $ 436,601
========== ==========
Depreciation and amortization charged to expense and rental income credited to
occupancy expense were:
-------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization of
premises and equipment $ 49,013 $ 42,674 $ 41,399
========= ======== ========
Rental income credited to occupancy expense $ 16,030 $ 12,896 $ 13,133
========= ======== ========
In 1998, the Bank entered into a sale/leaseback arrangement that included
the sale of 59 properties with a book value approximating $110 million. This
arrangement included a mix of branch bank regional offices, and operations
facilities, each of which is being leased back to the Bank. The proceeds of
$174.1 million received from the transaction were used to reduce short-term
debt. The resulting deferred gain is being amortized as a reduction of occupancy
expense over the lease term.
NOTE 8 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is
summarized as follows:
-----------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999
-----------------------------------------------------------------------------------------------------
Average balance during the period $1,200,077 $ 1,405,305
Average interest rate during the period 5.34% 4.09%
Maximum month-end balance during the period $1,328,677 $ 1,683,386
Securities pledged to secure public or trust deposits, repurchase
agreements, and for other purposes were $3.0 billion and $3.3 billion at
December 31, 2000 and 1999, respectively.
BPF-33
181
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 OTHER BORROWED MONEY, SUBORDINATED NOTES AND OTHER LONG-TERM DEBT
The Banks' debt at December 31, 2000 and 1999, net of unamortized discount,
consisted of the following:
---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Medium Term Notes (maturing through 2005) $ 2,442,150 $ 3,254,150
Term Federal Funds 150,000 190,000
Subordinated notes
7 5/8 % due 2003 149,860 149,792
6 3/4% due 2003 99,919 99,886
6 3/4% due 2007 50,000 150,000
5 3/4% due 2008 70,000 70,000
7 1/4% due 2009 110,000 110,000
Floating rate due 2008 100,000 100,000
8% due 2010 147,981 --
6 3/5% due 2018 198,455 198,366
------------ ------------
Total subordinated notes 926,215 878,044
------------ ------------
Demand notes issued to the U.S. Treasury 24,484 25,000
Federal Home Loan Bank notes 25,000 --
Other 42,916 21,413
------------ ------------
TOTAL OTHER BORROWED MONEY, SUBORDINATED NOTES AND
OTHER LONG-TERM DEBT $ 3,610,765 $ 4,368,607
============ ============
The bank's floating rate subordinated notes were issued in 1998 and are
based on three-month LIBOR. At December 31, 2000, these notes carried an
interest rate of 7.17%. The subordinated notes due in 2007 through 2009 are
payable to the Bank's parent company.
Term Federal Funds at December 31, 2000 carried a weighted average interest
rate of 6.22% and mature in the second quarter of 2001. Long-term advances from
the Federal Home Loan Bank are at fixed interest rates ranging from 5.76% to
6.71% and have maturities ranging from 2001 to 2004. The weighted average
interest rate of these advances at December 31, 2000, was 6.22%. Advances from
the Federal Home Loan Bank are collateralized by qualifying securities.
The majority of the Bank's fixed-rate debt has been effectively converted
to variable-rate debt with the use of off-balance sheet derivatives, principally
through interest rate swaps. As a result, the weighted average interest-rate
swap adjusted rate for Medium-term notes at December 31, 2000, and 1999, was
6.68% and 5.84%, respectively. Based on face value, the weighted average
interest rate swap adjusted rate for subordinated notes was 6.92% at December
31, 2000, and 6.44% at the end of 1999.
The terms of the Bank's medium and long-term debt obligations contain
various restrictive covenants including limitations on the acquisition of
additional debt in excess of specified levels, dividend payments, and the
disposition of subsidiaries. As of December 31, 2000, the Bank was in compliance
with all such covenants.
Medium- and long-term debt maturities for the next five years are as
follows: $1.3 billion in 2001; $536 million in 2002; $500 million in 2003; $133
million in 2004; $285 million in 2005; and $680 million thereafter.
BPF-34
182
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 BENEFIT PLANS
Huntington sponsors a non-contributory defined benefit pension plan
covering substantially all employees, including employees of the Bank. The plan
provides benefits based upon length of service and compensation levels. The
funding policy of Huntington is to contribute an annual amount which is at least
equal to the minimum funding requirements but not more than that deductible
under the Internal Revenue Code. Plan assets, held in trust, primarily consist
of mutual funds.
Huntington's unfunded defined benefit post-retirement plan provides certain
health care and life insurance benefits to retired employees who have attained
the age of 55 and have at least 10 years of service. For any employee retiring
on or after January 1, 1993, post-retirement healthcare and life insurance
benefits are based upon the employee's number of months of service and are
limited to the actual cost of coverage. Huntington's benefit obligation for
pension benefits and post-retirement benefits are indicative of the Bank's as of
the measurement dates presented. The following table reconciles the funded
status of the pension plan and the post-retirement benefit plan at the
applicable September 30 measurement dates with the amounts recognized in
Huntington's consolidated balance sheet at December 31:
----------------------------------------------------------------------------------------------------------------------------
Pension Post-Retirement
Benefits Benefits
----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation at
beginning of measurement year $ 210,894 $ 198,541 $ 48,414 $ 46,451
Changes due to:
Service cost 10,241 11,081 1,544 1,494
Interest cost 15,509 13,622 3,506 3,249
Benefits paid (15,959) (18,227) (2,904) (3,130)
Plan amendments -- 12,049 -- (549)
Actuarial assumptions (10,731) (6,172) (5,654) 899
------------ ------------ ------------ ------------
Total changes (940) 12,353 (3,508) 1,963
------------ ------------ ------------ ------------
Projected benefit obligation at end of measurement year 209,954 210,894 44,906 48,414
------------ ------------ ------------ ------------
Fair value of plan assets at beginning
of measurement year 177,694 179,727 -- --
Changes due to:
Actual return on plan assets 5,201 16,194 -- --
Employer contribution 40,000 -- -- --
Benefits paid (15,959) (18,227) -- --
------------ ------------ ------------ ------------
Total changes 29,242 (2,033) -- --
------------ ------------ ------------ ------------
Fair value of plan assets at end of measurement year 206,936 177,694 -- --
------------ ------------ ------------ ------------
Projected benefit obligation greater
than plan assets (3,018) (33,200) (44,906) (48,414)
Unrecognized net actuarial (gain) loss 879 (1,978) (6,168) (575)
Unrecognized prior service cost 114 (204) 7,143 7,836
Unrecognized transition (asset) liability,
net of amortization (831) (1,156) 15,129 16,390
------------ ------------ ------------ ------------
Accrued liability at measurement date (2,856) (36,538) (28,802) (24,763)
Fourth quarter contribution -- 40,000 -- --
------------ ------------ ------------ ------------
Prepaid (accrued) liability at end of year $ (2,856) $ 3,462 $ (28,802) $ (24,763)
============ ============ ============ ============
Weighted-average assumptions at September 30:
Discount rate 7.75% 7.50% 7.75% 7.50%
Expected return on plan assets 9.25% 9.25% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
BPF-35
183
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the components of pension cost recognized in the most
recent three years:
------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Post-Retirement Benefits
---------------------------------------- ----------------------------------------
(in thousands of dollars) 2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 10,241 $ 11,081 $ 11,979 $ 1,544 $ 1,494 $ 1,410
Interest cost 15,509 13,622 12,897 3,506 3,249 3,080
Expected return on plan assets (18,947) (16,906) (16,447) -- -- --
Amortization of transition asset (325) (389) (442) 1,261 1,261 1,261
Amortization of prior service cost (318) (1,326) (1,326) 693 694 670
Recognized net actuarial gain 158 (1,336) (2,669) -- -- (52)
-------- -------- -------- -------- -------- --------
Benefit cost $ 6,318 $ 4,746 $ 3,992 $ 7,004 $ 6,698 $ 6,369
======== ======== ======== ======== ======== ========
The 2001 health care cost trend rate was projected to be 7.00% for pre-65
participants and 6.50% for post-65 participants compared with estimates of 7.75%
and 7.00% in 2000. These rates are assumed to decrease gradually until they
reach 4.75% in the year 2006 and remain at that level thereafter.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage point increase would increase service and
interest costs and the post-retirement benefit obligation by $142,000 and $1.5
million, respectively. A one-percentage point decrease would reduce service and
interest costs by $146,000 and the post-retirement benefit obligation by $1.4
million. The benefit cost to Huntington is representative of the cost to the
Bank for all years presented.
Huntington also sponsors an unfunded Supplemental Executive Retirement
Plan, a nonqualified plan that provides certain key officers of Huntington and
its subsidiaries with defined pension benefits in excess of limits imposed by
federal tax law. At December 31, 2000 and 1999, Huntington's accrued pension
liability for this plan totaled $12.9 million and $10.7 million, respectively.
The Bank's share of the pension expense for the plan was $1.0 million in 2000,
$568,000 in 1999, and $753,000 million in 1998.
Huntington has a defined contribution plan that is available to eligible
employees. Matching contributions by Huntington equal 100% on the first 3% and
50% on the next 2% of participant elective deferrals. The Bank's cost of
providing this plan was $7.5 million in 2000, $7.0 million in 1999, and $7.8
million in 1998.
--------------------------------------------------------------------------------
NOTE 11 STOCK-BASED COMPENSATION
Huntington sponsors nonqualified and incentive stock option plans covering
key employees, including those of the Bank. Approximately 23.9 million shares
have been authorized under the plans, 3.7 million of which were available at
December 31, 2000 for future grants. All options granted have a maximum term of
ten years. Options that were granted in the most recent three years vest ratably
over three years while those granted in 1994 through 1997 vest ratably over four
years. All grants preceding 1994 became fully exercisable after one year.
The fair value of the options granted, as presented below, was estimated at
the date of grant using a Black-Scholes option-pricing model. The weighted
average expected option life of six years was used in all periods presented. The
other weighted-average assumptions used were:
2000 1999 1998
---- ---- ----
Risk-free rate 6.14% 5.60% 5.28%
Dividend Yield 4.37% 2.63% 2.59%
Volatility factors of the expected market
price of Huntington's common stock 45.1% 39.7% 26.2%
BPF-36
184
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Huntington's stock option activity and related information for the three
years ended December 31 is summarized below:
-------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(in 000's) Price (in 000's) Price (in 000's) Price
-------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 7,719 $20.07 6,245 $16.36 6,555 $ 12.63
Granted /Acquired 2,526 16.10 2,356 27.66 1,505 25.55
Exercised (298) 8.15 (612) 9.56 (1,547) 9.03
Forfeited/Expired (465) 22.69 (270) 24.35 (268) 18.86
---------- ----------- -----------
Outstanding at end of year 9,482 $19.26 7,719 $20.07 6,245 $ 16.36
========== =========== ===========
Exercisable at end of year 5,399 $18.18 4,331 $15.35 3,848 $ 12.89
========== =========== ===========
Weighted-average fair value of
options granted during the year $ 5.58 $10.20 $ 7.10
Additional information regarding options outstanding as of December 31, 2000, is
as follows:
--------------------------------------------------------------------------------------------------------------------
Options Outstanding Exercisable Options
-------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Price (in 000's) Life (Years) Price (in 000's) Price
--------------------------------------------------------------------------------------------------------------------
$4.17 to $10.50 749 1.4 $ 7.71 749 $ 7.71
$10.51 to $16.50 3,082 6.4 14.09 1,915 13.26
$16.51 to $22.50 2,073 8.2 18.13 758 19.35
$22.51 to $28.35 3,578 8.0 26.78 1,977 26.47
----------- -----------
Total 9,482 7.0 $ 19.26 5,399 $ 18.18
=========== ===========
Huntington has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123 (FAS
123), "Accounting for Stock-Based Compensation", requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of Huntington's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
As permissible under FAS 123, the Bank is presenting the following pro
forma disclosures for net income as if the fair value method of accounting had
been applied in measuring compensation costs for stock options. The
Black-Scholes option pricing model assumes that the estimated fair value of the
options is amortized over the options' vesting periods and the compensation
costs would be included in personnel expense on the income statement. Pro forma
net income was $279.4 million for 2000; $396.3 million for 1999; and $285.2
million for 1998.
--------------------------------------------------------------------------------
BPF-37
185
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 INCOME TAXES
The Bank is included in the consolidated federal income tax return of
Huntington. Under the Bank's tax sharing agreement with Huntington, the Bank
provides and remits income taxes to or receives an income tax benefit from
Huntington. The following is a summary of the provision for income taxes:
----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Current tax expense (benefit) $ (121,047) $ 112,663 $ 95,506
Deferred tax expense 238,668 70,415 38,506
-------------- -------------- --------------
PROVISION FOR INCOME TAXES $117,621 $ 183,078 $ 134,012
============== ============== ==============
A tax benefit associated with securities transactions included in the above
amounts were $7.1 million in 2000 and $5.1 million in 1999, and tax expense of
$10.0 million in 1998.
The following is a reconcilement of income tax expense to the amount computed at
the statutory rate of 35%:
-----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Pre-tax income computed at the statutory rate $ 142,228 $ 205,117 $148,032
Increases (decreases):
Tax-exempt interest income (19,331) (19,342) (16,844)
State income taxes 302 1,438 2,191
Other-net (5,578) (4,135) 633
------------- ------------- --------------
PROVISION FOR INCOME TAXES $ 117,621 $ 183,078 $134,012
============= ============= ==============
The significant components of deferred tax assets and liabilities at December
31, 2000 and 1999, are as follows:
-----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 100,209 $ 96,296
Unrealized losses on securities available for sale 14,809 70,111
Other 35,135 33,432
------------- -------------
Total deferred tax assets 150,153 199,839
------------- -------------
Deferred tax liabilities:
Lease financing 512,548 336,617
Undistributed income of subsidiary 70,766 ---
Mortgage servicing rights 10,525 18,437
Other 29,001 23,502
------------- -------------
Total deferred tax liabilities 622,840 378,556
------------- -------------
Net deferred tax liability $ 472,687 $ 178,717
============= =============
BPF-38
186
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
In the ordinary course of business, there are various legal proceedings
pending against the Bank and its subsidiaries. In the opinion of management, the
aggregate liabilities, if any, arising from such proceedings are not expected to
have a material adverse effect on the Bank's consolidated financial position.
OPERATING LEASES
At December 31, 2000, the Bank and its subsidiaries were obligated under
noncancelable leases for land, buildings, and equipment. Many of these leases
contain renewal options, and certain leases provide options to purchase the
leased property during or at the expiration of the lease period at specified
prices. Some leases contain escalation clauses calling for rentals to be
adjusted for increased real estate taxes and other operating expenses, or
proportionately adjusted for increases in the consumer or other price indices.
The following summary reflects the future minimum rental payments, by year,
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 2000.
-------------------------------------------------------------
Year (in thousands of dollars)
-------------------------------------------------------------
2001 $ 46,856
2002 44,897
2003 41,126
2004 38,480
2005 35,083
2006 and thereafter 339,568
-------------
Total $ 546,010
=============
Total minimum lease payments have not been reduced by minimum sublease rentals
of $84.0 million due in the future under noncancelable subleases. The rental
expense for all operating leases was $49.6 million for 2000 compared with $39.1
million for 1999 and $31.0 million in 1998.
--------------------------------------------------------------------------------
NOTE 14 MERGERS AND ACQUISITIONS
On June 23, 2000, the Bank acquired The Empire National Bank of Traverse
City (Empire), headquartered in Traverse City, Michigan, as part of the
acquisition by Huntington of Empire Banc Corporation, a $506 million one-bank
holding company. The Bank's parent company reissued approximately 6.5 million
shares of common stock, all of which were purchased on the open market during
the first quarter 2000, in exchange for all of the common stock of Empire Banc
Corporation. The Bank's total loans and deposits increased $395 million and $435
million, respectively, at the date of the merger. The transaction was accounted
for as a purchase; accordingly, the results of Empire have been included in the
Bank's consolidated financial statements from the respective dates of
acquisition. Goodwill, which represents the excess of the cost of an acquisition
over the fair value of the assets acquired, was $105 million.
--------------------------------------------------------------------------------
NOTE 15 REGULATORY MATTERS
The Bank and its subsidiaries are subject to various regulatory
requirements that impose restrictions on cash, debt, and dividends. The Bank is
required to maintain non-interest bearing cash balances with the Federal Reserve
Bank. During 2000 and 1999, the average balance of these deposits were $412.0
million and $393.8 million, respectively.
Under current Federal Reserve regulations, the Bank is limited as to the
amount and type of loans it may make to the parent company and non-bank
subsidiaries. At December 31, 2000, the Bank could lend $285.8 million to a
single affiliate, subject to the qualifying collateral requirements defined in
the regulations.
BPF-39
187
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dividends from the Bank are one of the major sources of funds for
Huntington. These funds aid Huntington in the payment of dividends to
shareholders, expenses, and other obligations. Payment of dividends to
Huntington is subject to various legal and regulatory limitations. Regulatory
approval is required prior to the declaration of any dividends in excess of
available retained earnings. The amount of dividends that may be declared
without regulatory approval is further limited to the sum of net income for the
current year and retained net income for the preceding two years, less any
required transfers to surplus or common stock. The Bank could, without
regulatory approval, declare dividends in 2001 of approximately $278.9 million
plus an additional amount equal to its net income through the date of
declaration in 2001.
The Bank is also subject to various regulatory capital requirements
administered by federal and state banking agencies. These requirements involve
qualitative judgments and quantitative measures of assets, liabilities, capital
amounts, and certain off-balance sheet items as calculated under regulatory
accounting practices. Failure to meet minimum capital requirements can initiate
certain actions by regulators that, if undertaken, could have a material effect
on the Bank's financial statements. Applicable capital adequacy guidelines
require minimum ratios of 4.00% for Tier 1 Risk-based Capital, 8.00% for Total
Risk-based Capital, and 4.00% for Tier 1 Leverage. To be considered well
capitalized under the regulatory framework for prompt corrective action, the
ratios must be at least 6.00%, 10.00% and 5.00% respectively.
As of December 31, 2000 and 1999, the Bank met all capital adequacy
requirements. In addition, the Bank had regulatory capital ratios in excess of
the levels established for well-capitalized institutions. The capital ratios of
the Bank as well as a comparison of the period-end capital balances with the
related amounts established by the regulatory agencies are presented in the
table below.
-------------------------------------------------------------------------------------------------------------------------
FOR CAPITAL
ACTUAL WELL CAPITALIZED ADEQUACY PURPOSES
-------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) 2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Capital Amount:
Tier 1 $ 1,781 $ 1,654 $ 1,618 $ 1,514 $ 1,079 $ 1,009
Total Risk-Based 2,858 2,733 2,697 2,523 2,158 2,018
Tier 1 Leverage 1,781 1,654 1,385 1,409 1,108 1,127
Ratios:
Tier 1 6.60% 6.56% 6.00% 6.00% 4.00% 4.00%
Total Risk-Based 10.60% 10.83% 10.00% 10.00% 8.00% 8.00%
Tier 1 Leverage 6.43% 5.87% 5.00% 5.00% 4.00% 4.00%
--------------------------------------------------------------------------------
BPF-40
188
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 COMPREHENSIVE INCOME
The components of Other Comprehensive Income were as follows in each of the
three years ended December 31:
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during the period:
Unrealized net gains (losses) $ 172,974 $ (220,446) $ (13,626)
Related tax (expense) benefit (60,541) 77,156 4,769
------------- -------------- ------------
Net 112,433 (143,290) (8,857)
------------- -------------- ------------
Less: Reclassification adjustment for net (losses) gains realized
during the period:
Realized net (losses) gains (14,971) (17,608) 28,650
Related tax benefit (expense) 5,240 6,163 (10,028)
------------- -------------- ------------
Net (9,731) (11,445) 18,622
------------- -------------- ------------
Total Other Comprehensive Income (Loss) $ 102,702 $ (154,735) $ 9,765
============= ============== ============
NOTE 17 SEGMENT REPORTING
The Bank views its operations as five distinct segments. Retail Banking,
Corporate Banking, Dealer Sales, and the Private Financial Group are the
company's major business lines. The fifth segment includes the Bank's Treasury
function and other unallocated assets, liabilities, revenue, and expense. Line
of business results are determined based upon Huntington's business
profitability reporting system, which assigns balance sheet and income statement
items to each of the business segments. The process is designed around the
Bank's organizational and management structure and accordingly, the results are
not necessarily comparable with similar information published by other financial
institutions. Listed below is certain financial information regarding the Bank's
first HALF results for 2001 and 2000, and annual results for 2000, 1999, and
1998, which is largely consistent with Huntington's results, by line of
business. For a detailed description of the individual segments, refer to the
Bank's Management's Discussion and Analysis.
BPF-41
189
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------------
Private
INCOME STATEMENT Retail Corporate Dealer Financial Treasury/
(in thousands of dollars) Banking Banking Sales Group Other Consolidated
------------------------------------------------------------------------------------------------------------------------------------
FIRST HALF 2001 (UNAUDITED)
Net Interest Income (FTE) $ 261,798 $ 138,116 $ 112,739 $ 18,646 $ (35,975) $ 495,324
Provision for Loan Losses 20,524 32,832 97,069 129 -- 150,554
Non-Interest income 149,864 25,138 9,571 21,152 20,514 226,239
Non-Interest expense 293,966 61,643 62,393 36,874 8,215 463,091
Income Taxes/FTE Adjustment 34,011 24,073 (13,003) 978 (20,594) 25,465
--------- --------- --------- --------- --------- ---------
Net income $ 63,161 $ 44,706 $ (24,149) $ 1,817 $ (3,082) $ 82,453
========= ========= ========= ========= ========= =========
BALANCE SHEET (in millions of dollars)
Average Identifiable Assets $ 7,058 $ 7,431 $ 7,217 $ 675 $ 5,817 $ 28,198
Average Deposits $ 15,891 $ 2,124 $ 87 $ 639 $ 451 $ 19,192
------------------------------------------------------------------------------------------------------------------------------------
FIRST HALF 2000 (UNAUDITED)
Net Interest Income (FTE) $ 259,599 $ 126,528 $ 97,973 $ 15,439 $ (20,227) $ 479,312
Provision for Loan Losses 8,351 6,453 15,452 1,031 -- 31,287
Non-Interest income 135,348 22,011 13,564 26,638 (19,456) 178,105
Non-Interest expense 278,296 48,353 25,693 24,098 7,843 384,283
Income Taxes/FTE Adjustment 37,905 32,807 24,637 5,932 (25,000) 76,281
--------- --------- --------- --------- --------- ---------
Net income $ 70,395 $ 60,926 $ 45,755 $ 11,016 $ (22,526) $ 165,566
========= ========= ========= ========= ========= =========
BALANCE SHEET (in millions of dollars)
Average Identifiable Assets $ 6,930 $ 6,910 $ 6,995 $ 567 $ 7,172 $ 28,574
Average Deposits $ 16,337 $ 1,417 $ 74 $ 649 $ 1,332 $ 19,809
BPF-42
190
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------------------------------------------------------
Private
INCOME STATEMENT Retail Corporate Dealer Financial Treasury/
(in thousands of dollars) Banking Banking Sales Group Other Consolidated
--------------------------------------------------------------------------------------------------------------------------------
2000
Net Interest Income (FTE) $ 537,386 $ 261,839 $ 193,466 $ 29,645 $ (66,702) $ 955,634
Provision for Loan Losses 26,006 13,971 49,078 1,063 -- 90,118
Non-Interest income 269,831 54,888 29,034 42,907 1,493 398,153
Non-Interest expense 546,575 111,177 105,194 40,395 45,847 849,188
Income Taxes/FTE Adjustment 70,039 57,186 17,791 9,281 (28,561) 125,736
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 164,597 $ 134,393 $ 50,437 $ 21,813 $ (82,495) $ 288,745
========== ========== ========== ========== ========== ==========
BALANCE SHEET (in millions of dollars)
Average Identifiable Assets $ 6,973 $ 7,005 $ 6,811 $ 582 $ 7,130 $ 28,501
Average Deposits $ 16,283 $ 1,692 $ 76 $ 636 $ 1,094 $ 19,781
-------------------------------------------------------------------------------------------------------------------------------
1999
Net Interest Income (FTE) $ 572,516 $ 249,259 $ 193,118 $ 31,732 $ 8,121 $1,054,746
Provision for Loan Losses 37,766 10,135 38,995 1,298 -- 88,194
Non-Interest income 284,047 51,904 7,273 38,191 154,427 535,842
Non-Interest expense 566,232 98,321 106,317 37,987 98,324 907,181
Income Taxes/FTE Adjustment 81,783 62,401 16,526 9,921 21,612 192,243
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 170,782 $ 130,306 $ 38,553 $ 20,717 $ 42,612 $ 402,970
========== ========== ========== ========== ========== ==========
BALANCE SHEET (in millions of dollars)
Average Identifiable Assets $ 7,487 $ 6,786 $ 6,304 $ 559 $ 7,449 $ 28,585
Average Deposits $ 16,885 $ 1,002 $ 65 $ 610 $ 776 $ 19,338
-------------------------------------------------------------------------------------------------------------------------------
1998
Net Interest Income (FTE) $ 574,446 $ 238,078 $ 162,326 $ 35,328 $ (11,701) $ 998,477
Provision for Loan Losses 40,345 16,854 40,168 1,242 -- 98,609
Non-Interest income 268,931 63,756 5,722 37,066 33,906 409,381
Non-Interest expense 544,287 112,821 48,021 50,561 120,545 876,235
Income Taxes/FTE Adjustment 89,841 56,820 26,316 6,796 (35,696) 144,077
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 168,904 $ 115,339 $ 53,543 $ 13,795 $ (62,644) $ 288,937
========== ========== ========== ========== ========== ==========
BALANCE SHEET (in millions of dollars)
Average Identifiable Assets $ 9,153 $ 5,932 $ 5,325 $ 614 $ 5,673 $ 26,697
Average Deposits $ 16,501 $ 947 $ 63 $ 561 $ 657 $ 18,729
Note: Fully tax equivalent basis (FTE) assumes a 35% tax rate.
BPF-43
191
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2000 and 1999:
------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1 Q 2 Q 3 Q 4 Q
------------------------------------------------------------------------------------------------------------------
2000
Interest income $ 513,100 $ 516,213 $ 532,680 $ 534,063
Interest expense 272,120 282,013 294,804 299,600
------------ ------------ ------------ ------------
Net interest income 240,980 234,200 237,876 234,463
------------ ------------ ------------ ------------
Provision for loan losses 15,453 15,834 26,377 32,454
Securities (losses) gains (7,736) (13,834) 1,675 4,924
Non-interest income 97,596 102,079 100,756 112,693
Non-interest expense 196,311 187,972 201,346 213,559
Special charges (1) -- -- 50,000 --
------------ ------------ ------------ ------------
Income before income taxes 119,076 118,639 62,584 106,067
Provision for income taxes 35,505 36,644 15,439 30,033
------------ ------------ ------------ ------------
Net income $ 83,571 $ 81,995 $ 47,145 $ 76,034
============ ============ ============ ============
------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1 Q 2 Q 3 Q 4 Q
------------------------------------------------------------------------------------------------------------------
1999
Interest income $ 494,340 $ 496,050 $ 514,268 $ 512,941
Interest expense 233,562 234,750 244,913 258,793
------------ ------------ ------------ ------------
Net interest income 260,778 261,300 269,355 254,148
------------ ------------ ------------ ------------
Provision for loan losses 25,305 21,026 21,910 19,953
Securities gains 2,330 (21,055) 530 587
Gains on sale of credit card portfolios -- -- -- 108,530
Non-interest income 105,227 113,056 114,797 111,840
Non-interest expense 198,859 199,013 205,398 207,120
Special charges (1) -- -- -- 96,791
------------ ------------ ------------ ------------
Income before income taxes 144,171 133,262 157,374 151,241
Provision for income taxes 47,046 42,943 51,063 42,026
------------ ------------ ------------ ------------
Net income $ 97,125 $ 90,319 $ 106,311 $ 109,215
============ ============ ============ ============
(1) See discussion of special charges in Note 19.
BPF-44
192
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 NON-INTEREST INCOME AND EXPENSE
A summary of the components in non-interest income follows for the three
years ended December 31:
-------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 158,802 $157,612 $126,379
Income from fiduciary activities 53,613 52,030 50,754
Bank Owned Life Insurance income 39,544 37,560 28,712
Other 161,165 197,718 165,356
-------------- ------------- -------------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES (LOSSES)
GAINS AND CREDIT CARD PORTFOLIO SALE GAINS 413,124 444,920 371,201
Securities (losses) gains (14,971) (17,608) 28,650
Gains on sale of credit card portfolios --- 108,530 9,530
-------------- ------------- -------------
TOTAL NON-INTEREST INCOME $ 398,153 $535,842 $409,381
============== ============= =============
A summary of the components in non-interest expense follows for the three
years ended December 31:
---------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
Personnel and related costs $ 364,781 $ 385,489 $ 378,667
Expenses of premises and fixed assets 149,372 124,845 111,077
Amortization of intangible assets 35,742 34,354 23,562
Other 249,293 265,702 272,929
-------------- ----------------- ----------------
TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL CHARGES 799,188 810,390 786,235
Special charges 50,000 96,791 90,000
-------------- ----------------- ----------------
TOTAL NON-INTEREST EXPENSE $ 849,188 $ 907,181 $ 876,235
============== ================= ================
SPECIAL CHARGES
During the fourth quarter of 1999 and in the third quarter 2000, the Bank
recorded special charges of $58.2 million and $50.0 million, respectively, to
write-down residual values related to its $3.0 billion vehicle lease portfolio.
Of this total, $71.4 million remained available at December 31, 2000, to cover
estimated losses inherent in the portfolio.
In addition to the lease charge in 1999, the Bank recorded $38.6 million of
additional costs, which included $21 million related to the company's
"Huntington 2000+" program and other one-time expenses, including amounts paid
for management consulting and other professional services as well as $11 million
for a special cash award to employees for achievement of the program goals for
1999. "Huntington 2000+" was a collaborative effort among all employees to
evaluate processes and procedures and the way Huntington conducts its business
with a mission of maximizing efficiency through all aspects of the organization.
BPF-45
193
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 FINANCIAL INSTRUMENTS
The contract or notional amount of financial instruments with off-balance
sheet risk and credit concentrations at December 31, 2000 and 1999, is presented
below:
---------------------------------------------------------------------------------------------------------------------
(in millions of dollars) 2000 1999
---------------------------------------------------------------------------------------------------------------------
CONTRACT AMOUNT REPRESENTS CREDIT RISK
Commitments to extend credit
Commercial $ 4,439 $3,746
Consumer 2,923 2,498
Commercial Real Estate 512 328
Standby letters of credit 859 803
Commercial letters of credit 197 169
NOTIONAL AMOUNT EXCEEDS CREDIT RISK
Asset/liability management activities
Interest rate swaps 7,234 6,077
Interest rate options 3,535 2,097
Interest rate forwards and futures 284 212
Trading activities
Interest rate swaps 776 619
Interest rate options 369 392
Commitments to extend credit generally have short-term, fixed expiration
dates, are variable rate, and contain clauses that permit the Bank to terminate
or otherwise renegotiate the contracts in the event of a significant
deterioration in the customer's credit quality. These arrangements normally
require the payment of a fee by the customer, the pricing of which is based on
prevailing market conditions, credit quality, probability of funding, and other
relevant factors. Since many of these commitments are expected to expire without
being drawn upon, the contract amounts are not necessarily indicative of future
cash requirements. The interest rate risk arising from these financial
instruments is insignificant as a result of their predominantly short-term,
variable rate nature.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Most of these
arrangements mature within two years. Approximately 58% of standby letters of
credit are collateralized, and nearly 80% are expected to expire without being
drawn upon.
Commercial letters of credit represent short-term, self-liquidating
instruments that facilitate customer trade transactions and have maturities of
no longer than ninety days. The merchandise or cargo being traded normally
secures these instruments.
Interest rate swaps are agreements between two parties to exchange periodic
interest payments that are calculated on a notional principal amount. The Bank
enters into swaps to synthetically alter the repricing characteristics of
designated earning assets and interest bearing liabilities and, on a much more
limited basis, as an intermediary for customers. Because only interest payments
are exchanged, cash requirements of swaps are significantly less than the
notional amounts.
Interest rate options grant the option holder the right to buy or sell an
underlying financial instrument for a predetermined price before the contract
expires. Interest rate caps and floors are option-based contracts which entitle
the buyer to receive cash payments based on the difference between a designated
reference rate and a strike price, applied to a notional amount. Written
options, primarily caps, expose the Bank to market risk but not credit risk.
Purchased options contain both credit and market risk. They are used to manage
fluctuating interest rates as exposure to loss from interest rate contracts
changes.
Interest rate forwards and futures are commitments to either purchase or
sell a financial instrument at a future date for a specified price or yield and
may be settled in cash or through delivery of the underlying financial
instrument. Forward contracts, used primarily by the Bank in connection with its
mortgage banking activities, settle in cash at a specified future date based on
the differential between agreed interest rates applied to a notional amount.
BPF-46
194
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the normal course of business, the Bank is party to financial
instruments with varying degrees of credit and market risk in excess of the
amounts reflected as assets and liabilities in the consolidated balance sheet.
Loan commitments and letters of credit are commonly used to meet the financing
needs of customers, while interest rate swaps, options, futures, and forwards
are an integral part of the Bank's asset/liability management activities. To a
much lesser extent, various financial instrument agreements are entered into to
assist customers in managing their exposure to interest rate fluctuations. These
customer agreements, for which the Bank counters interest rate risk through
offsetting third party contracts, are considered trading activities.
The credit risk arising from loan commitments and letters of credit,
represented by their contract amounts, is essentially the same as that involved
in extending loans to customers, and both arrangements are subject to the Bank's
standard credit policies and procedures. Collateral is obtained based on
management's credit assessment of the customer and, for commercial transactions,
may consist of accounts receivable, inventory, income-producing properties, and
other assets. Residential properties are the principal form of collateral for
consumer commitments.
Notional values of interest rate swaps and other off-balance sheet
financial instruments significantly exceed the credit risk associated with these
instruments and represent contractual balances on which calculations of amounts
to be exchanged are based. Credit exposure is limited to the sum of the
aggregate fair value of positions that have become favorable to the Bank,
including any accrued interest receivable due from counterparties. Potential
credit losses are minimized through careful evaluation of counterparty credit
standing, selection of counterparties from a limited group of high quality
institutions, collateral agreements, and other contract provisions. At December
31, 2000, the Bank's credit risk from these off-balance sheet arrangements,
including trading activities, was approximately $84.3 million.
NOTE 21 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Bank's financial
instruments at December 31 are presented in the following table:
-----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(in thousands of dollars) AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and short-term assets $ 1,416,297 $ 1,416,297 $ 1,216,868 $ 1,216,868
Trading account securities -- -- 5,743 5,743
Mortgages held for sale 155,104 155,104 141,723 141,723
Securities 4,013,185 4,013,263 4,780,002 4,779,899
Loans 20,256,715 20,431,761 20,283,552 20,295,088
Customers' acceptance liability 17,366 17,366 17,167 17,167
Interest rate contracts:
Asset/liability management 7,278 37,934 21,491 19,147
Customer accommodation 6,171 6,171 12,950 12,950
FINANCIAL LIABILITIES:
Deposits 20,084,074 20,119,173 19,910,423 19,921,543
Federal funds purchased and securities sold under
agreements to repurchase 1,672,480 1,672,480 1,871,392 1,871,392
Bank acceptances outstanding 17,366 17,366 17,167 17,167
Other borrowed money 2,684,550 2,708,767 3,490,563 3,510,083
Subordinated notes and other long-term debt 926,215 932,756 878,044 915,941
Interest rate contracts:
Asset/liability management -- 23,315 -- 72,991
Customer accommodation 4,360 4,360 10,765 10,765
BPF-47
195
THE HUNTINGTON NATIONAL BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain assets, the most significant being Bank Owned Life Insurance and
premises and equipment, do not meet the definition of a financial instrument and
are excluded from this disclosure. Similarly, mortgage and non-mortgage
servicing rights, deposit base, and other customer relationship intangibles are
not considered financial instruments and are not discussed below. Accordingly,
this fair value information is not intended to, and does not, represent the
Bank's underlying value. Many of the assets and liabilities subject to the
disclosure requirements are not actively traded, requiring fair values to be
estimated by management. These estimations necessarily involve the use of
judgment about a wide variety of factors, including but not limited to,
relevancy of market prices of comparable instruments, expected future cash
flows, and appropriate discount rates.
The terms and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include cash and due from
banks, interest bearing deposits in banks, trading account securities, federal
funds sold and securities purchased under resale agreements, customers'
acceptance liabilities, federal funds purchased and repurchase agreements, and
bank acceptances outstanding. Loan commitments and letters of credit generally
have short-term, variable rate features and contain clauses that limit the
Bank's exposure to changes in customer credit quality. Accordingly, their
carrying values, which are immaterial at the respective balance sheet dates, are
reasonable estimates of fair value.
The following methods and assumptions were used by the Bank to estimate the
fair value of the remaining classes of financial instruments:
Mortgages held for sale - valued at the lower of aggregate cost or market
value primarily as determined using outstanding commitments from investors.
Securities available for sale and investment securities - based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. Retained
interests in securitized assets are valued using a discounted cash flow
analysis. The carrying amount and fair value of securities exclude the fair
value of asset/liability management interest rate contracts designated as hedges
of securities available for sale.
Loans and leases - variable rate loans that reprice frequently are based on
carrying amounts, as adjusted for estimated credit losses. The fair values for
other loans are estimated using discounted cash flow analyses and employ
interest rates currently being offered for loans with similar terms. The rates
take into account the position of the yield curve, as well as an adjustment for
prepayment risk, operating costs, and profit. This value is also reduced by an
estimate of probable losses in the loan portfolio. Although not considered
financial instruments, lease financing receivables have been included in the
loan totals at their carrying amounts.
Deposits - demand deposits, savings accounts, and money market deposits
are, by definition, equal to the amount payable on demand. The fair values of
fixed rate time deposits are estimated by discounting cash flows using interest
rates currently being offered on certificates with similar maturities.
Debt - fixed rate long-term debt, as well as medium-term notes, are based
upon quoted market prices or, in the absence of quoted market prices, discounted
cash flows using rates for similar debt with the same maturities. The carrying
amount of variable rate obligations approximates fair value.
Off-balance sheet derivatives - interest rate swap agreements and other
off-balance sheet interest rate contracts are based upon quoted market prices or
prices of similar instruments, when available, or calculated with pricing models
using current rate assumptions.
BPF-48
196
THE HUNTINGTON NATIONAL BANK
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma consolidated financial statements give effect to
the sale of the Huntington's Florida operations. On September 26, 2001,
Huntington entered into a definitive agreement with SunTrust Banks, Inc. which
provides for sale of Huntington's Florida operations to SunTrust. The Florida
operations being offered for sale include 141 branches, 456 store-based and
remote ATMs, and various other customer support and operations in Eastern and
Western Florida. These unaudited pro forma consolidated financial statements
reflect the sale based on preliminary accounting adjustments. Estimates relating
to fair value of certain assets, liabilities and other items have been made as
more fully described in the Notes to the Unaudited Pro Forma Consolidated
Financial Statements. Actual adjustments, which may include adjustments to
additional assets, liabilities and other items, will be made on the basis of
appraisals and evaluations as of the effective date of the sale and, therefore,
may differ from those reflected in these unaudited pro forma consolidated
financial statements.
The unaudited pro forma consolidated financial statements on the following
pages present:
- the historical consolidated balance sheet of the Bank as of June 30,
2001, giving effect to the sale of the Florida operations as if it
had occurred on that date; and
- the impact on the conditional financial condition of the sale of
HPCI's Class C and D preferred securities and
- the special surplus/capital reduction, subject to regulatory
approval, to make funds available to Huntington for the repurchase
of common shares and other corporate purposes, and
- the historical consolidated statements of income of the Bank for the
six months ended June 30, 2001, and for the twelve months ended
December 31, 2000, in each case giving effect to the sale of the
Florida operations as if it had been effected at the beginning of the
periods presented.
The unaudited pro forma consolidated financial statements may not be
indicative of the financial position or results of operations that actually
would have occurred had the transaction been consummated during the periods or
as of the dates indicated, or which will be attained in the future. The
unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements which appear elsewhere in
this prospectus.
BPF-49
197
THE HUNTINGTON NATIONAL BANK
PRO FORMA CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2001
(UNAUDITED)
The The
The Sale of Huntington Sale Special Huntington
Huntington HPCI National of Surplus/ National
National Preferred Bank Florida Capital Bank
(in thousands of dollars) Bank Securities Pro Forma Operations Reduction Pro Forma
---------------------------------------- ---------- ----------- ----------- ----------- ------------ ----------
(A) (B) (E)
ASSETS
Cash and due from banks $ 886,195 $ 50,000 $ 936,195 $ (79,651) $ 856,544
Interest bearing deposits in banks 1,322 1,322 1,322
Trading account securities 1,640 1,640 1,640
Federal funds sold and securities
purchased under resale agreements 54,696 54,696 54,696
Mortgages held for sale 376,671 376,671 376,671
Securities available for sale - at fair
value 3,088,779 3,088,779 3,088,779
Investment securities 14,978 14,978 14,978
Total loans, net of unearned income 21,047,712 21,047,712 (2,574,802) 18,472,910
Less allowance for loan losses 351,133 351,133 (21,371) 329,762
----------- ----------- ----------- ------------
Net loans 20,696,579 20,696,579 (2,553,431) 18,143,148
----------- ----------- ----------- ------------
Bank owned life insurance 824,062 824,062 824,062
Premises and equipment 450,553 450,553 450,553
Customers' acceptance liability 15,335 15,335 15,335
Accrued income and other assets 1,406,887 1,406,887 (617,812) 789,075
----------- -------- ----------- ----------- ----------- ------------
TOTAL ASSETS $27,817,697 $ 50,000 $27,867,697 $(3,250,894) $ -- $ 24,616,803
=========== ======== ============ ============ =========== ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Total Deposits $19,168,546 $19,168,546 $(4,564,014) $ 894,000 $15,498,532
Federal funds purchased and securities
sold under agreements to repurchase 2,454,471 2,454,471 2,454,471
Bank acceptances outstanding 15,335 15,335 15,335
Other borrowed money 2,122,208 2,122,208 1,197,391 (C) 3,319,599
Subordinated notes and other long-term debt 953,547 953,547 953,547
Accrued expenses and other liabilities 1,008,398 $ 50,000 1,058,398 (14,271) 1,044,127
----------- -------- ----------- ----------- ----------- ------------
Total Liabilities 25,722,505 50,000 25,772,505 (3,380,894) 894,000 23,285,611
----------- -------- ----------- ----------- ----------- ------------
Shareholder's equity
Preferred stock -- --- --
Common stock 40,000 40,000 40,000
Surplus 451,268 451,268 (451,268) ---
Accumulated other comprehensive loss (4,895) (4,895) (4,895)
Retained earnings 1,608,819 1,608,819 130,000 (F) (442,732) 1,296,087
----------- -------- ----------- ----------- ----------- ------------
Total Shareholder's Equity 2,095,192 -- 2,095,192 130,000 (894,000) 1,331,192
----------- -------- ----------- ----------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $27,817,697 $ 50,000 $27,867,697 $(3,250,894) $ -- $24,616,803
=========== ======== ============ ============ =========== ===========
REGULATORY CAPITAL RATIOS
Core (or leverage) 6.64% 6.82% 6.49%
Tier 1 risk-based capital 6.65% 6.83% 6.50%
Total risk-based capital 10.57% 10.75% 11.04%
See Notes to Unaudited Pro Forma Consolidated Financial Statements.
BPF-50
198
THE HUNTINGTON NATIONAL BANK
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
--------------------------------------------------------------------------------
The
The Sale Huntington
Huntington of National
National Florida Bank
(in thousands of dollars) Bank Operations Pro Forma
--------------------------------------------------- ------------ ---------- ----------
(B)/(C) (D)
Net Interest Income $491,787 $(52,958) 438,829
Provision for loan losses 150,554 (5,235) 145,319
-------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 341,233 (47,723) 293,510
-------- -------- --------
Non-interest income 226,239 (38,478) 187,761
Non-interest expense 463,091 (83,195) 379,896
-------- -------- --------
INCOME BEFORE INCOME TAXES 104,381 (3,006) 101,375
Provision for income taxes 21,928 (1,052) 20,876
-------- -------- --------
NET INCOME $ 82,453 $ (1,954) $ 80,499
======== ======== ========
THE HUNTINGTON NATIONAL BANK
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
The
The Sale Huntington
Huntington of National
National Florida Bank
(in thousands of dollars) Bank Operations Pro Forma
---------------------------------------------------- ----------- ------------ ------------
(B)/(C) (D)
Net Interest Income $ 947,519 $(107,333) $ 840,186
Provision for loan losses 90,118 (11,600) 78,518
--------- --------- ---------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 857,401 (95,733) 761,668
--------- --------- ---------
Non-interest income 398,153 (76,905) 321,248
Non-interest expense 849,188 (165,895) 683,293
--------- --------- ---------
INCOME BEFORE INCOME TAXES 406,366 (6,743) 399,623
Provision for income taxes 117,621 (2,360) 115,261
--------- --------- ---------
Net Income $ 288,745 $ (4,383) $ 284,362
========= ========= =========
See Notes to Unaudited Pro Forma Consolidated Financial Statements.
BPF-51
199
THE HUNTINGTON NATIONAL BANK
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(A) Assumes the issuance by HPCI of Noncumulative Exchangeable Perpetual
Preferred Securities, Class C, at $25 par value, to third parties. The
ownership interests by these third parties in HPCI is reflected as
minority interest in consolidated subsidiaries in the consolidated
financial statements of the Bank and are expected to fully qualify as
Tier 1 capital for regulatory purposes. The purchase of HPCI
Noncumulative Exchangeable Perpetual Preferred Securities, Class D, at
$25 par value, is not reflected in these pro forma consolidated
financial statements because the transaction is eliminated in
consolidation. The transaction costs related to the issuance of these
shares are not included in these pro forma financial statements.
(B) On September 26, 2001, Huntington Bancshares signed a definitive
agreement to divest its Florida operations. This action is expected to
free up significant capital, which will be used to strengthen our
balance sheet. The Florida operations being sold include 141 branches,
456 store-based and remote ATMs, and various other customer support
operations in Eastern and Western Florida. The related assets include
the applicable goodwill and other intangible assets. These pro forma
results include management's best estimate of the impact of the sale
of the Florida operations. These estimates my not be indicative of the
financial position or results of operations that actually would have
occurred had the transaction been consummated during the periods or as
of the dates indicated, or which will be attained in the future. The
sale is expected to close in the first quarter 2002.
(C) Includes the issuance of medium term notes to raise the necessary cash
to pay the purchaser for their acquisition of the net liabilities of
our Florida operations. The pro forma results of operations for the
Florida operations include the impact of this additional borrowing for
the six and twelve month periods at a rate of 4.57%.
(D) The pro forma consolidated statements of income do not give effect to
future restructuring or other charges or future expense savings related
to the sale of the Florida operations.
Huntington Bancshares owns all of the authorized, issued and
outstanding common shares of the Bank and therefore per share
information is not presented.
(E) Special surplus/capital reduction, subject to regulatory agency
approval, in the form of a cash distribution to Huntington Bancshares
Incorporated for the repurchase of common shares and for other
corporate purposes. Huntington Bancshares expects to use these funds
shortly after being received. After the reduction in capital, the
Bank's regulatory capital ratios will remain in excess of the minimums
for a "well-capitalized" institution.
(F) Represents the estimated after-tax gain on the sale of the Florida
operations. This gain reflects a 15% premium on deposits and an assumed
tax rate of 35%.
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===============================================================================
2,000,000 Preferred Securities
HUNTINGTON PREFERRED CAPITAL, INC.
_____% Noncumulative Exchangeable Perpetual Preferred Securities, Class C
(liquidation amount $25 each)
Exchangeable in Specified Circumstances into Preferred Securities of
THE HUNTINGTON NATIONAL BANK
-----------------------
PROSPECTUS
-----------------------
SALOMON SMITH BARNEY
RAYMOND JAMES
HUNTINGTON CAPITAL CORP.
[_____], 2001
-----------------------
You may rely on the information contained in this prospectus. We have not
authorized anyone to provide any information different from that contained in
this prospectus. Neither the delivery of this prospectus nor the sale of our
Class C preferred securities means that the information contained in this
prospectus is correct after the date of this prospectus. This prospectus is not
an offer to sell or a solicitation to buy any securities in any circumstances
under which the offer or solicitation is unlawful.
Until [_____], 2001, all dealers that buy, sell, or trade our Class C
preferred securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
===============================================================================
201
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-----------------------------------------------------
SEC registration fee. .................................. $ 12,500
Printing expenses........................................ 40,000*
Legal fees and expenses.................................. 400,000*
Accounting fees and expenses............................. 60,000*
Investment banking legal fees and expenses............... 250,000*
Rating agencies' fees.................................... 35,000*
Miscellaneous expenses................................... 12,500*
---------------
TOTAL.................................. $ 810,000*
===============
*Estimated.
ITEM 32. SALES TO SPECIAL PARTIES.
----------------------------------
See response to Item 33 below.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On January 15, 1999, we issued 1,000 Class A preferred securities,
$1,000 par value per share, at a purchase price of $1,000 per share, for an
aggregate purchase price of $1,000,000. Of the total amount issued, 896 Class A
preferred securities were issued to Holdings and one Class A preferred security
was issued to each of 104 employees of the Bank or its affiliates. The
consideration for the Class A preferred securities issued to the employees was
paid by either Holdings or the Bank. These Class A preferred securities were
issued in reliance upon the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended.
On December 28, 2000, we issued 400,000 Class B preferred
securities, $1,000 par value per share, to HPC Holdings-II, Inc. at a purchase
price of $1,000 per share, for an aggregate purchase price of $400,000,000.
These Class B preferred securities were issued in reliance upon the exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
---------------------------------------------------
General Indemnification. Our regulations provide that we will indemnify
our directors, and may indemnify or agree to indemnify our officers,
against expenses (including attorney's fees), judgments, fines, and amounts paid
in settlement by reason of the fact that they are or were our directors,
officers, employees, or agents of or, at our request, were serving another
entity in a similar capacity. In order to receive indemnification, the directors
or officers must have acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, our best interests. With regard to
criminal matters, we will indemnify directors, and may indemnify or agree to
indemnify officers, if the directors or officers had no reasonable cause to
believe their conduct was unlawful. Directors or officers claiming
indemnification will be presumed to have acted in good faith and in a manner
they reasonably believed to be not opposed to our best interests and, with
respect to any criminal matter, to have had no reasonable cause to believe their
conduct was unlawful.
Suits by Us or on Our Behalf. Our regulations provide that we may
indemnify or agree to indemnify our directors and officers in connection with
actions or suits instituted by us, or in our right of, against expenses
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(including attorney's fees), judgments, fines, and amounts paid in settlement by
reason of the fact that they are or were our directors, officers, employees, or
agents of or, at our request, were serving another entity in a similar capacity.
In order to receive indemnification, the directors or officers must have acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, our best interests.
We will not indemnify any officer or director who was a party
to any completed action or suit instituted by us, or in our right of, for any
matter asserted in the action as to which the officer or director has been
adjudged to be liable for negligence or misconduct in the performance of the
individual's duty to us. If, however, the Court of Common Please of Franklin
County, Ohio, or the court in which the action was brought, determines that the
officer or director is fairly and reasonably entitled to indemnity, we must
indemnify the officer or director to the extent permitted by the court.
Furthermore, we will not indemnify any director who is a party to an action or
suit in which the only liability asserted against the director is pursuant to
Section 1701.95 of the Ohio Revised Code relating to unlawful loans, dividends,
and distributions.
Determination Required. We will make any indemnification not precluded by
our regulations only upon a determination that the director or officer has met
the applicable standard of conduct. The determination may be made only:
- by a majority vote of a quorum of disinterested directors;
- if a quorum is not obtainable or if a majority of a quorum of
disinterested directors so directs, in a written opinion by
independent legal counsel;
- by the shareholders; or
- by the Court of Common Pleas of Franklin County, Ohio, or the
court, if any, in which the action was brought.
Advances for Expenses. We will pay expenses (including attorney's fees)
incurred by a director in defending any action, suit, or proceeding, except
where the only liability asserted against the director is pursuant to Section
1701.95 of the Ohio Revised Code relating to unlawful loans, dividends, and
distributions, in advance upon receipt of an undertaking by or on behalf of the
director to (1) repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that the director's action or
failure to act involved an act or omission undertaken with deliberate intent to
cause injury to us or undertaken with reckless disregard for our best interests,
and (2) reasonably cooperate with us in connection with the action, suit, or
proceeding.
We may pay expenses (including attorney's fees) incurred by a director
or officer in defending any action, suit, or proceeding, including an action
pursuant to Section 1701.95 of the Ohio Revised Code relating to unlawful loans,
dividends, and distributions, in advance as authorized by the directors in the
specific case upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount if it is determined that the director or officer is
not entitled to indemnification by us.
Not Exclusive; Insurance. Our regulations state that the
indemnification provided by the regulations is not exclusive of any other rights
to which any individual seeking indemnification may be entitled. Additionally,
our regulations provide that we may purchase and maintain insurance on behalf of
any individual who is or was one of our directors, officers, employees, or
agents, or who is or was serving another entity at our request, against any
liability asserted against the individual and incurred by the individual in that
capacity, or arising out of the individual's status as such, whether or not we
would have the obligation or power to indemnify the individual under our
regulations. We have purchased and maintain those policies.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
-----------------------------------------------------------
Not applicable.
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ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
-------------------------------------------
(a) Financial Statements
See F-1 of the Prospectus for an index to financial statements of the
Registrant included as part of the Prospectus.
(b) Exhibits
Exhibit Description
------- -----------
1(a) Form of Subscription Agreement for the Class C preferred securities between
Huntington Preferred Capital, Inc., The Huntington National Bank, and
Huntington Preferred Capital Holdings, Inc.
1(b)* Form of Underwriting Agreement
3(a)(i) Amended and Restated Articles of Incorporation
3(a)(ii)* Form of Amended And Restated Articles Of Incorporation
3(b) Code of Regulations
4 Specimen of certificate representing Class C preferred securities
5 Opinion of Porter, Wright, Morris & Arthur LLP relating to Class C preferred
securities
8 Opinion of Porter, Wright, Morris & Arthur LLP, relating to certain tax
matters
Loan Participation Agreement, dated May 1, 1998 between The Huntington
10(a) National Bank and Huntington Preferred Capital Holdings, Inc. (f/k/a Airbase
Realty Holding Company)
Amendment to Loan Participation Agreement, dated March 1, 2001, between The
10(b) Huntington National Bank and Huntington Preferred Capital Holdings, Inc.
(f/k/a Airbase Realty Holding Company)
Loan Subparticipation Agreement, dated May 1, 1998, between Huntington
10(c) Preferred Capital Holdings, Inc. (f/k/a Airbase Realty Holding Company) and
Huntington Preferred Capital, Inc. (f/k/a Airbase Realty Company)
Amendment to Loan Subparticipation Agreement, dated March 1, 2001, between
Huntington Preferred Capital Holdings, Inc. (f/k/a Airbase Realty Holding
10(d) Company) and Huntington Preferred Capital, Inc. (f/k/a Airbase Realty
Company)
Form of Amendment to Loan Subparticipation Agreement, dated May 16, 2001,
10(e) between Huntington Preferred Capital Holdings, Inc. and Huntington Preferred
Capital, Inc.
Subscription and Conversion Agreement, dated December 28, 2000, among
10(f) Huntington Preferred Capital, Inc. (f/k/a Airbase Realty Company), HPC
Holdings-II, Inc. (f/k/a ARHC-II, Inc.), and The Huntington National Bank
Form of Conversion Agreement between The Huntington National Bank,
10(g) Huntington Preferred Capital Holdings, Inc., and Huntington Preferred
Capital, Inc.
10(h) Reserved.
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Form of Subscription Agreement for the Class D preferred securities between
10(i) Huntington Preferred Capital, Inc., The Huntington National Bank, and
Huntington Preferred Capital Holdings, Inc.
12 Statement of Computation of Earnings to Fixed Charges and Preferred Stock
Dividends
23(a)* Consent of Ernst & Young LLP
23(b) Consent of Porter, Wright, Morris & Arthur LLP (included in Exhibit 5)
23(c) Consent of Ernst & Young LLP as to its report on the financial statements of
The Huntington National Bank.
24 Power of Attorney
*Filed with this amendment.
ITEM 37. UNDERTAKINGS.
----------------------
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding), is asserted by such director, officer, or controlling
person in connection with the securities registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act will be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus
will be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time will be deemed to be the initial bona fide offering
thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this amendment
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Columbus, Ohio, on the 11th day of
October, 2001.
HUNTINGTON PREFERRED CAPITAL, INC.
By: /s/ Michael J. McMennamin
----------------------------------
Michael J. McMennamin, President
Pursuant to the requirements of the Securities Act, this amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Michael J. McMennamin President and Director October 11, 2001
----------------------------------------- (principal executive officer)
Michael J. McMennamin
* Paul V. Sebert Vice President, Treasurer, and Director October 11, 2001
----------------------------------------- (principal financial and accounting officer)
Paul V. Sebert
* Richard A. Cheap Vice President, Secretary, and Director October 11, 2001
-----------------------------------------
Richard A. Cheap
* Ronald C. Baldwin Vice President and Director October 11, 2001
-----------------------------------------
Ronald C. Baldwin
* R. Larry Hoover Vice President and Director October 11, 2001
-----------------------------------------
R. Larry Hoover
Vice President and Director
-----------------------------------------
John Van Fleet
*By:/s/ Michael J. McMennamin
---------------------------
Michael J. McMennamin,
attorney-in fact for each of the
persons indicated
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HUNTINGTON PREFERRED CAPITAL, INC.
Registration Statement on Form S-11
Registration No. 333-61182
EXHIBIT INDEX
Exhibit Description
------- -----------
1(a) Form of Subscription Agreement for the Class C preferred securities between
Huntington Preferred Capital, Inc., The Huntington National Bank, and Huntington
Preferred Capital Holdings, Inc.
1(b)* Form of Underwriting Agreement
3(a)(i) Amended and Restated Articles of Incorporation
3(a)(ii)* Form of amended and restated articles of incorporation
3(b) Code of Regulations
4 Specimen of certificate representing Class C preferred securities
5 Opinion of Porter, Wright, Morris & Arthur LLP relating to Class C preferred
securities
8 Opinion of Porter, Wright, Morris & Arthur LLP, relating to certain tax matters
10(a) Loan Participation Agreement, dated May 1, 1998 between The Huntington National
Bank and Huntington Preferred Capital Holdings, Inc. (f/k/a Airbase Realty
Holding Company)
10(b) Amendment to Loan Participation Agreement, dated March 1, 2001, between The
Huntington National Bank and Huntington Preferred Capital Holdings, Inc. (f/k/a
Airbase Realty Holding Company)
10(c) Loan Subparticipation Agreement, dated May 1, 1998, between Huntington Preferred
Capital Holdings, Inc. (f/k/a Airbase Realty Holding Company) and Huntington
Preferred Capital, Inc. (f/k/a Airbase Realty Company)
10(d) Amendment to Loan Subparticipation Agreement, dated March 1, 2001, between
Huntington Preferred Capital Holdings, Inc. (f/k/a Airbase Realty Holding
Company) and Huntington Preferred Capital, Inc. (f/k/a Airbase Realty Company)
10(e) Form of Amendment to Loan Subparticipation Agreement, dated May 16, 2001,
between Huntington Preferred Capital Holdings, Inc. and Huntington Preferred
Capital, Inc.
10(f) Subscription and Conversion Agreement, dated December 28, 2000, among Huntington
Preferred Capital, Inc. (f/k/a Airbase Realty Company), HPC Holdings-II, Inc.
(f/k/a ARHC-II, Inc.), and The Huntington National Bank.
10(g) Form of Conversion Agreement between The Huntington National Bank, Huntington
Preferred Capital Holdings, Inc., and Huntington Preferred Capital, Inc.
10(h) Reserved
10(i) Form of Subscription Agreement for the Class D preferred securities between
Huntington Preferred Capital, Inc. and Huntington Preferred Capital Holdings,
Inc.
12 Statement of Computation of Earnings to Fixed Charges and Preferred Stock
Dividends
23(a)* Consent of Ernst & Young LLP
23(b) Consent of Porter, Wright, Morris & Arthur LLP (included in Exhibit 5)
23(c) Consent of Ernst & Young LLP as to its report on the financial statements of The
Huntington National Bank.
24 Power of Attorney
*Filed with this amendment.
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