UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED JUNE 30, 2003
Commission File Number: 000-33243
HUNTINGTON PREFERRED CAPITAL, INC.
OHIO 31-1356967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287
Registrant's telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of July 31, 2003, 14,000,000 shares of common stock without par value were
outstanding, all of which were held by affiliates of the registrant.
HUNTINGTON PREFERRED CAPITAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2003 and 2002, and December 31, 2002 3
Consolidated Statements of Income -
For the three and six months ended June 30, 2003 and 2002 4
Consolidated Statements of Changes in Shareholders' Equity -
For the six months ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows -
For the six months ended June 30, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
(in thousands of dollars, except share data) 2003 2002 2002
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from The Huntington National Bank $ 59,191 $ 534,254 $ 39,367
Interest bearing deposits with The Huntington National Bank 423,579 -- 823,068
Due from Huntington Preferred Capital Holdings, Inc. and The
Huntington National Bank 11,616 7,440 66,183
Loan participation interests
Commercial 233,579 344,858 507,108
Commercial real estate 4,077,396 3,922,467 3,849,495
Consumer 534,711 612,357 693,714
Residential real estate 376,641 153,808 199,988
- -------------------------------------------------------------------------------------------------------------------
Total loan participation interests 5,222,326 5,033,490 5,250,305
Less allowance for loan losses 110,127 140,353 163,359
- -------------------------------------------------------------------------------------------------------------------
Net loan participation interests 5,112,199 4,893,137 5,086,946
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment 34,980 38,088 41,332
Accrued income and other assets 20,153 44,102 44,095
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,661,718 $5,517,021 $6,100,991
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable and other liabilities $ 3,288 $ 670 $ 8,182
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 3,288 670 8,182
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred securities, Class A, 8.000% noncumulative, non- exchangeable;
$1,000 par and liquidation value per share;
1,000 shares authorized, issued and outstanding 1,000 1,000 1,000
Preferred securities, Class B, variable-rate noncumulative and
conditionally exchangeable; $1,000 par and liquidation
value per share; authorized 500,000 shares; 400,000
shares issued and outstanding 400,000 400,000 400,000
Preferred securities, Class C, 7.875% noncumulative and
conditionally exchangeable; $25 par and liquidation
value per share; 2,000,000 shares authorized, issued, and outstanding 50,000 50,000 50,000
Preferred securities, Class D, variable-rate noncumulative and
conditionally exchangeable; $25 par and liquidation
value per share; 14,000,000 shares authorized, issued, and outstanding 350,000 350,000 350,000
Preferred securities, $25 par value, 10,000,000 shares
authorized; no shares issued or outstanding -- -- --
Common stock - without par value; 14,000,000 shares authorized,
issued and outstanding 4,715,351 4,715,351 5,082,511
Retained earnings 142,079 -- 209,298
- -------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 5,658,430 5,516,351 6,092,809
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,661,718 $5,517,021 $6,100,991
===================================================================================================================
See notes to unaudited consolidated financial statements.
3
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest and fee income
Interest on loan participation interests
Commercial $ 2,979 $ 6,440 $ 6,934 $ 13,749
Commercial real estate 45,879 54,290 92,836 108,170
Consumer 12,388 18,882 25,767 38,926
Residential real estate 3,000 3,851 5,251 8,411
- --------------------------------------------------------------------------------------------------------------
Total loan participation interest income 64,246 83,463 130,788 169,256
Fees from loan participation interests 2,609 2,737 5,342 5,178
Interest on deposits with The Huntington
National Bank 2,015 3,284 3,869 5,162
- --------------------------------------------------------------------------------------------------------------
TOTAL INTEREST AND FEE INCOME 68,870 89,484 139,999 179,596
- --------------------------------------------------------------------------------------------------------------
Provision (credit) for loan losses (15,000) 3,000 (15,000) 19,839
- --------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES 83,870 86,484 154,999 159,757
- --------------------------------------------------------------------------------------------------------------
Non-interest income
Rental income 1,463 1,533 3,269 3,068
Collateral fees 146 273 306 273
- --------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,609 1,806 3,575 3,341
- --------------------------------------------------------------------------------------------------------------
Non-interest expense
Servicing fees 1,750 1,715 3,326 3,445
Depreciation and amortization 1,383 1,450 2,784 2,902
Loss on disposal of fixed assets -- -- 325 407
Other 95 92 150 142
- --------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 3,228 3,257 6,585 6,896
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 82,251 85,033 151,989 156,202
Income taxes 24 25 49 (92)
- --------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE PREFERRED DIVIDENDS 82,227 85,008 151,940 156,294
DIVIDENDS DECLARED ON PREFERRED SECURITIES 4,787 6,231 9,861 12,213
- --------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 77,440 $ 78,777 $ 142,079 $ 144,081
==============================================================================================================
See notes to unaudited consolidated financial statements.
4
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
PREFERRED, CLASS A PREFERRED, CLASS B PREFERRED, CLASS C
-------------------- ------------------ -------------------
(in thousands) SHARES SECURITIES SHARES SECURITIES SHARES SECURITIES
- --------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002:
Balance, beginning of period 1 $ 1,000 400 $400,000 2,000 $ 50,000
Comprehensive Income:
Net income
Total comprehensive income
Dividends declared on Class A preferred securities
Dividends declared on Class B preferred securities
Dividends declared on Class C preferred securities
Dividends declared on Class D preferred securities
- -------------------------------------------------------------------------------------------------------------------------------
Balance, end of period (Unaudited) 1 $ 1,000 400 $400,000 2,000 $ 50,000
===============================================================================================================================
SIX MONTHS ENDED JUNE 30, 2003:
BALANCE, BEGINNING OF PERIOD 1 $ 1,000 400 $400,000 2,000 $ 50,000
COMPREHENSIVE INCOME:
NET INCOME
TOTAL COMPREHENSIVE INCOME
DIVIDENDS DECLARED ON CLASS A PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS B PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS C PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS D PREFERRED SECURITIES
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD (UNAUDITED) 1 $ 1,000 400 $400,000 2,000 $ 50,000
===============================================================================================================================
PREFERRED, CLASS D PREFERRED
--------------------- ----------------------
(in thousands) SHARES SECURITIES SHARES SECURITIES
- -------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002:
Balance, beginning of period 14,000 $ 350,000 -- $ --
Comprehensive Income:
Net income
Total comprehensive income
Dividends declared on Class A preferred securities
Dividends declared on Class B preferred securities
Dividends declared on Class C preferred securities
Dividends declared on Class D preferred securities
- -------------------------------------------------------------------------------------------------------
Balance, end of period (Unaudited) 14,000 $ 350,000 -- $ --
=======================================================================================================
SIX MONTHS ENDED JUNE 30, 2003:
BALANCE, BEGINNING OF PERIOD 14,000 $ 350,000 -- $ --
COMPREHENSIVE INCOME:
NET INCOME
TOTAL COMPREHENSIVE INCOME
DIVIDENDS DECLARED ON CLASS A PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS B PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS C PREFERRED SECURITIES
DIVIDENDS DECLARED ON CLASS D PREFERRED SECURITIES
- -------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD (UNAUDITED) 14,000 $ 350,000 -- $ --
=======================================================================================================
COMMON
--------------------- RETAINED
(in thousands) SHARES STOCK EARNINGS TOTAL
- --------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002:
Balance, beginning of period 14,000 $ 5,082,511 $ 65,217 $ 5,948,728
Comprehensive Income:
Net income 156,294 156,294
-----------
Total comprehensive income 156,294
-----------
Dividends declared on Class A preferred securities (80) (80)
Dividends declared on Class B preferred securities (3,904) (3,904)
Dividends declared on Class C preferred securities (1,970) (1,970)
Dividends declared on Class D preferred securities (6,259) (6,259)
- --------------------------------------------------------------------------------------------------------
Balance, end of period (Unaudited) 14,000 $ 5,082,511 $ 209,298 $ 6,092,809
========================================================================================================
SIX MONTHS ENDED JUNE 30, 2003:
BALANCE, BEGINNING OF PERIOD 14,000 $ 4,715,351 $ -- $ 5,516,351
COMPREHENSIVE INCOME:
NET INCOME 151,940 151,940
-----------
TOTAL COMPREHENSIVE INCOME 151,940
-----------
DIVIDENDS DECLARED ON CLASS A PREFERRED SECURITIES (80) (80)
DIVIDENDS DECLARED ON CLASS B PREFERRED SECURITIES (2,650) (2,650)
DIVIDENDS DECLARED ON CLASS C PREFERRED SECURITIES (1,969) (1,969)
DIVIDENDS DECLARED ON CLASS D PREFERRED SECURITIES (5,162) (5,162)
- --------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD (UNAUDITED) 14,000 $ 4,715,351 $ 142,079 $ 5,658,430
========================================================================================================
See notes to unaudited consolidated financial statements.
5
HUNTINGTON PREFERRED CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
--------------------------
(in thousands of dollars) 2003 2002
- ---------------------------------------------------------------------------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income before preferred dividends $ 151,940 $ 156,294
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision (credit) for loan losses (15,000) 19,839
Depreciation and amortization 2,784 2,902
Loss on disposal of fixed assets 325 407
Decrease in accrued income and other assets 17,052 412
(Increase) decrease in due from/to Huntington
Preferred Capital Holdings, Inc. and The
Huntington National Bank (4,176) 227,626
Decrease in other liabilities (112) (25)
- ---------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 152,813 407,455
- ---------------------------------------------------------------------------------
INVESTING ACTIVITIES
Participation interests acquired (2,961,908) (1,956,624)
Sales and repayments on loans underlying
participation interests 2,764,742 2,050,729
- ---------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (197,166) 94,105
- ---------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid on preferred securities (7,131) (4,037)
- ---------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (7,131) (4,037)
- ---------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (51,484) 497,523
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF PERIOD 534,254 364,912
- ---------------------------------------------------------------------------------
AT END OF PERIOD $ 482,770 $ 862,435
=================================================================================
Supplemental information:
Income taxes paid $ 161 $ --
Interest paid -- --
See notes to unaudited consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Huntington Preferred Capital, Inc. (HPCI) was organized under Ohio law
in 1992 and designated as a real estate investment trust (REIT) in 1998. HPCI's
common stock is owned by three related parties, HPC Holdings-III, Inc.
(HPCH-III), a Nevada corporation; Huntington Preferred Capital II, Inc. (HPCII),
also a REIT and an Ohio corporation; and Huntington Bancshares Incorporated
(Huntington), a Maryland corporation headquartered in Columbus, Ohio. HPCI and
HPCII are subsidiaries of HPCH-III, which is a subsidiary of Huntington
Preferred Capital Holdings, Inc. (Holdings), an Indiana corporation. Holdings is
a subsidiary of The Huntington National Bank (the Bank), a national banking
association organized under the laws of the United States and also headquartered
in Columbus, Ohio. The Bank is a wholly owned subsidiary of Huntington. HPCI has
one subsidiary, HPCLI, Inc. (HPCLI), a taxable REIT subsidiary formed in March
2001 for the purpose of holding certain assets (primarily leasehold
improvements).
NOTE 2 - BASIS OF PRESENTATION AND NEW ACCOUNTING PRONOUNCEMENT
The unaudited interim consolidated financial statements reflect all
adjustments, consisting of normal and/or recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the consolidated
financial position, results of operations, and cash flows for the periods
presented. These unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
(GAAP). As permitted by the Securities and Exchange Commission, certain
information and footnote disclosures normally included in annual financial
statements have been omitted. The Notes to the Consolidated Financial Statements
appearing in HPCI's 2002 Annual Report on Form 10-K (2002 Annual Report), which
include descriptions of significant accounting policies, should be read in
conjunction with these interim financial statements.
In preparing financial statements in conformity with GAAP, management
of HPCI is required to make estimates, assumptions, and judgments that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and the reported amounts of revenue and expenses during the reporting
period. An accounting estimate requires assumptions about uncertain matters that
could have a material effect on the financial statements of HPCI if a different
amount within a range of estimates were used or if estimates changed from period
to period. Actual results could differ from those estimates. A material estimate
that is particularly susceptible to significant change relates to the
determination of the allowance for loan losses.
Cash and cash equivalents used in the Statement of Cash Flows are
defined as the sum of "Cash and due from The Huntington National Bank" and
"Interest bearing deposits with The Huntington National Bank".
SFAS 91 (Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases) addresses the
timing of recognition of loan and lease origination fees and certain expenses.
The statement requires that such fees and costs, if material, be deferred and
amortized over the estimated life of the asset. HPCI does not incur any
origination costs but does receive origination fees; however HPCI has not
deferred origination fees and has recognized the amounts in the period of
origination as has been disclosed in its audited financial statements. The
company has decided to defer origination fees prospectively for all loans
originated after June 30, 2003. The decision to defer origination fees will only
impact the timing, not the total amount of net revenue recognized over the life
of the asset. This change is not expected to materially impact HPCI's future
results of operations and will have no impact on its ability to pay operating
expenses and dividends.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer such as Huntington classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify as a liability a
financial instrument that is (a) in the form of mandatorily redeemable shares;
(b) that, at inception, embodies an obligation to repurchase equity shares; and
(c) that embodies an unconditional obligation that the issuer must or may settle
by issuing a variable number of equity shares. The classification of the
preferred stock of HPCI will not be affected by the adoption of this standard.
This Statement does not apply to features that are embedded in a financial
instrument that is not a derivative in its entirety. This Statement is effective
for financial instruments entered into or modified May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003.
All of HPCI's common stock is owned by Huntington, HPCII, and HPCH-III
and, therefore, earnings per common share information is not presented.
HPCI has elected to be treated as a REIT for federal income tax
purposes and intends to maintain compliance with the provisions of the Internal
Revenue Code and, therefore, is not subject to income taxes. HPCI's subsidiary,
HPCLI, elected to be treated as a taxable REIT subsidiary and, therefore, a
separate provision related to its income taxes is included in the accompanying
unaudited consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - LOAN PARTICIPATION INTERESTS
Participation interests are categorized based on the collateral
securing the underlying loan. At June 30, loan participation interests were
comprised of the following:
- -----------------------------------------------------------------
(in thousands of dollars) 2003 2002
- -----------------------------------------------------------------
Commercial $ 233,579 $ 507,108
Commercial real estate 4,077,396 3,849,495
Consumer 534,711 693,714
Residential real estate 376,641 199,988
- -----------------------------------------------------------------
TOTAL LOAN PARTICIPATIONS $ 5,222,326 $ 5,250,305
=================================================================
There are no underlying loans outstanding that would be considered a
concentration of lending in any particular industry, group of industries, or
business activity. Underlying loans are, however, generally secured by real
estate and concentrated to borrowers in the four states of Ohio, Michigan,
Indiana, and Kentucky, which comprise 94.1% and 95.7% of the portfolio at June
30, 2003 and 2002, respectively.
PARTICIPATIONS IN NON-PERFORMING LOANS AND PAST DUE LOANS
At June 30, 2003 and 2002, the participations in loans in non-accrual
status and loans past due 90 days or more and still accruing interest, were as
follows:
- -----------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- -----------------------------------------------------------------------------------------
Commercial $ 16,537 $ 106,330
Commercial real estate 27,376 41,103
Consumer - -
Residential real estate 6,316 5,816
- -----------------------------------------------------------------------------------------
TOTAL PARTICIPATIONS IN NON-ACCRUAL LOANS $ 50,229 $ 153,249
=========================================================================================
PARTICIPATIONS IN ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 13,513 $22,659
=========================================================================================
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses (ALL)
follows for the periods indicated:
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 125,884 $ 171,007 $ 140,353 $ 175,690
Allowance of loan participations acquired 11,740 10,700 23,397 17,261
Net loan losses (12,497) (21,348) (38,623) (49,431)
Provision (credit) for loan losses (15,000) 3,000 (15,000) 19,839
- ------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 110,127 $ 163,359 $ 110,127 $ 163,359
============================================================================================================
During the first quarter of 2003, a total of $12.2 million of interest
receivables was determined to be uncollectible and charged off against the ALL.
These interest receivables related to loans that were previously charged off.
NOTE 5 - DIVIDENDS
Holders of Class A preferred securities, a majority of which are
currently held by HPCH-III and the remainder by current and past employees of
the Bank and Huntington, are entitled to receive, if, when, and as declared by
the Board of Directors of HPCI out of funds legally available, dividends at a
fixed rate of $80.00 per share per annum. Dividends on the Class A preferred
securities, if declared, are payable
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
annually in December to holders of record on the record date fixed for such
purpose by the Board of Directors in advance of payment.
The holder of the Class B preferred securities, HPC Holdings-II, Inc.,
a direct non-bank subsidiary of Huntington, is entitled to receive, if, when,
and as declared by the Board of Directors of HPCI out of funds legally
available, dividends at a variable rate equal to the three-month LIBOR published
on the first day of each calendar quarter times par value. Dividends on the
Class B preferred securities, which are declared quarterly, are payable annually
and are non-cumulative. No dividend, except payable in common shares, may be
declared or paid upon Class B preferred securities unless dividend obligations
are satisfied on the Class A, Class C, and Class D preferred securities.
Holders of Class C preferred securities are entitled to receive, if,
when, and as declared by the Board of Directors of HPCI out of funds legally
available, dividends at a fixed rate of 7.875% per annum, of the initial
liquidation preference of $25.00 per share payable quarterly. 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 on HPCI's common stock and
other HPCI-issued securities ranking junior to the Class C preferred securities
(i.e., Class B preferred securities) will be prohibited for that period and at
least the following three quarterly dividend periods.
The holder of Class D preferred securities, currently HPCH-III, is
entitled to receive, if, when, and as declared by the Board of Directors of HPCI
out of funds legally available, dividends at a variable rate established at the
beginning of each calendar quarter equal to LIBOR plus 1.625% times par value,
payable quarterly. 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 D
preferred securities for a quarterly dividend period, the payment of dividends
on HPCI's common stock and other HPCI-issued securities ranking junior to the
Class D preferred securities (i.e., Class B preferred securities) will be
prohibited for that period and at least the following three quarterly dividend
periods.
A summary of dividends declared by each class of preferred securities
follows for the periods indicated:
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ----------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------
Class A preferred securities $ - $ - $ 80 $ 80
Class B preferred securities 1,270 2,040 2,650 3,904
Class C preferred securities 984 984 1,969 1,970
Class D preferred securities 2,533 3,207 5,162 6,259
- ----------------------------------------------------------------------------------------------
TOTAL DIVIDENDS DECLARED $ 4,787 $ 6,231 $ 9,861 $ 12,213
==============================================================================================
As of June 30, 2003 and 2002, dividends that are declared and unpaid totaled
$2.7 million and $8.2 million, respectively. For 2003 and 2002, dividends
payable represents dividends declared but unpaid on HPCI's Class A and B
preferred securities. In addition, dividends that were declared on the Class C
and D preferred securities for the second quarter of 2002 were not paid until
July 1, 2002, and thus are included in dividends payable as of June 30, 2002.
Dividends payable is reflected as a component of dividends payable and other
liabilities in the consolidated balance sheets.
NOTE 6 - RELATED PARTY TRANSACTIONS
HPCI is a party to an Amended and Restated Loan Subparticipation
Agreement with Holdings, a Loan Subparticipation Agreement with HPCI-III, and a
Loan Participation Agreement with the Bank. Under these agreements HPCI holds a
100% participation interest and a subparticipation interest in Holdings' 99%
participation interests in loans originated by the Bank and its subsidiaries.
The participation and subparticipation interests are in commercial, commercial
real estate, residential real estate, and consumer loans that were either
directly underwritten by the Bank and its subsidiaries or acquired by the Bank.
On May 12, 2003, the amendments to and new participation and subparticipation
agreements were approved by the Board of Directors to allow HPCI to acquire
interests in loans
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
directly from the Bank. Prior to this date, participation interests in loans
were acquired from the Bank only through Holdings at the Bank's carrying value,
which is the principal amount outstanding plus accrued interest, net of unearned
income, if any, less an ALL. The amended and new agreements also allow for HPCI
to acquire up to a 100% participation interest in such loans. HPCI expects to
continue to purchase such interests, net of ALL, in the future from the Bank or
its affiliates.
The Bank performs the servicing of the commercial, commercial real
estate, residential real estate, and consumer loans underlying the
participations held by HPCI in accordance with normal industry practice under
HPCI's participation agreement with the Bank or HPCI's subparticipation
agreement with Holdings and Holding's participation amended agreements and
subparticipation agreements. As of June 1, 2003, the annual servicing fee the
Bank charges is 0.125% of the outstanding principal balances of the underlying
commercial and commercial real estate loans, 0.320% of the outstanding principal
balances of the underlying consumer loans, and 0.2997% of the outstanding
principal balances of the underlying residential real estate loans. Prior to
June 1, 2003, the servicing fee the Bank charged, on an annual basis, was 0.125%
with respect to the underlying commercial real estate, commercial, and consumer
loan balances and 2.35% of the interest income collected on residential real
estate loans. In its capacity as servicer, the Bank collects and holds the 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 the Bank in the accompanying consolidated
financial statements. Servicing fee expense paid to the Bank totaled $1.8
million for the three months ended June 30, 2003 and $1.7 million for the same
period in 2002. In addition, servicing fee expense paid to the Bank totaled $3.3
million and $3.4 million for the six months ended June 30, 2003 and 2002,
respectively.
HPCI, Huntington, and the Bank share personnel to handle day-to-day
operations of HPCI such as financial analysis and reporting, accounting, tax
reporting, and other administrative functions. On a monthly basis, HPCI
reimburses the Bank and Huntington for the cost related to the time spent by
employees for performing these functions. These personnel costs totaled $58,000
and $40,000, respectively, for each of the three-month periods ended June 30,
2003 and 2002, and $98,000 and $81,000, respectively, for each of the six month
periods ended June 30, 2003 and 2002. The Bank has a policy of not participating
certain categories of loans to HPCI. From time to time loans are inadvertently
participated to HPCI against those policies. In such instances, the Bank will
reacquire those participations from HPCI at their fair market value.
In February 2001, Huntington purchased 18,667 shares of the 14 million
outstanding common shares of HPCI from Holdings (after adjusting for the April
2001 18,666.67-for-1 stock split). Prior to February 2001, Holdings was the
owner of 100% of the outstanding common stock of HPCI. On July 1, 2002, Holdings
exchanged 4.55 million common shares of HPCI and certain other assets for two
classes of HPCII's preferred stock. On December 27, 2002, Holdings contributed
its ownership in HPCI's Class A and Class D preferred securities and its
remaining common stock to HPCH-III. The following table represents the current
ownership of HPCI's common and preferred securities.
- ----------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF PREFERRED SECURITIES
COMMON ---------------------------------------
OWNER AT JUNE 30, 2003: SHARES CLASS A CLASS B CLASS C CLASS D
- ----------------------------------------------------------------------------------------------------
HPC II 4,550,000 - - - -
HPCH-III 9,431,333 893 - - 14,000,000
HPC Holdings II, Inc. - - 400,000 - -
Huntington 18,667 - - - -
- ----------------------------------------------------------------------------------------------------
Total held by related parties 14,000,000 893 400,000 - 14,000,000
====================================================================================================
Other shareholders - 107 - 2,000,000 -
====================================================================================================
At June 30, 2003, 10.7% of the Class A preferred securities are owned
by current and past employees of Huntington and its subsidiaries in addition to
the 89.3% owned by HPCH-III. The Class A preferred securities are non-voting.
All of the Class B preferred securities are owned by HPC Holdings II, Inc., a
non-bank subsidiary of Huntington and are non-voting. In 2001, the Class C
preferred securities were obtained by Holdings, who sold the securities to the
public. Various board members and executive officers of HPCI have purchased a
portion of the Class C preferred securities. At June 30, 2003, a total of 7,100
shares, or 0.355%, were beneficially owned by HPCI board members and executive
officers in the aggregate. All of the Class D preferred securities owned by
HPCH-III are being held for possible sale to the public in the
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
future. Dividends paid to the Class C and D shareholders in the second quarter
of 2003 were $984,000 and $2,533,000, respectively, and were paid June 30, 2003.
Both the Class C and D preferred securities are entitled to one-tenth
of one vote per share on all matters submitted to HPCI shareholders. The Class C
and D preferred securities are exchangeable, without shareholder approval or any
action of shareholders, for preferred securities of the Bank with substantially
equivalent terms as to dividends, liquidation preference, and redemption if the
Office of the Comptroller of the Currency (OCC) so directs only under the
following circumstances where the Bank becomes or may in the near term become
undercapitalized, or the Bank is placed in conservatorship or receivership. The
Class C and Class D preferred securities are redeemable at HPCI's option on or
after December 31, 2021, and December 31, 2006, respectively, with prior consent
of the OCC.
HPCI's premises and equipment were acquired from the Bank through
Holdings. Leasehold improvements were subsequently contributed to HPCLI for its
common shares in the fourth quarter of 2001. HPCLI charges rent to the Bank for
use of applicable facilities by the Bank. During each of the quarters ended June
30, 2003 and 2002, HPCLI received $1.5 million of rental income, and during the
six months ended June 30, 2003 and 2002, HPCLI received $3.3 million and $3.1
million, respectively. Rental income is reflected as a component of non-interest
income in the consolidated statements of income.
HPCI has a non-interest bearing receivable from Holdings of $11.6
million at June 30, 2003, and $66.2 million at June 30, 2002. At December 31,
2002, there were no non-interest bearing receivables from Holdings. These
balances represent unsettled cash transactions involving its participation
interests that occur in the ordinary course of business.
The Bank is eligible to obtain advances from various federal and
government-sponsored agencies such as the Federal Home Loan Bank of Cincinnati.
From time to time, HPCI may be asked to act as guarantor of the Bank's
obligations under such advances and/or pledge all or a portion of its assets in
connection with those advances. See Note 7 for further information regarding the
pledging of HPCI's assets in association with the Bank's advances.
HPCI maintains and transacts all of its cash activity through a
non-interest bearing demand deposit account with the Bank. In addition, to the
extent that it does not jeopardize qualification as a REIT, HPCI invests
available funds in Eurodollar deposits with the Bank for a term of not more than
30 days. The following amounts were on deposit with the Bank at June 30:
- --------------------------------------------------------
(in thousands of dollars) 2003 2002
- --------------------------------------------------------
Non-interest bearing $ 59,191 $ 39,367
Interest bearing 423,579 823,068
- --------------------------------------------------------
Total deposits with the Bank $ 482,770 $ 862,435
========================================================
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Bank is eligible to obtain advances from various federal and
government-sponsored agencies such as the Federal Home Loan Bank of Cincinnati
(FHLBC). From time to time, HPCI may be asked to act as guarantor of the Bank's
obligations under such advances and/or pledge all or a portion of its assets in
connection with those advances. Any such guarantee and/or pledge would rank
senior to HPCI's common and preferred securities upon liquidation. Accordingly,
any federal or government-sponsored agencies that make advances to the Bank
where HPCI has acted as guarantor or has pledged its assets as collateral will
have a liquidation preference over the holders of HPCI's securities. Any such
guarantee and/or pledge in connection with the Bank's advances from federal or
government-sponsored agencies falls within the definition of Permitted
Indebtedness (as defined in HPCI's articles of incorporation) and, therefore,
HPCI is not required to obtain the consent of the holders of its common or
preferred securities for any such guarantee and/or pledge.
The Bank is currently eligible to obtain one or more advances from the
FHLBC based upon the amount of FHLBC capital stock owned by the Bank. As of June
30, 2003, the Bank's total borrowing capacity under this facility was capped at
$1.34 billion. As of this same date, the Bank had borrowings of $1.27 billion
under this facility, in addition to standby letters of credit that were issued
and outstanding in the amount of $18.2 million.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPCI has entered into an agreement with the Bank with respect to the
pledge of HPCI's assets to collateralize the Bank's borrowings from the FHLBC.
The agreement provides that the Bank will not place at risk HPCI's assets in
excess of an aggregate amount or percentage of such assets established from time
to time by HPCI's board of directors, including a majority of HPCI's independent
directors. HPCI's board has set this limit at $1.0 billion, which limit may be
changed in the future by the board of directors, including a majority of HPCI's
independent directors. As of June 30, 2003, HPCI's pledged collateral was
limited to 1-4 family residential mortgages and second mortgage loans. As of
that same date, HPCI's participation interests in 1-4 family residential
mortgages and second mortgage loans pledged as collateral aggregated $733
million. The agreement also provides that the Bank will pay HPCI a monthly fee
based upon the pledged collateral held by HPCI. For the three and six month
periods ended June 30, 2003, the Bank paid a total of $146,000 and $306,000,
respectively, to HPCI, representing twelve basis points per year on the
collateral pledged, as compensation for making such assets available to the Bank
as collateral. For both the three and six month periods ended June 30, 2002, the
Bank paid a total of $273,000 to HPCI. HPCI began receiving these fees after the
first quarter of last year.
NOTE 8 - SEGMENT REPORTING
HPCI's operations consist of acquiring, holding, and managing its
participation interests. Accordingly, HPCI only operates in one segment. HPCI
has no external customers and transacts all of its business with the Bank and
its affiliates.
12
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Huntington Preferred Capital, Inc. (HPCI) is an Ohio corporation
operating as a real estate investment trust (REIT) for federal income tax
purposes. HPCI's principal business objective is to acquire, hold, and manage
mortgage assets and other authorized investments that will generate net income
for distribution to its shareholders.
HPCI was organized under Ohio law in 1992 and designated as a real
estate investment trust (REIT) in 1998. HPCI's common stock is owned by three
related parties, HPC Holdings-III, Inc. (HPCH-III), a Nevada corporation;
Huntington Preferred Capital II, Inc. (HPCII), also a REIT and an Ohio
corporation; and Huntington Bancshares Incorporated (Huntington), a Maryland
corporation headquartered in Columbus, Ohio. HPCI and HPCII are subsidiaries of
HPCH-III, which is a subsidiary of Huntington Preferred Capital Holdings, Inc.
(Holdings), an Indiana corporation. Holdings is a subsidiary of The Huntington
National Bank (the Bank), a national banking association organized under the
laws of the United States and also headquartered in Columbus, Ohio. The Bank is
a wholly owned subsidiary of Huntington. HPCI has one subsidiary, HPCLI, Inc.
(HPCLI), a taxable REIT subsidiary formed in March 2001 for the purpose of
holding certain assets (primarily leasehold improvements).
HPCI is a party to an Amended and Restated Loan Subparticipation
Agreement with Holdings, a Loan Subparticipation Agreement with HPCI-III, and a
Loan Participation Agreement with the Bank. The Bank is required, through its
participation and/or subparticipation agreements, to service HPCI's loan
portfolio in a manner substantially the same as for similar work for
transactions on its own behalf. HPCI, however, has retained the right to elect
to foreclose on mortgaged properties and the Bank has agreed to follow any such
direction from HPCI in this regard. The Bank also collects and remits principal
and interest payments, maintains perfected collateral positions, and submits and
pursues insurance claims. In addition, the Bank provides to HPCI accounting and
reporting services as required. The Bank is required to pay all expenses related
to the performance of its duties under the participation and subparticipation
agreements. All of these participation interests to date were acquired directly
or indirectly from the Bank.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of financial condition and results
of operations contain forward-looking statements about HPCI, including
descriptions of products or services, plans, or objectives of its management for
future operations, and forecasts of its revenues, earnings, or other measures of
economic performance. Forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors, including, but not
limited to, those set forth under the heading "Business Risks" included in Item
1 of HPCI's 2002 Annual Report on Form 10-K (2002 Annual Report) and other
factors described from time to time in HPCI's other filings with the Securities
and Exchange Commission, could cause actual conditions, events, or results to
differ significantly from those described in the forward-looking statements.
Forward-looking statements speak only as of the date they are made.
HPCI does not update forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements are made or to
reflect the occurrence of unanticipated events.
The following discussion and analysis provides investors and others
with information that HPCI's management believes to be necessary for an
understanding of its financial condition, changes in financial condition, and
results of operations, and should be read in conjunction with the financial
statements, notes, and other information contained in this document.
CRITICAL ACCOUNTING POLICIES
Note 1 to HPCI's consolidated financial statements included in its 2002
Annual Report lists critical accounting policies used in the development and
presentation of its financial statements. This discussion and analysis, the
critical accounting policies, and other financial statement disclosures identify
and address key variables and other qualitative and quantitative factors that
are necessary for an understanding and evaluation of HPCI, its financial
position, results of operations, and cash flows.
13
SFAS 91 (Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases) addresses the
timing of recognition of loan and lease origination fees and certain expenses.
The statement requires that such fees and costs, if material, be deferred and
amortized over the estimated life of the asset. HPCI does not incur any
origination costs but does receive origination fees; however HPCI has not
deferred origination fees and has recognized the amounts in the period of
origination as has been disclosed in its audited financial statements. The
company has decided to defer origination fees prospectively for all loans
originated after June 30, 2003. The decision to defer origination fees will
only impact the timing, not the total amount of net revenue recognized over the
life of the asset. This change is not expected to materially impact HPCI's
future results of operations and will have no impact on its ability to pay
operating expenses and dividends.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires HPCI's
management to establish critical accounting policies and make accounting
estimates, assumptions, and judgments that affect amounts recorded and reported
in its financial statements. An accounting estimate requires assumptions about
uncertain matters that could have a material effect on the financial statements
of HPCI if a different amount within a range of estimates were used or if
estimates changed from period to period. Readers of this report should
understand that estimates are made under facts and circumstances at a point in
time and changes in those facts and circumstances could produce actual results
that differ from when those estimates were made. A material estimate that is
particularly susceptible to significant change relates to the determination of
the allowance for loan losses.
OVERVIEW
HPCI's income is primarily derived from its participation interests in
loans acquired directly or indirectly from the Bank. Income varies based on the
level of these assets and interest rates earned on these assets. The cash flows
from these assets are used to satisfy HPCI's preferred dividend obligations. The
preferred securities are considered equity and therefore, the dividends are not
reflected as interest expense.
HPCI's net income before preferred dividends was $82.2 million and
$85.0 million, respectively, for the three months ended June 30, 2003 and 2002,
while net income available to common shareholders was $77.4 million and $78.8
million, respectively, for the same three month ended periods. For the six
months ended June 30, 2003 and 2002, HPCI's net income before preferred
dividends was $151.9 million and $156.3 million, respectively, while net income
available to common shareholders was $142.1 million and $144.1 million,
respectively, for the same six month ended periods.
HPCI had total assets and total equity of $5.7 billion at June 30,
2003, up slightly from $5.5 billion at December 31, 2002, but down from $6.1
billion at June 30, 2002. At June 30, 2003 and 2002, an aggregate of $5.2
billion and $5.3 billion, respectively, consisted of 99% participation interests
in loans. Participation interests in specific underlying loans were as follows:
- ---------------------------------------------------------------------------------
AT JUNE 30,
- ---------------------------------------------------------------------------------
% OF % OF
TOTAL TOTAL
(in thousands of dollars) 2003 ASSETS 2002 ASSETS
- ---------------------------------------------------------------------------------
Gross loan participation interests:
Commercial $ 233,579 4.1 $ 507,108 8.3
Commercial real estate 4,077,396 72.0 3,849,495 63.1
Consumer 534,711 9.4 693,714 11.4
Residential real estate 376,641 6.7 199,988 3.3
- --------------------------------------------------------------------------------
Total $ 5,222,326 92.2 $ 5,250,305 86.1
================================================================================
Participation interests in commercial loans at June 30, 2003 declined
54% from a year ago, while residential real estate loans increased 88% over the
same period. HPCI has not acquired additional participation interests in
commercial loans over the past several quarters, but did acquire participation
interests in $269.8 million of residential real estate loans in June 2003.
Participation interests in commercial real estate loans at June 30, 2003
increased 6% over levels at the end of the same period in 2002.
14
Participation interests in consumer loans decreased 23% for the same
comparable periods as scheduled payment and prepayment activity in this
portfolio outpaced the investment in new participation interests. Participation
interests in consumer loans were comprised largely of interests in home equity
loans secured by first and second mortgages.
Interest-bearing and non-interest bearing cash balances on deposit with
the Bank were $482.8 million at June 30, 2003, down from $534.3 million at
December 31, 2002, and down from $862.4 million at June 30, 2002. These declines
were due, in part, to reinvestment opportunities in acquiring additional
participation interests. Typically, cash is invested with the Bank in an
interest bearing account. These interest-bearing balances are invested overnight
or in Eurodollar deposits with the Bank for a term of not more than 30 days.
At June 30, 2003, amounts due from Holdings and the Bank were $11.6
million, down from $66.2 million at June 30, 2002, but up from $7.4 million at
December 31, 2002. These represent amounts due from or due to Holdings and/or
the Bank that arise in the ordinary course of business for unsettled
transactions involving participation interests, fees, and other related costs.
Dividends payable and other liabilities were $3.3 million at June 30,
2003, down from $8.2 million at June 30, 2002, but up from $0.7 million at
December 31, 2002. This decline since June 30, 2002 was due to the timing of the
payment of dividends paid on the Class C and D preferred securities and reduced
LIBOR rates. All preferred dividends declared in 2002 were paid by December 31,
2002.
Shareholders' equity was $5.7 billion at June 30, 2003, down from $6.1
billion at June 30, 2002, but up from $5.5 billion at December 31, 2002. The
decline since June 30, 2002 largely reflects the impact of the declaration and
payment of common and preferred dividends in the third and fourth quarters of
2002 and return of capital at December 31, 2002.
Qualification as a REIT involves application of specific provisions of
the Internal Revenue Code relating to income and asset tests. A REIT must
satisfy six asset tests quarterly: (1) 75 percent of the value of the REIT's
total assets must consist of real estate assets, cash and cash items, and
government securities; (2) not more than 25 percent of the value of the REIT's
total assets may consist of securities, other than those includible under the 75
percent test; (3) not more than five percent of the value of its total assets
may consist of securities of any one issuer, other than those securities
includible under the 75 percent test or securities of taxable REIT subsidiaries;
(4) not more than 10 percent of the outstanding voting power of any one issuer
may be held, other than those securities includible under the 75 percent test or
securities of taxable REIT subsidiaries; (5) not more that 10 percent of the
total value of the outstanding securities of any one issuer may be held, other
than those securities includible under the 75 percent test or securities of
taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more
taxable REIT subsidiaries which comprise more than 20 percent of its total
assets. Also, a REIT must annually satisfy two gross income tests: (1) 75
percent of its gross income must be from qualifying income closely connected
with real estate activities; and (2) 95 percent of its gross income must be
derived from sources qualifying for the 75 percent test plus dividends, interest
and gains from the sale of securities. At June 30, 2003, HPCI had met all of the
quarterly asset tests and as of December 31, 2002 met all annual income tests.
HPCI intends to operate in a manner that will not cause it to be deemed
an investment company under the Investment Company Act. The Investment Company
Act exempts from registration as an investment company an entity that is
primarily engaged in the business of "purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" (Qualifying
Interests). Under positions taken by the SEC staff in no-action letters, in
order to qualify for this exemption, HPCI must invest at least 55 percent of its
assets in Qualifying Interests and an additional 25 percent of its assets in
real estate-related assets, although this percentage may be reduced to the
extent that more than 55 percent of its assets are invested in Qualifying
Interests. The assets in which HPCI may invest under the Internal Revenue Code
therefore may be further limited by the provisions of the Investment Company Act
and positions taken by the SEC staff. HPCI intends to operate its business in a
manner that will maintain its exemption from registration as an investment
company under the Investment Company Act.
RESULTS OF OPERATIONS
INTEREST AND FEE INCOME
HPCI's primary source of revenue is interest and fee income on its
participation interests in loans. At June 30, 2003 and 2002, HPCI did not have
any interest-bearing liabilities or related interest expense. HPCI's capital
15
structure has provided funding for acquisition of participation interests and
the continued cash flows from its participation interests in loans provide
sufficient funding such that outside borrowings are not required. Interest
income is impacted by changes in the level of interest rates and earning assets.
The yield on earning assets is the percentage of interest income to average
earning assets. For the three and six month periods ended June 30, HPCI's
average balances, interest and fee income, and yields are presented below:
- -----------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------
2003 2002
----------------------- -------------------------
AVERAGE AVERAGE
(in millions of dollars) BALANCE INCOME YIELD BALANCE INCOME YIELD
- -----------------------------------------------------------------------------------
Loan participation interests:
Commercial $ 270.6 $ 3.0 4.42% $ 533.8 $ 6.4 4.84%
Commercial real estate 4,005.6 45.9 4.59 3,843.1 54.3 5.67
Consumer 560.8 12.4 8.86 712.6 18.9 10.63
Residential real estate 215.0 3.0 5.58 222.9 3.9 6.91
- -----------------------------------------------------------------------------------
Total loan participations 5,052.0 64.3 5.10 5,312.4 83.5 6.30
- -----------------------------------------------------------------------------------
Interest bearing deposits
in banks 637.6 2.0 1.27 747.4 3.3 1.76
Fees from loan participation
interests 2.6 2.7
- -----------------------------------------------------------------------------------
Total $ 5,689.6 $ 68.9 4.85% $ 6,059.8 $ 89.5 5.92%
===================================================================================
- --------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------
2003 2002
----------------------- --------------------------
AVERAGE AVERAGE
(in millions of dollars) BALANCE INCOME YIELD BALANCE INCOME YIELD
- --------------------------------------------------------------------------------------
Loan participation interests:
Commercial $ 296.8 $ 6.9 4.71% $ 570.3 $ 13.7 4.86%
Commercial real estate 3,949.7 92.8 4.74 3,788.7 108.2 5.76
Consumer 580.2 25.8 8.96 737.8 38.9 10.64
Residential real estate 180.8 5.3 5.81 240.3 8.4 7.00
- --------------------------------------------------------------------------------------
Total loan participations 5,007.5 130.8 5.27 2,337.1 169.2 6.39
- --------------------------------------------------------------------------------------
Interest bearing deposits
in banks 627.7 3.9 1.24 586.1 5.2 1.78
Fees from loan participation
interests 5.3 5.2
- --------------------------------------------------------------------------------------
Total $ 5,635.2 $ 140.0 5.01 % $ 5,923.2 $ 179.6 6.11%
======================================================================================
For the three months ended June 30, 2003, interest and fee income was $68.9
million, compared with $89.5 million for the same quarter in 2002. Approximately
53% of the decline in interest and fee income was due to the lower interest rate
environment and the remainder due to declines in average participation balances.
Approximately three-quarters of the loan participation portfolio is variable in
nature with respect to interest rate. As shown in the table above, the yield on
HPCI's participation interests declined from 6.30% in the second quarter a year
ago to 5.10% for the recent three-month period.
On a six month basis, interest and fee income was $140.0 million for
2003, compared with $179.6 million for the same period in 2002. The yield on
HPCI's participation interests declined from 6.39% for the first half of last
year to 5.27% for the six-month period ended June 30, 2003. Approximately 58% of
the decline in interest and fee income was due to the lower interest rate
environment and 42% due to declines in average participation balances.
16
The table below shows changes in interest and fee income for the three
and six-month periods ended June 30, 2003 and 2002 due to volume and rate for
each category of earning assets. The change in interest and fees not solely due
to changes in volume or rates has been allocated in proportion to the absolute
dollar amounts of the change in volume and rate.
- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------
2003 COMPARED TO 2002 2002 COMPARED TO 2001
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
From Previous From Previous
Year Due To: Year Due To:
- ---------------------------------------------------------------------------------------------------
(in millions of dollars) Volume Yield Total Volume Yield Total
- ---------------------------------------------------------------------------------------------------
Interest bearing deposits in banks $ (0.4) $ (0.9) $ (1.3) $ 2.1 $ (3.8) $ (1.7)
Loan participations purchased:
Commercial (3.1) (0.5) (3.6) (0.4) (3.4) (3.8)
Commercial real estate 2.3 (10.5) (8.2) (5.0) (19.1) (24.1)
Consumer (3.7) (2.9) (6.6) (8.6) 3.2 (5.4)
Residential real estate (0.1) (0.8) (0.9) (8.7) 0.2 (8.5)
- ---------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS (5.0) (15.6) (20.6) (20.6) (22.9) (43.5)
- ---------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES - - - - - -
- ---------------------------------------------------------------------------------------------------
TOTAL INTEREST AND FEE INCOME $ (5.0) $ (15.6) $ (20.6) $ (20.6) $ (22.9) $ (43.5)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
2003 COMPARED TO 2002 2002 COMPARED TO 2001
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
From Previous From Previous
Year Due To: Year Due To:
- ---------------------------------------------------------------------------------------------------
(in millions of dollars) Volume Yield Total Volume Yield Total
- ---------------------------------------------------------------------------------------------------
Interest bearing deposits in banks $ 0.3 $ (1.6) $ (1.3) $ (2.2) $ (9.9) $ (12.1)
Loan participations purchased:
Commercial (6.6) (0.5) (7.1) (0.4) (7.9) (8.3)
Commercial real estate 4.6 (19.7) (15.1) (10.1) (41.8) (51.9)
Consumer (7.7) (5.5) (13.2) (14.5) 6.0 (8.5)
Residential real estate (1.9) (1.2) (3.1) (12.1) (1.2) (13.3)
- ---------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS (11.3) (28.5) (39.8) (39.3) (54.8) (94.1)
- ---------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES - - - - - -
- ---------------------------------------------------------------------------------------------------
TOTAL INTEREST AND FEE INCOME $ (11.3) $ (28.5) $ (39.8) $ (39.3) $ (54.8) $ (94.1)
===================================================================================================
PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES (ALL)
The provision for loan losses is the charge to earnings necessary to
maintain the ALL at a level adequate to absorb management's estimate of inherent
losses in the loan portfolio. There was a credit of $15.0 million recorded to
the provision for loan losses in the second quarter 2003 and no provision
expense in the first quarter of this year. Provision expense was $3.0 million
and $19.8 million for the three and six-month periods in 2002, respectively. The
overall decline in provision expense in 2003 from 2002 is indicative of the
significantly lower level of non-performing loans underlying HPCI's
participation interests and lower losses on loan participations.
The ALL was $110.1 million at June 30, 2003, down from $140.4 million
at December 31, 2002, and $163.4 million at June 30, 2002. This represents
2.11%, 2.79%, and 3.11% of total loan participations at the end of each
respective period. The ALL decreased from June and December of last year because
of the factors described above related to provision expense. The ALL covered
219.2% of the participations in non-performing loans June 30, 2003,
17
compared to 145.4% and 106.6% at December 31, 2002 and June 30, 2002,
respectively. In management's judgment, the ALL is adequate at June 30, 2003 to
cover losses inherent in the loan participation portfolio. Additional
information regarding the ALL and asset quality appears in the "Credit Quality"
section. The following table shows the activity in HPCI's ALL for the periods
indicated:
- -----------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD 125,884 171,007 $ 140,353 $ 175,690
Allowance of loan participations acquired, net 11,740 10,700 23,397 17,261
Net loan losses
Commercial (7,749) (12,058) (16,331) (26,261)
Commercial real estate (391) (4,394) (1,351) (10,403)
Consumer (4,152) (4,896) (18,686) (12,767)
Residential real estate (205) - (2,255) -
- -----------------------------------------------------------------------------------------------
Total net loan losses (12,497) (21,348) (38,623) (49,431)
- -----------------------------------------------------------------------------------------------
Provision (credit) for loan losses (15,000) 3,000 (15,000) 19,839
- -----------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD 110,127 163,359 $ 110,127 $ 163,359
===============================================================================================
Charge-offs are a cost of making loans. Since loan yields are expressed
as an annual rate, for approximation purposes in assessing loan profitability
trends, management finds it helpful to also express charge-offs on an annualized
basis. As such, quarterly charge-offs expressed as a percent of related
quarterly average loans, are multiplied by a factor of four. For example, a
quarterly charge-off rate of 0.25%, represents an annualized charge-off rate of
1.00%.
Total net charge-offs for the quarter ended June 30, 2003, were $12.5
million, or 0.99% of average participation interests, down from the $21.3
million, or 1.61%, recorded in the same quarterly period in 2002. For the six
months ended June 30, 2003, total net charge-offs were $38.6 million, or 1.56%
of average participation interests, down from $49.4 million, or $1.85%, recorded
in the same period in 2002. The first half of 2003 includes $12.2 million of
interest receivables that were determined to be uncollectible and charged off
against the allowance for loan losses in the first quarter of this year. These
interest receivables related to loans that were previously charged off.
It is HPCI's policy to perform a detailed analysis as of the end of
each period to estimate the required level of the ALL. HPCI, through reliance on
methods utilized by Huntington, allocates the ALL to each loan participation
category. For the commercial and commercial real estate loan participations,
expected loss factors are assigned by credit grade at the individual underlying
loan level at the time the loan is originated by the Bank. On a periodic basis,
management reevaluates these credit grades. The aggregation of these factors
represents management's estimate of the inherent loss. The portion of the
allowance allocated to the more homogeneous underlying consumer and residential
real estate loan participations is determined by developing expected loss ratios
based on the risk characteristics of the various portfolio segments and giving
consideration to existing economic conditions and trends.
Expected loss ratios also incorporate factors such as trends in past
due and non-accrual amounts, recent underlying loan loss experience, current
economic conditions, risk characteristics, and concentrations of various
underlying loan categories. Actual loss ratios experienced in the future could
vary from those expected, as performance is a function of factors unique to each
customer as well as general economic conditions. Management believes that a
reserve of 2.11% of the total participation interests at June 30, 2003 is
appropriate given (1) the composition of the loans underlying HPCI's
participation interests, predominantly commercial real estate, commercial loans,
and lower quality consumer loans; and (2) the uncertainties in the general
economic outlook and world events that could impact customers' ability to make
payments. In the second quarter of 2003, HPCI changed its methodology of
determining its ALL to eliminate any unallocated ALL. 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. Management will continue to assess the level of the
reserve on a quarterly basis.
18
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
For the three months ended June 30, 2003 and 2002, non-interest income
was $1.6 million and $1.8 million, respectively. For the six month period,
non-interest income was $3.6 million and $3.3 million, respectively. This income
largely represents rents received from the Bank related to land, buildings, and
leasehold improvements owned by HPCI. In addition, non-interest income includes
fees from the Bank for use of its assets as collateral for the Bank's advances
from the Federal Home Loan Bank of Cincinnati (FHLBC). These fees totaled
$146,000 and $306,000, respectively, for the three and six months ended June 30
2003, while for both the three and six months ended June 30, 2002, these fees
totaled $273,000. HPCI began receiving these fees after the first quarter of
last year. See Note 7 to the unaudited consolidated financial statements for
more information regarding use of HPCI's assets as collateral for the Bank's
advances from the FHLBC.
Non-interest expense for the three months ended June 30, 2003, was $3.2
million compared with $3.3 million for the same period last year. For the six
months ended June 30, 2003 and 2002, non-interest expense was $6.6 million and
$6.9 million, respectively. The predominant components of HPCI's non-interest
expense are the fees paid to the Bank for servicing the loans underlying the
participation interests and depreciation and amortization on its premises and
equipment. Servicing fees amounted to $1.8 million and $1.7 million,
respectively, for the three months ended June 30, 2003 and 2002. For the six
months ended June 30, 2003, these servicing fees totaled $3.3 million versus
$3.4 million a year ago. As of June 1, 2003, the service fee with respect to the
underlying commercial real estate and commercial loans is equal to the
outstanding principal balance of each loan multiplied by a fee of 0.125% on an
annual basis, 0.320% on underlying consumer loan balances, and 0.2997% on
underlying residential real estate loans. Prior to June 1, 2003, the servicing
fee was 0.125% annually with respect to the underlying commercial real estate,
commercial, and consumer loan balances and 2.35% of the interest income
collected on residential real estate loans. Depreciation on premises and
equipment was $1.4 million and $1.5 million, respectively, for the three months
ended June 30, 2003 and 2002. For the six month period, depreciation expense
totaled $2.8 million for 2003 and $2.9 million for 2002. See Note 6 to the
unaudited consolidated financial statements for further information regarding
these servicing fees paid to the Bank as part of the related subparticipation
agreements.
PROVISION FOR INCOME TAXES
HPCI has elected to be treated as a REIT for federal income tax
purposes and intends to maintain compliance with the provisions of the Internal
Revenue Code and, therefore, is not subject to income taxes. HPCI's subsidiary,
HPCLI, elected to be treated as a taxable REIT subsidiary and, therefore, a
separate provision related to its income taxes is included in the accompanying
unaudited consolidated financial statements. Income taxes for the recent three
months were $24,000, down slightly from $25,000 a year ago due to lower income.
For the first six months of 2003, income taxes were $49,000 compared with a
benefit of $92,000 for the prior year period.
INTEREST RATE RISK MANAGEMENT
HPCI's income consists primarily of interest income on participation
interests in commercial, consumer, residential real estate, and commercial real
estate loans. If there is a decline in market interest rates, HPCI may
experience a reduction in interest income on its participation interests and a
corresponding decrease in funds available to be distributed to shareholders. The
reduction in interest income may result from downward adjustments of the indices
upon which the interest rates on underlying variable rate loans are based and
from prepayments of underlying loans with fixed interest rates as well as
reinvestment in lower-earning assets. HPCI has no interest bearing liabilities,
and therefore would have no offsetting reduction in interest expense if market
interest rates decline.
Huntington conducts its interest rate risk management on a centralized
basis and does not manage HPCI's interest rate risk separately. A key element
used in Huntington's interest rate risk management is an income simulation
model, which includes, among other things, assumptions for loan prepayments on
the existing portfolio and new loan volumes. Using that model for HPCI as of
June 30, 2003, and assuming no new loan participation volumes, interest income
for the next 12 month period would be expected to increase by 9.1% if rates rose
200 basis points gradually and with a parallel shift of the yield curve above
the forward rates implied in the June 30, 2003 yield curve. The model was not
used to estimate the impact of a 200 basis point decline in rates due to the
overall low level of current rates, however, management believes further
declines in market rates would put modest downward pressure on net interest
income.
19
CREDIT QUALITY
HPCI's exposure to credit risk is managed by personnel of 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 other concentrations. The Bank's credit administration function
employs risk management techniques to ensure that loans adhere to corporate
policy and problem loans are promptly identified. These procedures provide
executive management of the Bank and HPCI with the information necessary to
implement policy adjustments where necessary, and to take corrective actions on
a proactive basis. These procedures also include evaluating the adequacy of the
ALL, which includes 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. In the first quarter of 2003, the
Bank revised and implemented an internal risk grading system for commercial and
commercial real estate credits. The Bank migrated from a single grading, to a
dual risk grading system that separately measures the probability of default and
loss in event of default and provides the Bank with more specificity in the risk
assessment process.
Concentration of credit risk generally arises with respect to
participation interests when a number of underlying loans have borrowers engaged
in similar business activities or 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.
Borrowers obligated in loans underlying HPCI's participation interests
do not represent a particular concentration of similar business activity.
Underlying loans are, however, generally secured by commercial real estate.
HPCI's balance sheet exposure to geographic concentrations directly affects the
credit risk of the loans underlying the participation interests. The majority of
the loans underlying the participation interests are concentrated in Ohio,
Michigan, Indiana, and Kentucky. At June 30, 2003, 94.1% of the underlying
participation interests consisted of loans located in these four states.
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 and may affect the ability of borrowers to make payments of
principal and interest on the underlying loans.
A participation interest acquired by HPCI and an underlying loan
originated by the Bank 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.
Non-performing assets (NPAs) consist of participation interests in
underlying loans that are no longer accruing interest. Underlying commercial and
commercial 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 underlying loan is 90 days past due. Underlying residential real estate
loans are generally placed on non-accrual status within 180 days past due as to
principal and 210 days past due as to interest. 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. The following table shows non-performing assets
at the end of the most recent five quarters:
20
- ----------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS 2003 2002
- ----------------------------------------------------------------------------- --------------------------------------------
(in thousands of dollars) SECOND FIRST FOURTH THIRD SECOND
- ----------------------------------------------------------------------------------------------------------------------------
Participation interests in non-accrual loans
Commercial $ 16,537 $ 33,367 $ 57,112 $ 92,427 $ 106,330
Commercial Real Estate 27,376 27,041 32,979 42,653 41,103
Residential Real Estate 6,316 5,499 6,455 6,150 5,816
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $ 50,229 $ 65,907 $ 96,546 141,230 $ 153,249
- ----------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS AS A % OF TOTAL
PARTICIPATION INTERESTS 0.96% 1.33% 1.92% 2.73% 2.92%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A % OF
NON-PERFORMING ASSETS 219.2% 191.0% 145.37% 118.26% 106.6%
Total NPAs at June 30, 2003 declined to $50.2 million from $65.9
million at March 31, 2003, and $96.5 million at December 31, 2002. As of the
same dates, the underlying non-performing loans represented 0.96%, 1.33%, and
1.92% of total participation interests. At June 30, 2002, non-performing assets
were $153.2 million, or 2.92% of total participation interests. Continued
improvement in the level of participation interest in non-performing loans was
seen in the recent five quarterly periods primarily related to declining
commercial loan balances. The change in non-performing assets during the recent
quarter included participation interests in underlying loans transfering to
nonaccrual status of $11.3 million, offset by charge-offs of $5.0 million, sales
of $6.3 million, and payments received of $15.5 million.
Underlying loans past due ninety days or more but continuing to accrue
interest also declined to $13.5 million at June 30, 2003, from $26.1 million at
December 31, 2002, and $22.7 million at June 30, 2002.
Under the participation and subparticipation agreements, HPCI 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 may institute foreclosure proceedings at
the discretion of HPCI, 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 participation interest in a 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.
LIQUIDITY AND CAPITAL RESOURCES
The objective of HPCI's liquidity management is to ensure the
availability of sufficient cash flows to meet all of its financial commitments.
In managing liquidity, management takes into account various legal limitations
placed on a REIT.
HPCI's principal liquidity needs are to pay operating expenses and
dividends and acquire additional participation interests as the underlying loans
in its portfolio paydown or mature. 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 and new capital contributions. HPCI intends to pay
dividends on its preferred securities and common stock in amounts necessary to
continue to preserve its status as a REIT under the Internal Revenue Code.
At June 30, 2003 and 2002, HPCI maintained interest bearing and
non-interest bearing cash balances with the Bank totaling $482.8 million and
$862.4 million, respectively. HPCI maintains and transacts all of its cash
activity with the Bank and invests available funds in Eurodollar deposits with
the Bank for a term of not more than 30 days.
To the extent that the board of directors determines that additional
funding is required, management 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. Management does not
anticipate that additional funding will be required for at least the next twelve
months.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures for the current period are
found beginning on page 19 of this report, which includes changes in market risk
exposures from disclosures presented in HPCI's 2002 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
HPCI, in conjunction with Huntington, carried out an evaluation, under
the supervision and with the participation of its management, including the
President (Chief Executive Officer or CEO) along with the Vice President (Chief
Financial Officer or CFO), of the effectiveness of its disclosure controls and
procedures as of June 30, 2003, pursuant to Exchange Act Rule 13a-15(b). Based
upon that evaluation, the CEO along with the CFO concluded that HPCI's
disclosure controls and procedures are effective in timely alerting the CEO and
CFO to material information relating to HPCI (including its consolidated
subsidiary) required to be included in its periodic SEC filings.
In addition, management continually evaluates and enhances its internal
control over financial reporting. During the second quarter, HPCI dedicated
additional personnel time to the maintenance of financial records, and
implemented enhancements to its procedures for reporting and reconciliation of
transactions.
22
QUARTERLY STATEMENTS OF INCOME
2003 2002
---------------------- ------------------------------------
(in thousands of dollars) SECOND FIRST FOURTH THIRD SECOND
- -----------------------------------------------------------------------------------------------------------------------
Interest and fee income
Interest on loan participation interests
Commercial $ 2,979 $ 3,955 $ 5,734 $ 5,421 $ 6,440
Commercial real estate 45,879 46,957 50,951 53,512 54,290
Consumer 12,388 13,379 16,838 18,198 18,882
Residential real estate 3,000 2,251 2,807 3,403 3,851
- -----------------------------------------------------------------------------------------------------------------------
Total loan participation interest income 64,246 66,542 76,330 80,534 83,463
Fees from loan participation interests 2,609 2,733 1,988 2,135 2,737
Interest bearing deposits with The Huntington
National Bank 2,015 1,854 3,138 4,033 3,284
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST AND FEE INCOME 68,870 71,129 81,456 86,702 89,484
- -----------------------------------------------------------------------------------------------------------------------
Provision (credit) for loan losses (15,000) -- (20,000) -- 3,000
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR LOAN LOSSES 83,870 71,129 101,456 86,702 86,484
- -----------------------------------------------------------------------------------------------------------------------
Non-interest income
Rental income 1,463 1,806 1,520 1,530 1,533
Collateral fees 146 160 177 191 273
- -----------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,609 1,966 1,697 1,721 1,806
- -----------------------------------------------------------------------------------------------------------------------
Non-interest expense
Servicing fees 1,750 1,575 1,647 1,623 1,715
Depreciation and amortization 1,383 1,401 1,437 1,428 1,450
Loss on disposal of fixed assets -- 325 -- 29 --
Other 95 57 150 72 92
- -----------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 3,228 3,358 3,234 3,152 3,257
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 82,251 69,737 99,919 85,271 85,033
Income taxes 24 24 25 22 25
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE PREFERRED DIVIDENDS 82,227 69,713 99,894 85,249 85,008
DIVIDENDS ON PREFERRED STOCK 4,787 5,074 5,709 5,892 6,231
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 77,440 $ 64,639 $ 94,185 $ 79,357 $ 78,777
=======================================================================================================================
23
PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in
this part have been omitted because they are not applicable or the information
has been previously reported.
Item 4. Submission of Matters to a Vote of Securities Holders
Huntington Preferred Capital, Inc. held its annual meeting of
shareholders on May 12, 2003. At this meeting, the shareholders
approved the following management proposals:
1. Election of directors to serve as Directors until the next Annual
Meeting of shareholders as follows: Richard A. Cheap, Stephen E.
Dutton, R. Larry Hoover, Edward J. Kane, Roger E. Kephart, Michael
J. McMennamin, Thomas P. Reed, James D. Robbins, and John D. Van
Fleet.
2. Ratification of appointment of Ernst & Young LLP to serve as the
company's independent auditor for the year 2003.
There were 13,981,333 votes cast in favor of each nominee for director
and for agenda item no. 2. There were no votes against, no abstentions,
and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Material contracts:
(a) Amended and Restated Loan Participation
Agreement between The Huntington National
Bank and Huntington Preferred Capital
Holdings, Inc.
(b) Amended and Restated Loan Subparticipation
Agreement between Huntington Preferred
Capital Holdings, Inc. and Huntington
Preferred Capital, Inc.
(c) Loan Subparticipation Agreement between
Huntington Preferred Capital Holdings, Inc.
and HPC Holdings-III, Inc.
(d) Loan Subparticipation Agreement between HPC
Holdings-III, Inc. and Huntington Preferred
Capital, Inc.;
(e) Loan Participation Agreement between The
Huntington National Bank and Huntington
Preferred Capital, Inc.;
31.1 Rule 13a-14 (a)/15d-14 (a) Certification - Principal
Executive Officer
31.2 Rule 13a-14 (a)/15d-14 (a) Certification - Principal
Financial Officer
32.1 Section 1350 Certification - Principal Executive
Officer
32.2 Section 1350 Certification - Principal Financial
Officer
(b) Reports on Form 8-K
None.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Huntington Preferred Capital, Inc.
----------------------------------
(Registrant)
Date: August 14, 2003 /s/ Michael J. McMennamin
----------------------------------
Michael J. McMennamin
President
(Principal Executive Officer)
Date: August 14, 2003 /s/ John D. Van Fleet
----------------------------------
John D. Van Fleet
Vice President
(Principal Financial Officer)
25