UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
S
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011
or
£
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file Number
000-33243
Huntington Preferred Capital, Inc.
(Exact name of registrant as specified in its
charter)
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Ohio
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31-1356967
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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41 S. High Street, Columbus, OH
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43287
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area
code
(614) 480-8300
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Noncumulative Exchangeable Preferred Securities,
Class C (Liquidation Amount $25.00 each)
(Title of class)
Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act.
£
Yes
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No
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
£
Yes
S
No
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 (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
S
Yes
£
No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
S
Yes
£
No
Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
£
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
£
Yes
S
No
All common stock is held
by affiliates of the registrant as of December 31, 2011. As of February 29, 2012, 14,000,000 shares of common stock without par
value were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of the close
of business on June 30, 2011: $0.00
Documents Incorporated By Reference
Part III of this Form 10-K
incorporates by reference certain information from the registrant's definitive Information Statement for the 2012 Annual Shareholders'
Meeting.
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HUNTINGTON PREFERRED CAPITAL, INC.
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INDEX
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Part I.
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Item 1.
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Business
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4
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Item 1A.
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Risk Factors
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9
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Item 1B.
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Unresolved Staff Comments
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13
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Item 2.
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Properties
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13
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Item 3.
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Legal Proceedings
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14
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Item 4.
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Mine Safety Disclosures
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14
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Part II.
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Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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14
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Item 6.
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Selected Financial Data
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15
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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16
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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27
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Item 8.
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Financial Statements and Supplementary Data
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27
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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53
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Item 9A.
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Controls and Procedures
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53
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Item 9B.
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Other Information
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53
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Part III.
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Item 10.
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Directors, Executive Officers and Corporate Governance
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53
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Item 11.
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Executive Compensation
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53
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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53
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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53
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Item 14.
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Principal Accountant Fees and Services
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53
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Part IV.
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Item 15.
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Exhibits and Financial Statement Schedules
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54
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Signatures
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55
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Glossary of Acronyms and Terms
The following listing provides a comprehensive
reference of common acronyms and terms used throughout the document:
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ACL
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Allowance for Credit Losses
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Agreements
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Third Amended and Restated Loan Participation Agreement, dated May 12, 2005, between the Bank and HPCI and the Third Amended and Restated Loan Subparticipation Agreement, dated May 12, 2005, between Holdings and HPCI.
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ALPL
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Allowance for Loan Participation Losses
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ASC
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Accounting Standards Codification
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ASU
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Accounting Standards Update
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AULPC
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Allowance for Unfunded Loan Participation Commitments
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Bank
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The Huntington National Bank
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CFPB
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Bureau of Consumer Financial Protection
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Codification
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FASB Accounting Standards Codification
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the Company
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(see HPCI)
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CRE
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Commercial Real Estate
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Dodd-Frank Act
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Dodd-Frank Wall Street Reform and Consumer Protection Act
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EVE
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Economic Value of Equity
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Exchange Act
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Securities Exchange Act of 1934, as amended
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Fannie Mae
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(see FNMA)
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FFO
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Funds from Operations
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FHLB
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Federal Home Loan Bank
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FHLMC
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Federal Home Loan Mortgage Corporation
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FICO
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Fair Isaac Corporation
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FNMA
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Federal National Mortgage Association
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Freddie Mac
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(see FHLMC)
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GAAP
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Generally Accepted Accounting Principles in the United States of America
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Holdings
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Huntington Preferred Capital Holdings, Inc.
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HPCI
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Huntington Preferred Capital, Inc.
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HPCII
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Huntington Preferred Capital II, Inc.
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Huntington
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Huntington Bancshares Incorporated
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IRC
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Internal Revenue Code
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IRS
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Internal Revenue Service
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LGD
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Loss Given Default
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LIBOR
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London Interbank Offered Rate
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LTV
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Loan to Value
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MD&A
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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NCO
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Net Charge-off
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NPAs
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Nonperforming Assets
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OCC
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Office of the Comptroller of the Currency
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OLEM
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Other Loans Especially Mentioned
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PD
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Probability of Default
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RBC
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Risk-Based Capital
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REIT
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Real Estate Investment Trust
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SAD
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Special Assets Division
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SEC
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Securities and Exchange Commission
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TDR
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Troubled Debt Restructuring
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UCS
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Uniform Classification System
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Huntington Preferred Capital, Inc.
PART I
Item 1: Business.
General
When
we refer to “we,” “our,” and “us” in this report, we mean HPCI. We were organized under Ohio
law in 1992 and designated as a REIT in 1998. Our principal business objective is to acquire, hold, and manage mortgage assets
and other authorized investments that will generate net income for distribution to our shareholders. The mortgage assets presently
held by us are participation interests in loans secured by commercial, multi-family or 1-4 family, real estate that were acquired
from the Bank. Two related parties, HPCII and Holdings, own our common stock.
HPCII and Holdings are direct or indirect
subsidiaries of the Bank, a national banking association organized under the laws of the United States and headquartered in Columbus,
Ohio. The Bank is a wholly owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized
under Maryland law and headquartered in Columbus, Ohio. At December 31, 2011 and 2010, the Bank, on a consolidated basis with its
subsidiaries, accounted for over 99% of Huntington’s consolidated assets and 97% of the net income. Thus, for purposes of
presenting consolidated financial statements for the Bank, Management considers information for the Bank and for Huntington to
be substantially the same.
T
he
following chart outlines the relationship among affiliates at December 31, 2011:
General Description of Assets
The
IRC requires a REIT to invest at least 75% of the total value of its assets in real estate assets, which includes residential real
estate loans and CRE loans, including participation interests in residential or CRE loans, mortgage-backed securities eligible
to be held by REITs, cash, cash equivalents which includes receivables, government securities, and other real estate assets (collectively,
REIT Qualified Assets). We must satisfy other asset and income tests in order to remain qualified as a REIT. In addition, we must
satisfy other tests in order to maintain our exemption from the registration requirements of the Investment Company Act. Additional
information regarding these tests is set forth in the Qualification Tests section of the MD&A in Part II, Item 7 of this report.
Commercial
Real Estate Loans
Participation
interests acquired in CRE loans are secured by real property such as industrial and warehouse, retail, office, and multi-family
properties of five units or more. CRE loans may not be fully amortizing. This means that the loans may have a significant principal
balance or balloon payment due on maturity. Additionally, there is no requirement regarding the percentage of any CRE property
that must be leased at the time we acquire a participation interest in a CRE loan secured by such property nor are commercial loans
required to have third party guarantees.
At
December 31, 2011, $3.0 billion, or 95%, of the CRE loans underlying our participation interests in such loans were secured by
a first mortgage or first lien and most bear variable or floating interest rates. Given the quality of our borrowers and the relatively
low current interest rates, we believe that we have a relatively limited exposure to ARM reset risk. The remaining balance is comprised
of $0.1 billion of second, third, and fourth mortgages, and less than $0.1 billion of loans not secured by real property.
Consumer
Loans and Residential Real Estate Loans
We
own participation interests in consumer loans primarily secured by a first or junior mortgage on the borrower’s primary residence.
Many of these mortgage loans were made for reasons such as home improvements or debt consolidation. These loans are predominately
repaid on an installment basis and income is accrued based on the outstanding balance of the loan over original terms that range
from 6 to 360 months. Of the loans underlying the consumer loan participations, 96% bear interest at fixed rates.
We
also own participation interests in adjustable-rate, fixed-rate, conforming, and nonconforming residential real estate loans. Conforming
residential real estate loans comply with the requirements for inclusion in a loan guarantee or purchase program sponsored by either
the FHLMC or FNMA. A majority of the nonconforming residential real estate loans underlying the participation interests acquired
by us to date are nonconforming because they have original principal balances which exceeded the requirements for FHLMC or FNMA
programs, the original terms are shorter than the minimum requirements for FHLMC or FNMA programs at the time of origination, or
generally because they vary in certain other respects from the requirements of such programs other than the requirements relating
to creditworthiness of the mortgagors. The Bank does not originate residential real estate loans that allow negative amortization
or are payment option adjustable-rate mortgages.
Dividend Policy and Restrictions
We expect to pay an aggregate amount
of dividends with respect to the outstanding shares of our capital stock equal to substantially all of our REIT taxable income,
which excludes capital gains. In order to remain qualified as a REIT, we must distribute annually at least 90% of our REIT taxable
income, excluding capital gains, to shareholders. Dividends are declared at the discretion of the board of directors after considering
our distributable funds, financial condition, capital needs, the impact of current and pending legislation and regulations, economic
conditions, tax considerations, our continued qualification as a REIT, and other factors. Although there can be no assurances,
we expect that both our cash available for distribution and our REIT taxable income, excluding capital gains, will be in excess
of amounts needed to pay dividends on the preferred securities in the foreseeable future because substantially all of our real
estate assets and other authorized investments are interest-bearing; all outstanding preferred securities represent, in the aggregate,
only approximately 21% of our capitalization; and we do not anticipate incurring any indebtedness other than permitted indebtedness,
which includes acting as a guarantor of certain obligations of the Bank. Our board of directors has limited any such pledges to
25% of our assets. In addition, we expect our interest-earning assets will continue to exceed the liquidation preference of our
preferred securities. For further discussion regarding guarantor obligations, see Commitments and Contingencies in the Notes to
Financial Statements included in Part II, Item 8 of this report.
Payment of dividends on the preferred
securities could also be subject to regulatory limitations if the Bank fails to be adequately-capitalized for purposes of regulations
issued by the OCC. The Bank currently intends to maintain its capital ratios in excess of the well-capitalized levels under these
regulations. However, there can be no assurance that the Bank will be able to maintain its capital in excess of the well-capitalized
levels. The Bank's risk-weighted assets, as defined for regulatory reporting purposes, increased to $45.7 billion at December 31,
2011, from $43.3 billion at December 31, 2010, as loans and unused loan commitments increased, partially offset by decreases in
securities. At December 31, 2011, the Bank had Tier 1 and Total risk-based capital in excess of the minimum level required to be
considered well-capitalized of $1.6 billion and $1.2 billion, respectively. Capital ratios for the Bank as of December 31, 2011
and 2010 are as follows:
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Table 1 - Capital Ratios for the Bank
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Well-Capitalized
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Adequately-Capitalized
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December 31,
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Minimums
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Minimums
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2011
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2010
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Tier 1 risk-based capital ratio
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6.00
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%
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4.00
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9.30
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%
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8.51
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Total risk-based capital ratio
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10.00
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8.00
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12.60
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12.82
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Tier 1 leverage ratio
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5.00
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4.00
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7.89
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6.97
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Regulatory approval is required prior
to the Bank’s declaration of any dividends in excess of available retained earnings. The amount of dividends that may be
declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for
the preceding two years, less any required transfers to surplus or common stock. Based on a regulatory dividend limitation, the
Bank could not have declared and paid a dividend at December 31, 2011, without regulatory approval. As a subsidiary of the Bank,
HPCI is also restricted from declaring or paying dividends to non-bank subsidiaries or outside shareholders without regulatory
approval. The OCC has approved the payment of HPCI’s dividends on its Class A, B, and C Preferred securities throughout 2010
and 2011. For the foreseeable future, Management intends to request approval for any future dividend; however, there can be no
assurance that the OCC will approve future Class A, B, and C Preferred dividends.
Conflict of Interests and Related
Policies
As of December 31, 2011, the Bank controlled
98.6% of the voting power of our outstanding securities. Accordingly, the Bank has the right to elect all of our directors, including
our independent directors, unless we fail to pay dividends on our Class C and Class E preferred securities. In addition, all of
our officers and six of our nine directors are also officers of Huntington or the Bank. Because of the nature of our relationship
with Holdings, HPCII, and the Bank, conflicts of interest have arisen and may arise in the future with respect to certain transactions,
including without limitation, our acquisition of assets from the Bank or Holdings, our disposition of assets to the Bank or Holdings,
servicing of the loans underlying our participation interests, particularly with respect to loans placed on nonaccrual status,
as well as the modification of the Agreements. Any future modification of these Agreements will require the approval of a majority
of our independent directors. Our board of directors also has broad discretion to revise its investment and operating strategy
without shareholder approval.
It is the intention of us, Holdings,
and the Bank that any agreements and transactions between us and / or our affiliates be fair to all parties and consistent with
market terms for such types of transactions. The requirement in our Articles of Incorporation that certain actions be approved
by a majority of our independent directors also is intended to ensure fair dealings among us, Holdings, the Bank and our respective
affiliates. Our independent directors serve on our audit committee and review material agreements among us, Holdings, the Bank,
and our respective affiliates. Our independent directors have approved an agreement with the Bank with respect to the pledge of
our assets to collateralize the Bank’s borrowings from the FHLB as described in the Risk Factors section of this report.
There are no provisions in our Articles
of Incorporation limiting any of our officers, directors, shareholders, or affiliates from having any direct or indirect financial
interest in any asset to be acquired or disposed of by us or in any transaction in which it has an interest or from engaging in
acquiring, holding, and managing our assets. It is expected that the Bank will have a direct interest in transactions with us including,
without limitation, the sale of assets to us. At December 31, 2011, there were no direct or indirect financial interests in any
asset of ours by any of our officers or directors.
Other Management Policies and
Programs
General
In administering our participation interests
and other authorized investments, the Bank has a high degree of autonomy. We have policies to guide our administration with respect
to the Bank’s underwriting standards, the acquisition and disposition of assets, credit risk management, and certain other
activities. These policies, which are discussed below, may be amended or revised at the discretion of our board of directors, subject
in certain circumstances, to the approval of a majority of our independent directors, but without a vote of our shareholders.
Underwriting Standards
The Bank has represented to Holdings,
and Holdings has represented to us, that the loans underlying our participation interests were originated in accordance with underwriting
policies customarily employed by the Bank during the period in which the loans were originated. The Bank emphasizes lending to
borrowers that are located where the Bank or its affiliates have branches or loan origination offices.
Some of the loans, however, were obtained
by the Bank in connection with the acquisition of other financial institutions. Upon renewal, these loans must meet the Bank’s
underwriting standards prior to the purchase of any participation or interest by us.
Asset Acquisition and Disposition Policies
It is our policy to purchase from the Bank
participation interests generally in loans that:
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are performing, meaning they have no more than two
payments past due;
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are in accruing status;
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are not made to related parties of ours, Huntington,
or the Bank;
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are secured by real property such that they are REIT
qualifying; and
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have not been previously sold, securitized, or charged-off
either in whole or in part.
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Our policy also allows for investment
in assets that are not REIT-Qualified Assets up to but not exceeding the statutory limitations imposed on organizations that qualify
as REITs. Management, under this policy, also has the discretion to purchase other assets to maximize return to shareholders.
It is anticipated that we will receive
participation interests in additional real estate loans from the Bank on a basis consistent with secondary market standards pursuant
to the loan participation and subparticipation agreements, out of proceeds received in connection with the repayment or disposition
of loan participation interests in our portfolio. Although we are permitted to do so, we have no present plans or intentions to
purchase loans or loan participation interests from unaffiliated third parties. It is currently anticipated that participation
interests in additional loans acquired by us will be of the types described above under the heading General Description of Assets,
although we are not precluded from purchasing additional types of loans or loan participation interests.
We may acquire limited amounts of participation
interests in loans that are not commercial or residential loans, such as automobile loans and equipment loans, or other authorized
investments. Although currently there is no intention to acquire any mortgage-backed securities representing interests in or obligations
backed by pools of mortgage loans that will be secured by single-family residential, multi-family, or commercial real estate properties
located throughout the United States, we are not restricted from doing so. We do not intend to acquire any interest-only or principal-only
mortgage-backed securities. We also will not be precluded from investing in mortgage-backed securities when the Bank is the sponsor
or issuer. At December 31, 2011, we did not hold any mortgage-backed securities.
We currently anticipate that we will
not acquire the right to service any loan underlying a participation interest that we acquire in the future and that the Bank will
act as servicer of any such additional loans. We anticipate that any servicing arrangement that we enter into in the future with
the Bank will contain fees and other terms that would be substantially equivalent to or more favorable to us than those that would
be contained in servicing arrangements entered into with third parties unaffiliated with us.
Our policy is not to acquire any participation
interest in any CRE loan that constitutes more than 5.0% of the total book value of our real estate assets at the time of acquisition.
In addition, our policy prohibits the retention of any loan or any interest in a loan other than an interest resulting from the
acquisition of mortgage-backed securities, which loan is collateralized by real estate located in West Virginia or that is made
to a municipality or other tax-exempt entity.
Our policy is to reinvest the proceeds
of our assets in other interest-earning assets such that our FFO, which represents cash flows from operations, over any period
of four fiscal quarters will equal or exceed 150% of the amount required to pay annual dividends on the Class A, Class C, Class
D, and Class E preferred securities, except as may be necessary to maintain our status as a REIT. FFO is equal to net cash provided
by operating activities as reflected in our statements of cash flows. For the years ended December 31, 2011, 2010, and 2009, our
FFO were $142.5 million, $149.7 million, and $169.9 million, respectively. These amounts exceeded the minimum requirement of 150%
of dividends on Class A, Class C, Class D, and Class E securities of $16.2 million, $16.4 million, and $19.1 million, for the same
periods, respectively. Our Articles of Incorporation provide that we cannot amend or change this policy with respect to the reinvestment
of proceeds without the consent or affirmative vote of the holders of at least two-thirds of the Class C preferred securities and
two-thirds of the Class E preferred securities, voting as separate classes.
Other Policies
We intend to operate in a manner that
will not subject us to regulation under the Investment Company Act. Unless otherwise approved by our board of directors, we do
not intend to:
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invest in the securities of other issuers for the
purpose of exercising control over such issuers;
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underwrite securities of other issuers;
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actively trade in loans or other investments;
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offer securities in exchange for property; or
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make loans to third parties, including, our officers,
directors, or other affiliates.
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The Investment Company Act exempts entities
that, directly or through majority-owned subsidiaries, are primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate (Qualifying Interests). Under current interpretations by the staff of
the SEC, in order to qualify for this exemption, we must maintain at least 55% of our assets in Qualifying Interests and also may
be required to maintain an additional 25% in Qualifying Interests or other real estate-related assets. The assets that we may acquire
therefore may be limited by the provisions of the Investment Company Act. We have established a policy, which we monitor monthly,
of limiting authorized investments that are not Qualifying Interests to no more than 20% of the value of our total assets.
We are not prohibited by our Articles of Incorporation
from repurchasing our capital securities; however, any such action would be taken only in conformity with applicable federal and
state laws and regulations and the requirements for qualifying as a REIT.
We distribute to our shareholders, in accordance
with the Exchange Act, annual reports containing financial statements prepared in accordance with GAAP and certified by our independent
registered public accounting firm. Our Articles of Incorporation provide that we will maintain our status as a reporting company
under the Exchange Act for so long as any of the Class C preferred securities are outstanding and held by unaffiliated shareholders.
We currently make investments and operate our
business in such a manner consistent with the requirements of the IRC to qualify as a REIT. However, future economic, market, legal,
tax, or other considerations may cause our board of directors, subject to approval by a majority of our independent directors,
to determine that it is in our best interest and the best interest of our shareholders to revoke our REIT status. The IRC prohibits
us from electing REIT status for the five taxable years following the year of such revocation.
Employees
At December 31, 2011, we had six executive
officers and two additional officers, but no employees. Day-to-day activities and the servicing of the loans underlying our participation
interests are administered by the Bank. All of our officers are also officers or employees of Huntington, the Bank, and / or Holdings.
We maintain corporate records and audited financial statements that are separate from those of Huntington, the Bank, and Holdings.
Although there are no restrictions or
limitations contained in our Articles of Incorporation or bylaws, we do not anticipate that our officers or directors will have
any direct or indirect financial interest in any asset to be acquired or disposed of by us or in any transaction in which we have
an interest or will engage in acquiring, holding, and managing assets, other than as borrowers or guarantors of loans underlying
our participation interests. In cases where our officers or directors do have a direct or indirect financial interest as borrower
or guarantors of loans underlining our participation interests, the loans would be on substantially the same terms, including interest
rates and collateral on loans, as those prevailing at the time for comparable transactions with others and would not involve more
than the normal risk of collectability or present other unfavorable features.
Servicing
The loans underlying our participation
interests are serviced by the Bank pursuant to the terms of (1) the participation agreement between the Bank and us, (2) the participation
agreement between the Bank and Holdings, and (3) the subparticipation agreement between Holdings and us.
The Agreements require the Bank to service
the loans underlying our participation interests in a manner substantially the same as for similar work performed by the Bank for
transactions on its own behalf. The Bank or its affiliates collect and remit principal and interest payments, maintain perfected
collateral positions, and submit and pursue insurance claims. The Bank and its affiliates also provide accounting and reporting
services required by us for our participation interests. The Bank may, in accordance with our guidelines, dispose of any loans
that become classified, are placed in a nonperforming status, or are renegotiated due to the financial deterioration of the borrower.
The Bank is required to pay all expenses related to the performance of its duties under the Agreements, including any payment to
its affiliates for servicing the loans. The Bank or its affiliates may, in accordance with our guidelines, institute foreclosure
proceedings, exercise any power of sale contained in any mortgage or deed of trust, obtain a deed in lieu of foreclosure, or otherwise
acquire title to a mortgaged property underlying a real estate loan by operation of law or otherwise in accordance with the terms
of the Agreements.
Under the Agreements, the Bank has the
right, in the exercise of its reasonable discretion and in accordance with prudent banking practices, to give consents, waivers,
and modifications of the loan documents to the same extent as if the loans were wholly owned by the Bank; provided, however, that
the Bank shall not grant or agree to any (1) waiver of any payment default, (2) extension of the maturity, (3) reduction of the
rate or rates of interest with respect to the loans, (4) forgiveness or reduction of the principal sum of the loans, (5) increase
the lending formula or advance rates, (6) waiver of any right to elect to foreclose on any loan in default, or (7) amendment or
modification of the financial covenants contained in the loan documents that would make such financial covenants less restrictive
with respect to any of the borrowers without the prior written consent of Holdings or us, except that the Bank shall be permitted
to grant or agree to any of such consents, waivers, or modifications pursuant to and in accordance with guidelines and limitations
provided by Holdings or us to the Bank in writing.
The Bank has the right to accept payment
or prepayment of the whole principal sum and accrued interest in accordance with the terms of the loans, waive prepayment charges
in accordance with the Bank's policy for loans in which no participation interest has been granted, and accept additional security
for the loans. No specific term is specified in the Agreements; the Agreements may be terminated by mutual agreement of the parties
at any time, without penalty. Due to the relationship among us, Holdings, and the Bank, it is not anticipated that these agreements
will be terminated by any party in the foreseeable future.
The Bank, in its role as servicer under
the terms of the loan participation agreements, receives a loan-servicing fee intended as compensation to service the underlying
loan. The amount and terms of the fee are determined by mutual agreement of the Bank, Holdings, and us during the term of the Agreements.
The fees and other terms contained in the servicing arrangements are substantially equivalent to, but may be more favorable to
us, than those that would be attained in agreements with unaffiliated third parties. Additional information regarding the servicing
fee rates are set forth under the caption Noninterest Income and Noninterest Expense of the MD&A in Part II, Item 7 of this
report.
Competition
Competition that impacts Huntington’s
ability to attract new business, particularly in the form of loans secured by real estate, also affects our availability to invest
in participation interests in such loans. Although there has been consolidation in the financial services industry, Huntington’s
markets remain competitive. Huntington competes with other banks and financial services companies such as savings and loans, credit
unions, finance and trust companies, mortgage banking companies, and brokerage firms, both within and outside of our primary market
areas. Internet companies are also providing nontraditional, but increasingly strong, competition for the Bank’s borrowers,
depositors, and other customers.
Segment Reporting
Our operations consist of acquiring, holding,
and managing our participation interests. Accordingly, we only operate in one segment.
Regulatory Matters
Because we are a public company, we are subject
to regulation by the SEC. The SEC has established four categories of issuers for the purpose of filing periodic and annual reports.
Under these regulations, we are considered to be a non-accelerated filer and, as such, must comply with SEC reporting requirements.
We are an indirect subsidiary of the Bank and,
therefore, regulatory authorities have the right to examine us and our activities and, under certain circumstances, to impose restrictions
on the Bank or us. The Bank is subject to examination and supervision by the OCC. In addition to the impact of federal and state
regulation, the Bank is affected significantly by the actions of the Federal Reserve Board as it attempts to control the money
supply and credit availability in order to influence the economy.
Item 1A: Risk Factors
We are subject to a number of risks, many of
which are outside of Management’s control, though Management strives to manage those risks while optimizing returns. In addition
to the other information included in this report, readers should carefully consider that the following important factors, among
others, could materially impact our business, future results of operations, and future cash flows.
A
decline in the Bank’s capital levels may result in our preferred securities being subject to a conditional exchange into
Bank preferred securities at a time when the Bank’s financial condition is deteriorating. Consequently, the likelihood of
dividend payments, as well as the liquidation preference, voting rights, and liquidity of securities would be negatively impacted.
In addition, this exchange would most likely be a taxable event to shareholders.
The
OCC, as the primary regulator of the Bank, has the ability to cause the exchange of our Class C preferred securities if:
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the Bank becomes under-capitalized;
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the OCC, in its sole discretion, anticipates that
the Bank will become under-capitalized in the near term; or
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the Bank is placed in conservatorship or receivership.
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None
of the holders of our Class C preferred securities, us, or the Bank can require or force such an exchange. In the event of an OCC-directed
exchange, each holder of our Class C preferred securities would receive a Class C preferred security from the Bank for each Class
C preferred security of HPCI. This would represent an investment in the Bank and not in us. Under these circumstances, there would
likely be a significant loss associated with this investment. Also, since our preferred shareholders would become preferred shareholders
of the Bank at a time when the Bank’s financial condition has deteriorated, it is unlikely that the Bank would be in a financial
position to make any dividend payments on the Bank’s preferred securities.
In
the event of a liquidation of the Bank, the claims of depositors and creditors of the Bank are entitled to priority in payment
over the claims of holders of equity interests, such as the Bank preferred securities. Therefore, preferred shareholders likely
would receive substantially less than would have been received had the preferred securities not been exchanged for Bank preferred
securities.
The
exchange of the preferred securities for Bank preferred securities would most likely be a taxable event to shareholders under the
IRC. In that event, shareholders would incur a gain or loss as measured by the difference between the basis in the preferred securities
and the fair market value of the Bank preferred securities received in the exchange.
There
are differences in the terms of the Bank preferred securities and the terms of our preferred securities, such as the Bank preferred
securities do not have any voting rights or any right to elect independent directors if dividends are missed. In addition, the
Bank preferred securities would not be listed on the NASDAQ Stock Market or any exchange and a market for them may never develop.
The
Bank would be considered to be under-capitalized if: its Tier 1 RBC ratio is below 4%, its Total RBC ratio is below 8% or its Tier
1 leverage ratio is below 4%. The Bank currently intends to maintain its capital ratios in excess of the levels it needs to be
considered to be Well-capitalized under regulations issued by the OCC. These guidelines, as well as the Bank’s regulatory
capital ratios for December 31, 2011, are discussed in Table 2 of Part I, Item 1 of this report.
Legislative
and regulatory actions taken now or in the future may significantly affect our financial condition, results of operations, liquidity,
or stock price.
Current economic conditions, particularly in
the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny
of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly
referred to as the financial crisis. In addition to the previously enacted governmental assistance programs designed to stabilize
and stimulate the U.S. economy, recent economic, political, and market conditions have led to numerous programs and proposals to
reform the financial regulatory system and prevent future crises.
On July 21, 2010, the Dodd-Frank Act was signed
into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes
the new federal CFPB, and requires the bureau and other federal agencies to implement many new and significant rules and regulations.
At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact
our business. Compliance with these new laws and regulations may result in additional costs, which could be significant, and may
have a material and adverse effect on our results of operations.
These
programs subject the Bank, and other financial institutions that participate in them, to additional restrictions, oversight, and
costs that may have an adverse impact on our business, financial condition, or results of operations. In addition, new proposals
for legislation continue to be introduced in the U.S. Congress that could further increase regulation of the financial services
industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent
with historical practices, including as related to compensation, interest rates, the impact of bankruptcy proceedings on consumer
real property mortgages, and otherwise. Federal and state regulatory agencies also frequently adopt changes to their regulations
and / or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future
legislation, regulation, or its application. Compliance with such current and potential regulation and scrutiny may significantly
increase our costs, negatively impact the recoverability of certain of our recorded assets, and limit our ability to pursue business
opportunities in an efficient manner.
A sustained weakness or weakening in business
and economic conditions generally or specifically in the markets in which we do business could adversely affect our business and
operating results.
Our
business could be further adversely affected to the extent that the above-mentioned conditions continue to exert direct or indirect
impacts on us or on our customers and counterparties. These conditions could lead, for example, to one or more of the following:
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A decrease in the demand for loans;
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An increase in the number of customers and counterparties
who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to us.
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An
increase in the number of delinquencies, bankruptcies, or defaults could negatively impact our business and result in a higher
level of related nonperforming assets, net charge-offs, and provision for credit losses. The markets we serve are dependent, indirectly,
on industrial businesses and are vulnerable to adverse changes in economic conditions in these markets.
We
rely on the Bank’s credit underwriting standards and on-going process of credit assessment. There can be no assurance that
the Bank’s standards and assessments will protect us from significant credit losses on loans underlying our participation
interests.
To
date, we have purchased, and intend to continue to purchase, all of our participation interests in loans originated by or through
the Bank and its affiliates. After we purchase the participation interests, the Bank continues to service the underlying loans.
Accordingly, in managing our credit risk, we rely on the Bank’s credit underwriting standards and on-going process of credit
assessment. There can be no assurance that the Bank’s credit underwriting standards and its on-going process of credit assessment
will protect us from significant credit losses on loans underlying our participation interests.
Our
ACL level may prove to be inappropriate or be negatively affected by credit risk exposures which could materially adversely affect
our net income and capital.
Our ACL of $84.8 million at December
31, 2011, represented Management’s estimate of probable losses inherent in our loan participation interest portfolio
as well as our unfunded loan participation commitments. The ACL is periodically reviewed for appropriateness. In doing so,
we consider economic conditions and trends, collateral values, and credit quality indicators, such as past
charge-off experience, levels of past due loans, and NPAs. There is no certainty that the ACL will be appropriate over time
to cover losses in the portfolio because of unanticipated adverse changes in the economy, market conditions, or events
adversely affecting specific customers, industries, or markets. If the credit quality of the Bank’s customer base
materially decreases, if the risk profile of a market, industry, or group of customers changes materially, or if the ACL is
not appropriate, our net income, capital and ability to pay dividends could be materially adversely affected which, in turn,
could have a material negative adverse effect on our financial condition and results of operations.
We
have no control over changes in interest rates and such changes could negatively impact our financial condition, results of operations,
and ability to pay dividends.
Interest
rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and
political conditions. Conditions such as inflation, recession, unemployment, money supply, and other factors beyond our control
may also affect interest rates. Our income consists primarily of interest and fees on loans underlying our participation interests.
Changes in interest rates also can affect the value of our loan participation interests. At December 31, 2011, 22% of the loans
underlying our participation interests, as measured by the aggregate outstanding principal amount, bore interest at fixed rates
and the remainder bore interest at adjustable rates. As interest rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, and the increased payment increases the potential for default. At the same time, the marketability of
the underlying property may be adversely affected by higher interest rates. In a declining interest rate environment, there may
be an increase in prepayments on the loans underlying our participation interests as the borrowers refinance their mortgages at
lower interest rates. Under these circumstances, we may find it more difficult to acquire additional participation interests with
rates sufficient to support the payment of the dividends on the preferred securities. Because the rate at which dividends are required
to be paid on the Class A and C preferred securities is fixed, there can be no assurance that a declining interest rate environment
would not adversely affect our ability to pay full, or even partial, dividends on our preferred securities.
Bank
regulators may limit our ability to implement our business plan and may restrict our ability to pay dividends.
Because
we are an indirect subsidiary of the Bank, regulatory authorities have the right to examine us and our activities and, under certain
circumstances, impose restrictions on the Bank or us. These restrictions could impact our ability to conduct business and could
adversely affect our financial condition and results of operations.
If
the OCC determines that the Bank’s relationship with us results in an unsafe and unsound banking practice, the OCC and other
regulators of the Bank have the authority to restrict our ability to transfer assets, restrict our ability to make distributions
to shareholders or redeem preferred securities, or require the Bank to sever its relationship with us or divest its ownership in
us. Certain of these actions by the OCC would likely result in our failure to qualify as a REIT. The payment of dividends on the
preferred securities could also be subject to regulatory limitations if the Bank becomes under-capitalized for purpose of regulations
issued by the OCC, as described under the heading Dividend Policy and Restrictions in Part 1, Item 1 of this report.
Legal
and regulatory limitations on the payment of dividends by the Bank could also affect our ability to pay dividends to unaffiliated
third parties, including the preferred shareholders. Since HPCI, HPCII, and Holdings are members of the Bank’s consolidated
group, payment of common and preferred dividends by the Bank and / or any member of its consolidated group to unaffiliated third
parties, including payment of dividends to the shareholders of preferred securities, would require regulatory approval if aggregate
dividends on a consolidated basis exceed certain limitations. Regulatory approval is required prior to the Bank’s declaration
of any dividends in excess of available retained earnings. The amount of dividends the Bank may declare without regulatory approval
is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any
required transfers to surplus or common stock.
At December 31, 2011, the Bank could
not declare or pay dividends without regulatory approval. As a subsidiary of the Bank, we are also restricted from declaring or
paying dividends to our non-bank subsidiaries or outside shareholders without regulatory approval. The OCC has approved the payment
of dividends on our preferred securities throughout 2010 and 2011. For the foreseeable future, Management intends to request approval
for any future dividends. However, there can be no assurance that the OCC will approve future dividends.
We
could suffer adverse tax consequences if we failed to qualify as a REIT.
No
assurance can be given that we will be able to continue to operate in such a manner so as to remain qualified as a REIT. Qualification
as a REIT involves the application of highly technical and complex tax law provisions for which there are only limited judicial
or administrative interpretations and involves the determination of various factual matters and circumstances not entirely within
our control. No assurance can be given that new legislation or new regulations, administrative interpretations, or court decisions
will not significantly change the tax laws in the future with respect to qualification as a REIT or the federal income tax consequences
of such qualification in a way that would materially and adversely affect our ability to operate. Any such new legislation, regulation,
interpretation, or decision could be the basis of a tax event that would permit us to redeem all or any preferred securities. If
we were to fail to qualify as a REIT, the dividends on preferred securities would not be deductible for federal income tax purposes.
We would face a tax liability that could consequently result in a reduction in our net earnings after taxes. A reduction in net
earnings after taxes could adversely affect our ability to add interest-earning assets to our portfolio and pay dividends to our
preferred security holders.
If
in any taxable year we fail to qualify as a REIT, unless we are entitled to relief under certain statutory provisions, we would
also be disqualified from treatment as a REIT for the five taxable years following the year our qualification was lost. As a result,
the amount of funds available for distribution to shareholders would be reduced for the year or years involved.
We
are dependent, in virtually every phase of our operations, on the diligence and skill of the officers and employees of the Bank,
the Bank’s ability to retain key employees, and our relationship with the Bank may create potential conflicts of interest.
The
Bank is involved in virtually every aspect of our existence. As of December 31, 2011, all of our officers and six of our nine directors
are also officers or directors of the Bank and / or its affiliates. Officers that are common with the Bank devote less than a majority
of their time to managing our business. The Bank has the right to elect all of our directors, including independent directors,
except under limited circumstances if we fail to pay dividends. The Bank and its affiliates have interests that are not identical
to ours and, therefore, conflicts of interest could arise in the future with respect to transactions between or among the Bank,
Holdings, HPCII, and us.
The
Bank administers our day-to-day activities under the terms of the Agreements. The parties to these agreements are all affiliated
and, accordingly, these agreements were not the result of arms-length negotiations and may be modified at any time in the future.
The Bank, through its control of voting power of our outstanding securities, controls the election of all of the directors, including
independent directors. Therefore, we cannot assure shareholders that modifications to the Agreements will be on terms as favorable
to us as those that could have been obtained from unaffiliated third parties.
Huntington,
the owner of all the Bank’s common shares, may have investment goals and strategies that differ from those of the holders
of our preferred securities. In addition, neither Huntington nor the Bank has a policy addressing the treatment of conflicts regarding
new business opportunities. Thus, new business opportunities identified by Huntington or the Bank may be directed to affiliates
other than us. Our board of directors has broad discretion to revise its investment and operating strategy without shareholder
approval. The Bank, through its direct and indirect ownership of Holdings and HPCII’s common stock and their ownership of
our common stock, controls the election of all of our directors, including independent directors. Consequently, our investment
and operating strategies will largely be directed by Huntington and the Bank.
We
are dependent on the diligence and skill of the officers and employees of the Bank for the selection and structuring of the loans
underlying our participation interests and other authorized investments. The Bank selected the amount, type, and price of loan
participation interests and other assets that were acquired from the Bank and its affiliates. We anticipate that we will continue
to acquire all or substantially all of our assets from the Bank or its affiliates for the foreseeable future. Neither we nor the
Bank obtained any third-party valuations at the time of acquisition by us. We do not intend to do so in the future. Policies to
guide the acquisition and disposition of assets may be revised or exceptions may be approved at the discretion of the board of
directors without a vote of shareholders. Changes in or exceptions made to these policies could permit the acquisition of lower
quality assets.
We
are dependent on the Bank and others for monitoring and servicing the loans underlying our participation interests. Conflicts could
arise as part of such servicing, particularly with respect to loans that are placed on nonaccrual status. We have no control over
the actions of the Bank in pursuing collection of any nonperforming assets. Our ability to make timely payments of dividends on
the preferred and common securities will depend in part upon the Bank’s prompt collection efforts on our behalf.
The
Bank may seek to exercise its influence over our affairs so as to cause the sale of our assets and their replacement by lesser
quality assets acquired from the Bank or elsewhere. This could adversely affect our business and our ability to make timely payment
of dividends on the preferred and common securities.
A change of control of Huntington could
result in a change in the way that we operate and this could have an adverse impact on our financial position and future results
of operations.
Our
assets may be used to guarantee certain of the Bank's obligations that will have a preference over the holders of our preferred
securities.
The
Bank is eligible to obtain advances from various federal and government-sponsored agencies, such as the FHLB. Any such agency that
makes advances to the Bank where we have acted as a guarantor or pledged our assets as collateral will have a preference over the
holders of our preferred securities. These holders would receive their liquidation preference only to the extent there are assets
available after satisfaction of our indebtedness and other obligations under any such guarantee or pledge, if any. Any such guarantee
and / or pledge in connection with the Bank’s advances from the FHLB falls within the definition of Permitted Indebtedness
(as defined in our Articles of Incorporation) and, therefore, we are not required to obtain the consent of the holders of our common
or preferred securities for any such guarantee and / or pledge.
Currently,
our assets have been used to collateralize only one such facility. The Bank has a line of credit from the FHLB, limited to $3.4
billion as of December 31, 2011, based on the Bank’s holdings of FHLB stock. As of that same date, the Bank had borrowings
of $0.4 billion under the facility.
We
have entered into an amended and restated agreement with the Bank with respect to the pledge of our assets to collateralize the
Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk our assets in excess of an aggregate
amount or percentage of such assets established by our board of directors, including a majority of our independent directors. The
pledge limit was established by our board at 25% of total assets, or approximately $0.9 billion as of December 31, 2011. This pledge
limit may be changed in the future by the board of directors, including a majority of our independent directors. As of December
31, 2011, our total loans pledged consisted of one-to-four family residential mortgage portfolio, which aggregated to $0.4 billion
as of that same date. A default by the Bank on its obligations to the FHLB could adversely affect our business and our ability
to make timely dividend payments on preferred and common securities.
We may redeem the Class C and Class
E preferred securities upon the occurrence of certain special events and holders of such securities may receive a redemption amount
that is different than the then current market price for the securities.
At any time following the occurrence
of certain special events, we will have the right to redeem the Class C and Class E preferred securities in whole, subject to the
prior written approval of the OCC. The occurrence of such an event will not, however, give a preferred shareholder any right to
request that such Class C or Class E preferred securities be redeemed. A special event includes:
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a tax event which occurs when we receive an opinion
of counsel to the effect that, as a result of a judicial decision or administrative pronouncement, ruling, or other action or
as a result of certain changes in the tax laws, regulations, or related interpretations, there is a significant risk that dividends
with respect to our capital stock will not be fully deductible by us or we will be subject to a significant amount of additional
taxes or governmental charges;
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an investment company event which occurs when we receive
an opinion of counsel to the effect that, as a result of certain changes in the applicable laws, regulations, or related interpretations,
there is a significant risk that we will be considered an investment company under the Investment Company Act of 1940; and
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a regulatory capital event which occurs when, as a
result of certain changes in the applicable laws, regulations, or related interpretations, there is a significant risk that our
Class C preferred securities will no longer constitute Tier 1 capital of the Bank (other than as a result of limitations on the
portion of Tier 1 capital that may consist of minority interests in subsidiaries of the Bank).
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In the event we redeem our Class
C or Class E preferred securities, holders of such securities will be entitled to receive the redemption price of $25.00 per share
for Class C securities, and $250.00 per share for Class E securities, plus accrued and unpaid dividends on such shares. The redemption
price may differ from the market price of the Class C preferred securities.
Item 1B: Unresolved Staff Comments
None.
Item 2: Properties
We do not own any material physical property
or real estate.
Item 3: Legal Proceedings
We are not the subject of any material
litigation. We are not currently involved in or, to Management’s knowledge, currently threatened with any material litigation
with respect to the loans underlying our participation interests other than routine litigation arising in the ordinary course of
business.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5: Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
There
is no established public trading market for our common stock. As of February 29, 2012, there were two common shareholders of record,
both of which are affiliates of the Bank. There were no dividends declared to common shareholders in 2011. The 2010 distributions
made in January 2011 met the 2011 REIT distribution requirements. In 2010, HPCI declared dividends to common shareholders of $149.9
million. There were no dividends declared to common shareholders in 2009. In addition,
we had return of capital distributions
on common stock of $0.0 million, $350.1 million, and $500.0 million, for the years ended December 31, 2011, 2010, and 2009, respectively.
These dividends and distributions were either accrued or paid by the last business day in each year.
Information regarding restrictions
on dividends, as required by this item, is set forth in Part I, Item 1 Dividend Policy and Restrictions.
We did not sell any unregistered
equity securities during the year ended December 31, 2011. Neither we nor any affiliated purchaser (as defined by Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934) repurchased any equity securities of us in any month within the fourth quarter ended
December 31, 2011.
Item 6: Selected Financial Data
The table
below represents selected financial data as of and for the five years ended December 31:
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Table 2 - Selected Financial
Data
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(dollar
amounts in thousands)
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2011
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2010
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2009
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2008
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2007
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STATEMENTS OF INCOME:
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Interest and fee income
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$
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147,351
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$
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153,521
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$
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167,485
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$
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254,549
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$
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324,811
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Provision (reduction in allowance) for credit losses
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(37,529
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)
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(43,350
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)
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171,926
|
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(14,855
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)
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3,390
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Noninterest income
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1,612
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2,106
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2,569
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3,064
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|
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12,042
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Noninterest expense
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7,664
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8,622
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|
|
|
10,116
|
|
|
|
11,689
|
|
|
|
15,587
|
|
|
Income (loss) before provision for income taxes
|
|
$
|
178,828
|
|
|
$
|
190,355
|
|
|
$
|
(11,988
|
)
|
|
$
|
260,779
|
|
|
$
|
317,876
|
|
|
Provision for income
taxes
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,617
|
|
|
Net income (loss)
|
|
$
|
178,828
|
|
|
$
|
190,355
|
|
|
$
|
(11,988
|
)
|
|
$
|
260,779
|
|
|
$
|
316,259
|
|
|
Dividends declared
on preferred shares
|
|
|
12,006
|
|
|
|
12,273
|
|
|
|
16,195
|
|
|
|
36,521
|
|
|
|
49,643
|
|
|
Net income (loss)
applicable to common shares
|
|
$
|
166,822
|
|
|
$
|
178,082
|
|
|
$
|
(28,183
|
)
|
|
$
|
224,258
|
|
|
$
|
266,616
|
|
|
Dividends and distributions declared on common
stock
|
|
$
|
---
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
225,000
|
|
|
$
|
300,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET HIGHLIGHTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan participation interests
|
|
$
|
3,499,830
|
|
|
$
|
3,403,015
|
|
|
$
|
3,717,222
|
|
|
$
|
4,343,035
|
|
|
$
|
4,276,764
|
|
|
All other assets
|
|
|
279,221
|
|
|
|
709,775
|
|
|
|
726,133
|
|
|
|
345,533
|
|
|
|
189,110
|
|
|
Total assets
|
|
|
3,779,051
|
|
|
|
4,112,790
|
|
|
|
4,443,355
|
|
|
|
4,688,568
|
|
|
|
4,465,874
|
|
|
Total shareholders' equity
|
|
|
3,777,938
|
|
|
|
3,611,116
|
|
|
|
3,933,034
|
|
|
|
4,461,217
|
|
|
|
4,461,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan participation interests
|
|
$
|
3,445,029
|
|
|
$
|
3,513,872
|
|
|
$
|
3,966,491
|
|
|
$
|
4,311,659
|
|
|
$
|
4,289,099
|
|
|
Total assets
|
|
|
3,698,115
|
|
|
|
4,012,128
|
|
|
|
4,503,403
|
|
|
|
4,588,530
|
|
|
|
4,653,184
|
|
|
Total shareholders' equity
|
|
|
3,690,017
|
|
|
|
3,972,162
|
|
|
|
4,422,497
|
|
|
|
4,562,126
|
|
|
|
4,617,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KEY RATIOS AND STATISTICS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield on interest earning assets
|
|
|
3.92
|
%
|
|
|
3.73
|
%
|
|
|
3.69
|
%
|
|
|
5.51
|
%
|
|
|
6.98
|
%
|
|
Return on average assets
|
|
|
4.84
|
|
|
|
4.74
|
|
|
|
(0.26
|
)
|
|
|
5.68
|
|
|
|
6.80
|
|
|
Return on average equity
|
|
|
4.85
|
|
|
|
4.79
|
|
|
|
(0.27
|
)
|
|
|
5.72
|
|
|
|
6.85
|
|
|
Average shareholders' equity to average assets
|
|
|
99.78
|
|
|
|
99.00
|
|
|
|
98.20
|
|
|
|
99.42
|
|
|
|
99.23
|
|
|
Preferred dividend coverage ratio
|
|
|
14.89
|
x
|
|
|
15.51
|
x
|
|
|
(0.74
|
)x
|
|
|
7.14
|
x
|
|
|
6.40
|
x
|
All of our common stock is owned
by HPCII and Holdings and, therefore, net income (loss) per common share information is not presented. At the end of all years
presented, we did not have any interest-bearing liabilities and, therefore, no liabilities are presented under this item.
Item 7: Management’s Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
We
are
an Ohio corporation operating as a REIT for federal income tax purposes. Our principal business objective is to acquire,
hold, and manage mortgage assets and other authorized investments that will generate net income for distribution to our shareholders.
We are a party to a Third Amended and
Restated Loan Subparticipation Agreement with Holdings and a Second Amended and Restated Loan Participation Agreement with the
Bank. The Bank is required, under the Agreements, to service our loan portfolio in a manner substantially the same as for similar
work for transactions on our own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral
positions, and submits and pursues insurance claims. In addition, the Bank provides to us accounting and reporting services as
required. The Bank is required to adhere to our policies relating to the relationship between us and the Bank and to pay all expenses
related to the performance of the Bank’s duties under the participation and subparticipation agreements. All of our participation
interests to date were acquired directly or indirectly from the Bank.
Forward-looking Statements
This report, including MD&A, contains certain
forward-looking statements, including certain plans, expectations, goals, projections, and statements, which are subject to numerous
assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about
beliefs and expectations, are forward-looking statements. The forward-looking statements are intended to be subject to the safe
harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and
the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from
those contained or implied by such statements for a variety of factors including: (1) worsening of credit quality performance due
to a number of factors such as the underlying value of the collateral could prove less valuable than otherwise assumed and assumed
cash flows may be worse than expected; (2) changes in economic conditions; (3) movements in interest rates; (4) competitive pressures
on the Bank’s product pricing and services; (5) success, impact, and timing of the Bank’s business strategies; (6)
changes in accounting policies and principles and the accuracy of our assumptions and estimates used to prepare our financial statements;
(7) extended disruption of vital infrastructure; and (8) the nature, extent, and timing of governmental actions and reforms, including
the Dodd-Frank Act, as well as future regulations which will be adopted by the relevant regulatory agencies, including the newly
created CFPB, to implement the Dodd-Frank Act’s provisions.
All forward-looking statements speak only as
of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking
statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect
the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant
risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Critical Accounting Policies and Use of Significant
Estimates
Our financial statements are prepared
in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires Management to establish critical
accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in our
financial statements. Note 1 to the Financial Statements included in this report lists significant accounting policies used by
Management in the development and presentation of our financial statements. This discussion and analysis, the significant 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 us and our financial position, results of operations, and cash flows.
An accounting estimate requires assumptions
about uncertain matters that could have a material effect on the financial statements 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.
Management
has identified the ACL as the most significant accounting estimate. At December 31, 2011, the ACL was $84.8 million and represented
the sum of the ALPL and AULPC. The ACL represents Management’s estimate as to the level of allowances considered appropriate
to absorb probable inherent credit losses in the loan participation portfolio, as well as unfunded loan participation commitments.
All known relevant internal and external factors that affected loan collectability were considered, including analysis of historical
charge-off experience, migration patterns, changes in economic conditions, and changes in loan collateral values.
Such factors
are subject to regular review and may change to reflect updated performance trends and expectations.
We
believe the process for determining the ACL considers all of the potential factors that could result in credit losses. However,
the process includes judgmental and quantitative elements that may be subject to significant change.
There is no certainty
that the ACL will be adequate over time to cover credit losses in the portfolio because of continued adverse changes in the economy,
market conditions, or events adversely affecting specific customers, industries or markets.
To the extent
actual outcomes differ from estimates,
the credit quality of the Bank’s customer base materially decreases, the risk
profile of a market, industry, or group of customers changes materially, or if the ACL is determined to not be appropriate,
additional provision for credit losses could be required, which could have a material adverse effect on our financial condition
and results of operations in future periods.
Qualification Tests
Qualification as a REIT involves application
of specific provisions of the IRC relating to various asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% 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% of the value of the REIT's total assets may consist of securities, other than those includible under the 75% test; (3)
not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible
under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one
issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not
more than 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible
under the 75% 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% of its total assets. For the year ended December 31, 2011, we met all of the quarterly
asset tests.
Also, a REIT must annually satisfy two
gross income tests: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and
(2) 95% of its gross income must be derived from sources qualifying for the 75% test plus dividends, interest, and gains from the
sale of securities. In addition, a REIT must distribute 90% of the REIT’s taxable income for the taxable year, excluding
any net capital gains, to maintain its nontaxable status for federal income tax purposes. For the tax year 2011, we met all annual
income and distribution tests.
We operate in a manner that will not
cause us 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, we must invest at least 55% of our assets in Qualifying Interests and an additional 25%
of our assets in real estate-related assets, although this percentage may be reduced to the extent that more than 55% of our assets
are invested in Qualifying Interests. The assets in which we may invest under the IRC therefore may be further limited by the provisions
of the Investment Company Act and positions taken by the SEC staff. At December 31, 2011, we were exempt from registration as an
investment company under the Investment Company Act and we intend to operate our business in a manner that will maintain this exemption.
DISCUSSION OF RESULTS OF OPERATIONS
Our income is primarily derived from
our participation in loans acquired from the Bank and Holdings. Income varies based on the level of these assets and their respective
interest rates. The cash flows from these assets are used to satisfy our preferred dividend obligations. The preferred stock is
considered equity and, therefore, the dividends are not reflected as interest expense.
We reported net income of $178.8 million
for 2011, as compared with net income of $190.4 million in 2010, and a net loss of $12.0 million for 2009. The decrease in net
income for 2011 was partially due to a decrease in interest income for the consumer and residential real estate portfolio. The
balances in this portfolio continue to decline as HPCI has not recently purchased any new consumer and residential real estate
loan participation interests. The decline in net income was also impacted by a decrease in the reduction in allowance for credit
losses compared to 2010. Net income available to common shares was $166.8 million for 2011, $178.1 million for 2010, and a net
loss applicable to common shares of $28.2 million in 2009.
Interest and Fee Income
Our primary source of revenue is the
interest and fee income on our participation interests in loans. At December 31, 2011 and 2010, we did not have any interest-bearing
liabilities or related interest expense. Interest income is impacted by changes in the levels of interest rates and earning assets.
The yield on earning assets is the percentage of interest income to average earning assets.
The table below shows our average annual
balances, interest and fee income, and yields for the three years ended December 31:
|
Table 3 - Interest and Fee Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
(dollar
amounts in millions)
|
|
Average
Balance
|
|
|
Income
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Income
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Income
|
|
|
Yield
|
|
|
Loan participation interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,047.4
|
|
|
$
|
114.3
|
|
|
|
3.75
|
%
|
|
$
|
3,004.3
|
|
|
$
|
109.5
|
|
|
|
3.64
|
%
|
|
$
|
3,195.9
|
|
|
$
|
110.1
|
|
|
|
3.45
|
%
|
|
Consumer
and residential real estate
|
|
|
498.6
|
|
|
|
32.4
|
|
|
|
6.50
|
|
|
|
662.8
|
|
|
|
42.7
|
|
|
|
6.45
|
|
|
|
848.2
|
|
|
|
56.2
|
|
|
|
6.62
|
|
|
Total loan
participations
|
|
|
3,546.0
|
|
|
|
146.7
|
|
|
|
4.14
|
|
|
|
3,667.1
|
|
|
|
152.2
|
|
|
|
4.15
|
|
|
|
4,044.1
|
|
|
|
166.3
|
|
|
|
4.11
|
|
|
Interest-bearing
deposits with The Huntington National Bank
|
|
|
214.9
|
|
|
|
0.7
|
|
|
|
0.30
|
|
|
|
444.8
|
|
|
|
1.3
|
|
|
|
0.29
|
|
|
|
490.4
|
|
|
|
1.2
|
|
|
|
0.25
|
|
|
Total
|
|
$
|
3,760.9
|
|
|
$
|
147.4
|
|
|
|
3.92
|
%
|
|
$
|
4,111.9
|
|
|
$
|
153.5
|
|
|
|
3.73
|
%
|
|
$
|
4,534.5
|
|
|
$
|
167.5
|
|
|
|
3.69
|
%
|
Interest
and fee income for the years ended December 31, 2011 and 2010 was $147.4 million and $153.5 million, respectively. As shown in
the table above, the decrease in interest and fee income was primarily the result of a decrease in average loan balances, offset
by slightly higher interest rate yields. The yield on average earning assets increased to 3.92% in 2011 from 3.73% in 2010 while
average total earning asset balances decreased by $351.0 million, or 9%. The 11 basis point increase in the commercial real estate
loan participation yield from 2010 to 2011 reflected the continuation of a pricing strategy change begun in 2009 in the CRE portfolio.
Interest
and fee income for the years ended December 31, 2010 and 2009 was $153.5 million and $167.5 million, respectively. As shown in
the table above, the decrease in interest and fee income was the result of a decrease in average loan balances, offset by slightly
higher interest rate yields. The yield on average earnings assets increased to 3.73% in 2010 from 3.69% in 2009 while average total
earning asset balances decreased by $422.6 million, or 9%.
Provision
(Reduction in Allowance) for Credit Losses
The provision (reduction in allowance)
for credit losses is the charge (credit) to earnings necessary to maintain the ACL at a level appropriate to absorb Management’s
estimate of inherent losses in the loan portfolio. Loan participations are acquired net of related ALPL. As a result, this ALPL
is transferred to us from the Bank and is reflected as ALPL acquired, rather than us recording provision for credit losses. If
credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality performance
is better than implied by the ALPL acquired, an ALPL reduction is recorded. As loan participations mature, refinance, or other
such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL.
The reduction
in the allowance for credit losses was $37.5 million for 2011, compared with a reduction in the allowance for credit losses of
$43.4 million in 2010 and a provision for credit losses of $171.9 million in 2009. The underlying credit quality of the overall
portfolio continued to improve in 2011, including lower overall NCOs and NPAs.
Noninterest Income and Noninterest
Expense
Noninterest income was $1.6 million,
$2.1 million, and $2.6 million for the years ended December 31, 2011, 2010, and 2009, respectively. Noninterest income includes
fees from the Bank for use of our assets as collateral for the Bank’s advances from the FHLB. Collateral fees totaled $1.5
million, $2.0 million, and $2.5 million in 2011, 2010, and 2009, respectively. See Note 7 to the Financial Statements included
in this report for more information regarding use of our assets as collateral for the Bank’s advances from the FHLB.
Noninterest expense was $7.7 million,
$8.6 million, and $10.1 million
the years ended December 31,
2011, 2010, and 2009, respectively.
The predominant component of noninterest expense is the fee paid to the Bank for servicing the loans underlying the participation
interests. The servicing costs for the years ended December 31, 2011, 2010, and 2009 totaled $7.0 million, $7.9 million, and $9.4
million, respectively. The decline is due to lower average participation balances being serviced.
In 2011, 2010, and 2009, the annual servicing rates the Bank
charged with respect to outstanding principal balances were:
|
|
January 1, 2009
|
|
|
through
|
|
|
December
31, 2011
|
|
Commercial and commercial real estate
|
0.125
|
%
|
|
|
Consumer
|
0.650
|
|
|
|
Residential real estate
|
0.267
|
|
|
Pursuant to the Agreements, the amount
and terms of the loan servicing fee between the Bank and us are determined by mutual agreement during the terms of the Agreements.
In lieu of paying higher servicing costs to the Bank with respect to CRE loans, we waive our right to receive any origination fees
associated with participation interests in CRE loans. We, along with t
he Bank, performed a review of
loan servicing fees in 2011, and agreed to retain current servicing rates for all loan participation categories, including the
continued waiver by us of our right to origination fees, until such time as servicing fees are reviewed in 2012.
Income Taxes
We have elected to be treated as a REIT
for federal income tax purposes and intend to maintain compliance with the provisions of the IRC and, therefore, are not subject
to income taxes. Thus, we did not have any provision for income taxes for the years ended December 31, 2011, 2010, and 2009.
RISK MANAGEMENT AND CAPITAL
Risk awareness, identification and assessment,
reporting, and active management are key elements in overall risk management. The Bank manages risk to an aggregate moderate-to-low
risk profile through a control framework and by monitoring and responding to potential risks. Controls include, among others, effective
segregation of duties, access, authorization and reconciliation procedures, as well as staff education and a disciplined assessment
process. Management relies on the Bank’s credit management controls, processes, and procedures in evaluating and responding
to risk within the loan participation interest portfolio.
Credit Risk
Credit risk is the risk of financial
loss if a counterparty is not able to meet the agreed upon terms of the financial obligation. The significant change in the economic
conditions and the resulting changes in borrower behavior over the past several years resulted in the focusing of significant resources
to the identification, monitoring, and managing of credit risk. In addition to the traditional credit risk mitigation strategies
of credit policies and processes, market risk management activities, and portfolio diversification, additional quantitative measurement
capabilities were implemented that utilize external data sources, enhanced use of modeling technology, and internal stress testing
processes.
Credit risk is mitigated through a combination
of credit policies and processes and portfolio diversification. These include loan origination/underwriting criteria, portfolio
monitoring processes, and effective problem asset management. Exposure to credit risk is managed by personnel of the Bank through
their credit risk management process. Based upon an assessment of the credit risk inherent in the portfolio of loan participation
interests, an ALPL is transferred from the Bank to us on loans underlying the participations at the time the participations are
acquired. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality
performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. As loan participations mature, refinance,
or other such actions occur, any allowance not absorbed by loan losses is released through the reduction in ALPL.
The maximum level of credit exposure
to individual commercial borrowers is limited by policy guidelines based on the default probabilities associated with the credit
facilities extended to each borrower or related group of borrowers. All authority to grant commitments is delegated through the
Bank’s independent credit administration function, and is monitored and regularly updated.
Concentration risk is managed with limits
on loan type, geography, industry, and loan quality factors. The checks and balances in the credit process and the independence
of the credit administration and risk management functions are designed to appropriately assess the level of credit risk being
accepted, facilitate the early recognition of credit problems when they occur, and provide for effective problem asset management
and resolution.
Under the Agreements, the Bank
may, in accordance with our guidelines, dispose of any underlying loan participation that is rated as Substandard or lower, is
placed in a nonaccrual status, or is renegotiated due to the financial deterioration of the borrower. The Bank may, in accordance
with our guidelines, institute foreclosure proceedings, exercise any power of sale contained in any mortgage or deed of trust,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a property underlying a mortgage loan by operation of law or
otherwise in accordance with the terms of the Agreements. Prior to completion of foreclosure or liquidation, the participation
is sold to the Bank at fair market value. The Bank then incurs all costs associated with repossession and foreclosure.
Loan Participation Interest Credit Exposure Mix
At December 31, 2011, CRE loan participations
were 88% of total loan participations compared with 84% at December 31, 2010. Consumer and residential real estate loan participations
were 12% of total loan participations at December 31, 2011, compared with 16% of total loan participations at December 31, 2010.
The change in portfolio mix in the current year reflects the decision by us not to purchase any new consumer and residential real
estate loan participations in 2011.
Commercial Real Estate Credit
CRE loan credit approvals are made by the Bank
and are based on, among other factors, the financial strength of the borrower, assessment of the borrower’s management capabilities,
appraised collateral value, industry sector trends, type of exposure, transaction structure, and the general economic outlook.
While these are the primary factors considered, there are a number of other factors that may be considered in the decision process.
For all loans exceeding $5.0 million, the Bank utilizes a centralized senior loan committee, led by the chief credit officer. For
loans less than $5.0 million, with the exception of small business loans, credit officers who understand each local region and
are experienced in the industries and loan structures of the requested credit exposure are involved in all credit-extension decisions
and have the primary credit authority. For small business loans, the Bank utilizes a centralized loan approval process for standard
products and structures. In this centralized decision environment, certain individuals who understand each local region may make
credit-extension decisions to preserve the commitment to communities the Bank operates in. In addition to disciplined and consistent
judgmental factors, a sophisticated credit scoring process is used as a primary evaluation tool in the determination of approving
a loan within the centralized loan approval process.
In commercial lending, on-going credit management
is dependent on the type and nature of the loan. The Bank monitors all significant credit extensions on an on-going basis. All
commercial credit extensions are assigned internal risk ratings reflecting the borrower’s PD and LGD (severity of loss).
This two-dimensional rating methodology provides granularity in the portfolio management process. The PD is rated and applied at
the borrower level. The LGD is rated and applied based on the type of credit extension and the quality and lien position associated
with the underlying collateral. The internal risk ratings are assessed at origination and updated at each periodic monitoring event.
There is also extensive macro portfolio management analysis on an on-going basis. The Bank continually reviews and adjusts the
risk-rating criteria based on actual experience, which provides the current risk level in the portfolio and is the basis for determining
an appropriate ACL amount for the portfolio. To provide consistent oversight, a centralized portfolio management team monitors
and reports on the performance of the commercial portfolio, including small business loans.
In addition to the initial credit analysis
initiated during the approval process, the Bank’s Credit Review group performs testing to provide an independent review and
assessment of the quality and / or risk of the new loan originations. This group is part of the Bank’s Risk Management area,
and conducts portfolio reviews on a risk-based cycle to evaluate individual loans, validate risk ratings, as well as test the consistency
of the credit processes.
The standardized loan grading system considers
many components that directly correlate loan quality and likelihood of repayment, one of which is guarantor support. On an annual
basis, or more frequently if warranted, we consider, among other things, the guarantor’s reputation and creditworthiness,
along with various key financial metrics such as liquidity and net worth, assuming such information is available. Our assessment
of the guarantor’s credit strength, or lack thereof, is reflected in the risk ratings for such loans, which is directly tied
to, and an integral component of, the ALPL methodology. When a loan participation interest goes to impaired status, viable guarantor
support is considered in the determination of the recognition of loan participation interest loss.
If the assessment of the guarantor’s
credit strength yields an inherent capacity to perform, we will seek repayment from the guarantor as part of the collection process
and have done so successfully. However, the repayment success from guarantors is not formally tracked.
Substantially all CRE loans categorized as
Classified
(see Note 3 of Notes to Financial Statements)
are managed by the Bank’s SAD. The SAD is a specialized credit
group that handles the day-to-day management of workouts, commercial recoveries, and problem loan sales. Its responsibilities include
developing action plans, assessing risk ratings, and determining the appropriateness of the allowance, the accrual status, and
the ultimate collectability of the Classified loan participation interest portfolio.
The CRE portfolio is diversified by customer
size, as well as geographically throughout the Bank’s footprint. No outstanding CRE loan participation interests comprised
an industry or geographic concentration of lending. CRE loan participation interests outstanding by property type and borrower
location at 2011 and 2010, were as follows:
|
Table 4 - Commercial Real Estate Loan Participation Interests by Property Type and Borrower Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011
|
|
|
|
|
Geographic
Region
|
|
|
Total
|
|
|
Percent of
|
|
|
(dollar amounts in thousands)
|
|
Ohio
|
|
|
Michigan
|
|
|
Indiana
|
|
|
Pennsylvania
|
|
|
Kentucky
|
|
|
Other
|
|
|
Amount
|
|
|
Total
|
|
|
Industrial and warehouse
|
|
$
|
457,890
|
|
|
$
|
185,519
|
|
|
$
|
52,519
|
|
|
$
|
15,898
|
|
|
$
|
13,896
|
|
|
$
|
16,886
|
|
|
$
|
742,608
|
|
|
|
24
|
%
|
|
Retail properties
|
|
|
379,335
|
|
|
|
100,437
|
|
|
|
47,305
|
|
|
|
25,638
|
|
|
|
14,662
|
|
|
|
102,535
|
|
|
|
669,912
|
|
|
|
21
|
|
|
Office
|
|
|
343,889
|
|
|
|
69,042
|
|
|
|
14,316
|
|
|
|
55,186
|
|
|
|
14,897
|
|
|
|
26,868
|
|
|
|
524,198
|
|
|
|
17
|
|
|
Multi family
|
|
|
131,059
|
|
|
|
14,604
|
|
|
|
25,881
|
|
|
|
9,903
|
|
|
|
25,985
|
|
|
|
10,620
|
|
|
|
218,052
|
|
|
|
7
|
|
|
Other commercial real estate
|
|
|
537,677
|
|
|
|
266,829
|
|
|
|
36,836
|
|
|
|
29,272
|
|
|
|
34,577
|
|
|
|
89,369
|
|
|
|
994,560
|
|
|
|
31
|
|
|
Total
|
|
$
|
1,849,850
|
|
|
$
|
636,431
|
|
|
$
|
176,857
|
|
|
$
|
135,897
|
|
|
$
|
104,017
|
|
|
$
|
246,278
|
|
|
$
|
3,149,330
|
|
|
|
100
|
%
|
|
|
|
At
December 31, 2010
|
|
|
|
|
Geographic
Region
|
|
|
Total
|
|
|
Percent of
|
|
|
(dollar amounts
in thousands)
|
|
Ohio
|
|
|
Michigan
|
|
|
Indiana
|
|
|
Pennsylvania
|
|
|
Kentucky
|
|
|
Other
|
|
|
Amount
|
|
|
Total
|
|
|
Industrial and
warehouse
|
|
$
|
398,633
|
|
|
$
|
168,863
|
|
|
$
|
48,795
|
|
|
$
|
12,538
|
|
|
$
|
11,854
|
|
|
$
|
11,097
|
|
|
$
|
651,780
|
|
|
|
22
|
%
|
|
Retail properties
|
|
|
306,722
|
|
|
|
112,140
|
|
|
|
45,081
|
|
|
|
45,483
|
|
|
|
17,028
|
|
|
|
33,147
|
|
|
|
559,601
|
|
|
|
19
|
|
|
Office
|
|
|
345,000
|
|
|
|
93,131
|
|
|
|
33,690
|
|
|
|
35,993
|
|
|
|
11,947
|
|
|
|
25,662
|
|
|
|
545,423
|
|
|
|
19
|
|
|
Multi family
|
|
|
176,131
|
|
|
|
6,397
|
|
|
|
20,477
|
|
|
|
9,158
|
|
|
|
22,460
|
|
|
|
7,838
|
|
|
|
242,461
|
|
|
|
8
|
|
|
Other commercial real estate
|
|
|
516,042
|
|
|
|
276,881
|
|
|
|
34,785
|
|
|
|
38,407
|
|
|
|
18,689
|
|
|
|
65,642
|
|
|
|
950,446
|
|
|
|
32
|
|
|
Total
|
|
$
|
1,742,528
|
|
|
$
|
657,412
|
|
|
$
|
182,828
|
|
|
$
|
141,579
|
|
|
$
|
81,978
|
|
|
$
|
143,386
|
|
|
$
|
2,949,711
|
|
|
|
100
|
%
|
As shown
in the table above, we had $3.1 billion of CRE loan participation interests at December 31, 2011. CRE
loan participation
interests are diversified by customer size, as well as customer location throughout the Bank’s lending area of Ohio, Michigan,
Indiana, Kentucky, and Pennsylvania.
Consumer Credit
Consumer credit approvals by the Bank
are based on, among other factors,
the financial strength and payment history of the borrower, type
of exposure, and the transaction structure.
Consumer credit decisions are generally made in a centralized environment utilizing
decision models. Importantly, certain individuals who understand each of the Bank’s local regions have the authority to make
credit extension decisions to preserve the focus to the local communites in which the Bank operates. Each loan is assigned a specific
PD and LGD. The PD is generally based on the borrower’s most recent credit bureau score (FICO), which is updated quarterly,
while the LGD is related to the type of collateral and the LTV ratio associated with the credit extension.
In consumer lending, credit risk is
managed from a segment (i.e., loan type, collateral position, geography, etc.) and vintage performance analysis. All portfolio
segments are continuously monitored for changes in delinquency trends and other asset quality indicators. The Bank
makes extensive use of portfolio assessment models to continuously monitor the quality of the portfolio, which may result in changes
to future origination strategies. The on-going analysis and review process results in a determination of an appropriate ALPL amount
for the consumer and residential real estate portfolio.
The independent risk management group has a consumer process review
component to ensure the effectiveness and efficiency of the consumer credit processes.
Collection action is initiated as needed
through the Bank’s centrally managed collection and recovery function. This collection group employs a series of collection
methodologies designed to maintain a high level of effectiveness while maximizing efficiency.
The consumer and residential real estate
portfolio is primarily located throughout the Bank’s geographic footprint. The continued stress on home prices has caused
the performance in this portfolio to remain weaker than historical levels.
Credit Quality
Credit quality performance in the CRE
portfolio in 2011 improved compared with 2010. CRE NPAs declined 16% and total past due loan levels declined. Although CRE NCOs
remained elevated compared with long-term expectations, 2011 continued to show improvement, declining 44% compared to 2010.
NPAs
NPAs consist of participation interests
in underlying loans that are no longer accruing interest. Any loan participation interest in our portfolio may be placed on nonaccrual
status prior to the policies described below when collection of principal or interest is in doubt.
Underlying
CRE loans are generally placed on nonaccrual status at 90-days past due. Participation interests in underlying first-lien and second-lien
consumer and
residential real estate loans are placed on nonaccrual status at 150-days past due and 120-days past due, respectively.
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. When, in Management’s judgment, the borrower’s
ability to make required principal and interest payments has resumed and collectibility is no longer in doubt, the loan participation
interest is returned to accrual status.
The following table shows NPAs at the
end of the most recent five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 5 - Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
(dollar amounts in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Participation interests in nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
45,485
|
|
|
$
|
53,953
|
|
|
$
|
165,184
|
|
|
$
|
54,246
|
|
|
$
|
42,060
|
|
|
Consumer and residential real estate
|
|
|
6,097
|
|
|
|
4,790
|
|
|
|
5,554
|
|
|
|
6,041
|
|
|
|
4,136
|
|
|
Total nonperforming assets
|
|
$
|
51,582
|
|
|
$
|
58,743
|
|
|
$
|
170,738
|
|
|
$
|
60,287
|
|
|
$
|
46,196
|
|
|
NPAs as a % of total participation interests
|
|
|
1.44
|
%
|
|
|
1.67
|
%
|
|
|
4.41
|
%
|
|
|
1.37
|
%
|
|
|
1.06
|
%
|
|
ALPL as a % of NPAs
|
|
|
162
|
|
|
|
187
|
|
|
|
92
|
|
|
|
109
|
|
|
|
135
|
|
|
ACL as a % of NPAs
|
|
|
164
|
|
|
|
190
|
|
|
|
93
|
|
|
|
112
|
|
|
|
143
|
|
|
Accruing loans past due 90 days or more
|
|
$
|
4,208
|
|
|
$
|
4,802
|
|
|
$
|
8,631
|
|
|
$
|
9,543
|
|
|
$
|
4,440
|
|
The $7.2 million, or 12%, decline in
total NPAs compared to December 31, 2010, was driven by the decline in CRE NPAs as consumer and residential real estate NPAs slightly
increased. The decline in CRE NPAs primarily reflected the positive impacts of NCO activity and problem credit resolutions, partially
offset by the negative impact of two relatively large CRE relationships placed on nonaccrual status in 2011. The increase in consumer
and residential real estate NPAs primarily reflected the negative impacts of the current weak economic conditions and the continued
decline in residential real estate property values.
ACL
We maintain two reserves, both of which
are available to absorb credit losses inherent in the loan participation interest portfolio: the ALPL and the AULPC. When summed
together, these reserves constitute the total ACL. Additions to the ALPL and AULPC result primarily from an allocation of the purchase
price of participations acquired.
The following table shows the activity
in our ALPL and AULPC for the last five years:
|
Table 6 - Allowance for Credit Loss Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
ALPL balance, beginning of year
|
|
$
|
110,103
|
|
|
$
|
156,431
|
|
|
$
|
65,456
|
|
|
$
|
62,275
|
|
|
$
|
48,703
|
|
|
Allowance related to loan participations acquired
|
|
|
46,205
|
|
|
|
57,040
|
|
|
|
33,632
|
|
|
|
36,284
|
|
|
|
26,530
|
|
|
Net loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
(26,303
|
)
|
|
|
(47,314
|
)
|
|
|
(103,261
|
)
|
|
|
(12,483
|
)
|
|
|
(12,001
|
)
|
|
Consumer and residential real estate
|
|
|
(9,267
|
)
|
|
|
(12,713
|
)
|
|
|
(12,016
|
)
|
|
|
(7,320
|
)
|
|
|
(4,295
|
)
|
|
Total net loan losses
|
|
|
(35,570
|
)
|
|
|
(60,027
|
)
|
|
|
(115,277
|
)
|
|
|
(19,803
|
)
|
|
|
(16,296
|
)
|
|
Provision for (reduction in) ALPL
|
|
|
(36,966
|
)
|
|
|
(43,341
|
)
|
|
|
172,620
|
|
|
|
(13,924
|
)
|
|
|
3,338
|
|
|
Economic reserve transfer from (to) AULPC
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
624
|
|
|
|
---
|
|
|
ALPL balance, end of year
|
|
$
|
83,772
|
|
|
$
|
110,103
|
|
|
$
|
156,431
|
|
|
$
|
65,456
|
|
|
$
|
62,275
|
|
|
AULPC balance, beginning of year
|
|
$
|
1,598
|
|
|
$
|
1,607
|
|
|
$
|
2,301
|
|
|
$
|
3,856
|
|
|
$
|
3,804
|
|
|
Provision for (reduction in) AULPC
|
|
|
(563
|
)
|
|
|
(9
|
)
|
|
|
(694
|
)
|
|
|
(931
|
)
|
|
|
52
|
|
|
Economic reserve transfer (from) to ALPL
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(624
|
)
|
|
|
---
|
|
|
AULPC balance, end of year
|
|
$
|
1,035
|
|
|
$
|
1,598
|
|
|
$
|
1,607
|
|
|
$
|
2,301
|
|
|
$
|
3,856
|
|
|
Total allowance for credit losses
|
|
$
|
84,807
|
|
|
$
|
111,701
|
|
|
$
|
158,038
|
|
|
$
|
67,757
|
|
|
$
|
66,131
|
|
|
ALPL as a % of total participation interests
|
|
|
2.34
|
%
|
|
|
3.13
|
%
|
|
|
4.04
|
%
|
|
|
1.48
|
%
|
|
|
1.44
|
%
|
|
ACL as a % of total participation interests
|
|
|
2.37
|
|
|
|
3.18
|
|
|
|
4.08
|
|
|
|
1.54
|
|
|
|
1.52
|
|
The following table shows the allocation
in the ALPL and AULPC for each of the past five years:
|
Table 7 - Allowance for Credit Losses by Product (1)
|
|
|
|
At December 31,
|
|
|
(dollar amounts in thousands)
|
|
2
011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Commercial real estate
|
|
$
|
71,555
|
|
|
|
88
|
%
|
|
$
|
97,920
|
|
|
|
84
|
%
|
|
$
|
147,893
|
|
|
|
81
|
%
|
|
$
|
59,827
|
|
|
|
78
|
%
|
|
$
|
56,668
|
|
|
|
72
|
%
|
|
Consumer and residential real estate
|
|
|
12,217
|
|
|
|
12
|
|
|
|
12,183
|
|
|
|
16
|
|
|
|
8,538
|
|
|
|
19
|
|
|
|
5,629
|
|
|
|
22
|
|
|
|
5,607
|
|
|
|
28
|
|
|
Total ALPL
|
|
|
83,772
|
|
|
|
100
|
%
|
|
|
110,103
|
|
|
|
100
|
%
|
|
|
156,431
|
|
|
|
100
|
%
|
|
|
65,456
|
|
|
|
100
|
%
|
|
|
62,275
|
|
|
|
100
|
%
|
|
AULPC
|
|
|
1,035
|
|
|
|
|
|
|
|
1,598
|
|
|
|
|
|
|
|
1,607
|
|
|
|
|
|
|
|
2,301
|
|
|
|
|
|
|
|
3,856
|
|
|
|
|
|
|
Total
|
|
$
|
84,807
|
|
|
|
|
|
|
$
|
111,701
|
|
|
|
|
|
|
$
|
158,038
|
|
|
|
|
|
|
$
|
67,757
|
|
|
|
|
|
|
$
|
66,131
|
|
|
|
|
|
|
(1)
Percentages represent the percentage of each loan participation interest category to total loan participation interests.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ACL decreased $26.9 million, or 24%, to
$84.8 million, or 2.37% of period-end loan participation interests at December 31, 2011, compared with $111.7 million, or 3.18%,
at December 31, 2010. The decrease in the ACL was the result of improvement in credit quality in the CRE portfolio, reflecting
lower NCOs as well as a decrease in specific reserves. Although the ACL level related to the consumer and residential real estate
portfolio increased slightly, the ACL as a percentage of consumer and residential real estate participation interests increased
to 2.81% at December 31, 2011 from 2.16% at December 31, 2010. This increase reflected the previously discussed increase in consumer
and residential real estate NPAs over the same time period.
The ACL as a percentage of period-end NPAs
decreased to 164% from 190%. Given the decline in overall NPAs and the improvement in the underlying credit quality of the overall
loan participation interest portfolio, we believe the decline in this ratio is appropriate.
Credit quality trends within the entire portfolio
steadily improved throughout 2010 and 2011. The ACL to total loans ratio declined to 2.37% at December 31, 2011, compared to 3.18%
at December 31, 2010. We believe the decline in the ratio is appropriate given the continued improvement in the risk profile of
the loan participation interest portfolio. However, the continued weakness in the residential real estate market and the overall
economic conditions remained stressed, and additional risks emerged throughout 2011. These additional risks included the European
banking sector stress, the continued budget issues in local governments, flat domestic economic growth, and the variety of policy
proposals regarding job growth, debt management, and domestic tax policy. Continued high unemployment, among other factors, has
slowed any significant recovery. In the near-term, Management anticipates modest improvement in the unemployment rate, however
we remain concerned that the U.S. and local government budget issues will continue to negatively impact the financial condition
of some retail and commercial borrowers. The pronounced downturn in the residential real estate market that began in early 2007
has resulted in significantly lower residential real estate values. The impact of the downturn in real estate values has had a
significant impact on some borrowers as evidenced by the higher delinquencies and NCOs since late 2007. Although there was improvement
in 2011, we believe that the impact of reduced property values and the continued weak economic conditions will continue to negatively
impact us. Given the combination of these noted factors, Management believes that the ACL is appropriate and its coverage level
is reflective of the quality of our portfolio and the current operating environment.
NCOs
Any loan participation interest in any
portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events
include, but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating
a collateral deficiency and that asset is the sole source of repayment.
CRE loan participation interests are
either charged-off or written down to net realizable value at 90-days past due. First-lien and second-lien consumer and residential
real estate loan participation interests are charged-off to the estimated fair value of the collateral at 150-days past due and
120-days past due, respectively.
The table below reflects NCO detail
for each of the last five years:
|
Table 8 - Net Charge-offs
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
Commercial real estate
|
$
|
26,303
|
0.86
|
%
|
$
|
47,314
|
1.57
|
%
|
$
|
103,261
|
3.23
|
%
|
$
|
12,483
|
0.38
|
%
|
$
|
12,001
|
0.38
|
%
|
|
Consumer and residential real estate
|
|
9,267
|
1.86
|
|
|
12,713
|
1.92
|
|
|
12,016
|
1.42
|
|
|
7,320
|
0.68
|
|
|
4,295
|
0.37
|
|
|
Total net charge-offs
|
$
|
35,570
|
1.00
|
%
|
$
|
60,027
|
1.64
|
%
|
$
|
115,277
|
2.85
|
%
|
$
|
19,803
|
0.45
|
%
|
$
|
16,296
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Percentages represent the percentage in each loan category to average loan participation interests.
|
|
|
The $24.5 million, or 41%, decline in
NCOs in 2011 compared to 2010 was primarily centered in the CRE portfolio and reflected significant credit quality improvement
in the underlying portfolio.
MARKET RISK
The predominate market risk to which
we are exposed is the risk of loss due to a decline in interest rates. If there is a decline in market interest rates, we may experience
a reduction in interest income from our loan participation interests and a corresponding decrease in funds available to be distributed
to shareholders. When rates rise, we are exposed to declines in the economic value of equity since only approximately 22% of our
loan participation portfolio is fixed rate.
Huntington conducts its monthly interest
rate risk management on a centralized basis and does not manage our interest rate risk separately. Two broad approaches to modeling
interest rate risk are employed: income simulation and economic value analysis. An income simulation analysis was used to measure
the sensitivity of forecasted interest income to changes in market rates over a 12-month period. The economic value analysis was
conducted by subjecting the period-end balance sheet to changes in interest rates and measuring the impact of the changes in the
value of the assets. The models used for these measurements assume, among other things, no new loan participation volume.
The following table shows the income
sensitivity of select portfolios to changes in market interest rates. A portfolio with 100% sensitivity would indicate that interest
income and expense will change with the same magnitude and direction as interest rates. A portfolio with 0% sensitivity is insensitive
to changes in interest rates.
|
Table 9 - Interest Income Sensitivity
|
|
|
|
Change in Interest Income for a Given
|
|
|
|
|
Change in Interest Rates
|
|
|
(dollar amounts in millions)
|
|
Over / (Under) Base Case Parallel Ramp
|
|
|
Basis point change scenario
|
|
|
-200 (1)
|
|
|
|
-100
|
|
|
|
+100
|
|
|
|
+200
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
-8.0
|
|
|
$
|
-6.8
|
|
|
$
|
8.6
|
|
|
$
|
17.4
|
|
|
Percentage change
|
|
|
-7.7
|
%
|
|
|
-6.6
|
%
|
|
|
8.3
|
%
|
|
|
16.7
|
%
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
-6.0
|
|
|
$
|
-5.0
|
|
|
$
|
7.3
|
|
|
$
|
14.9
|
|
|
Percentage change
|
|
|
-5.6
|
%
|
|
|
-4.7
|
%
|
|
|
6.8
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The gradual 200 basis point decline in market rates over the next 12-month period assumes market interest rates would reach a bottom and not fall below historical levels.
|
|
The primary simulations for EVE
at risk assume immediate +/-200 basis points parallel shifts in market interest rates beyond the interest rate change implied by
the current yield curve. The table below outlines the December 31, 2011 results
compared with
December 31, 2010.
|
Table 10 - Economic Value Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Economic Value for a Given
|
|
|
|
|
Change in Interest Rates
|
|
|
(dollar amounts in millions)
|
|
Over / (Under) Base Case Parallel Shocks
|
|
|
Basis point change scenario
|
|
-200 (1)
|
|
|
+200
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
Fair value of loan participation interests
|
|
$
|
4.3
|
|
|
$
|
-34.1
|
|
|
Percentage change
|
|
|
0.1
|
%
|
|
|
-0.9
|
%
|
|
2010
|
|
|
|
|
|
|
|
|
|
Fair value of loan participation interests
|
|
$
|
14.0
|
|
|
$
|
-49.6
|
|
|
Percentage change
|
|
|
0.4
|
%
|
|
|
-1.3
|
%
|
(1) The gradual 200 basis point decline in market rates over the next 12-month period assumes market interest rates would reach a bottom and not fall below historical levels.
OFF-BALANCE SHEET ARRANGEMENTS
Under the terms of the participation
and subparticipation agreements, we are obligated to make funds or credit available to the Bank, either directly or indirectly
through Holdings so that the Bank may extend credit to any borrower, or pay letters-of-credit issued for the account of any borrowers,
to the extent provided in the loan agreements underlying our participation interests. At December 31, 2011 and 2010, unfunded commitments
totaled $233.4 million and $195.7 million, respectively. It is expected that cash flows generated by the existing portfolio will
be sufficient to meet these obligations.
LIQUIDITY AND CAPITAL RESOURCES
The objective of our liquidity management
is to ensure the availability of sufficient cash flows to fund our existing loan participation commitments, to acquire additional
participation interests, and to pay operating expenses and dividends. Unfunded commitments and additional participation interests
in loans are funded with the proceeds from repayment of principal balances by individual borrowers, utilization of existing cash
and cash equivalent funds, and if necessary, new capital contributions. Payment of operating expenses and dividends will be funded
through cash generated by operations.
In managing liquidity, we take into
account forecasted principal and interest payments on loan participations as well as various legal limitations placed on a REIT.
To the extent that additional funding is required, we may raise such funds through retention of cash flow, debt financings, additional
equity offerings, or a combination of these methods. However, any cash flow retention must be consistent with the provisions of
the IRC 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.
At December 31, 2011 and 2010, we maintained
cash and interest-bearing deposits with the Bank totaling $229.0 million and $638.2 million, respectively. We maintain and transact
all of our cash activity with the Bank and invest available funds in Eurodollar deposits with the Bank for a term of no more than
30 days at market rates.
At December 31, 2011, we had no material liabilities
or contractual obligations, other than unfunded loan commitments of $233.4 million, with a weighted average maturity of 1.4 years.
In addition to anticipated cash flows, as noted above, we have interest-bearing and noninterest-bearing cash balances with the
bank totaling $229.0 million to supplement the funding of these liabilities and contractual commitments.
Shareholders’ equity was $3.8
billion at December 31, 2011 and $3.6 billion at December 31, 2010. The preferred dividend coverage ratio for 2011 was 14.89x,
compared to 15.51x in 2010. The decrease from the prior year primarily relates to lower income levels.
Regulatory
approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings. The amount
of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year
and retained net income for the preceding two years, less any required transfers to surplus or common stock. Based on these regulatory
dividend limitations, the Bank could not have declared and paid a dividend at December 31, 2011, without regulatory approval. As
a subsidiary of the Bank, we are also restricted from declaring or paying dividends to our non-bank subsidiaries or outside shareholders
without regulatory approval. The OCC has approved the payment of dividends on our preferred securities throughout 2010 and 2011.
For the foreseeable future, Management intends to request approval for any future dividends. However, there can be no assurance
the OCC will approve future dividends.
|
Table 11 - Quarterly Statements of Income
|
|
|
|
2011
|
|
|
2010
|
|
|
4Q11 vs. 4Q10
|
|
|
(dollar amounts in thousands)
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
$ Chg
|
|
|
% Chg
|
|
|
Interest and fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loan participation interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
29,135
|
|
|
$
|
28,732
|
|
|
$
|
27,774
|
|
|
$
|
27,356
|
|
|
$
|
27,609
|
|
|
$
|
1,526
|
|
|
|
5.5
|
%
|
|
Consumer and residential real estate
|
|
|
7,393
|
|
|
|
7,833
|
|
|
|
8,262
|
|
|
|
8,830
|
|
|
|
9,518
|
|
|
|
(2,125
|
)
|
|
|
(22.3
|
)
|
|
Total loan participation interest income
|
|
|
36,528
|
|
|
|
36,565
|
|
|
|
36,036
|
|
|
|
36,186
|
|
|
|
37,127
|
|
|
|
(599
|
)
|
|
|
(1.6
|
)
|
|
Fees from loan participation interests
|
|
|
396
|
|
|
|
297
|
|
|
|
320
|
|
|
|
369
|
|
|
|
302
|
|
|
|
94
|
|
|
|
31.1
|
|
|
Interest on deposits with The Huntington National Bank
|
|
|
181
|
|
|
|
148
|
|
|
|
169
|
|
|
|
156
|
|
|
|
475
|
|
|
|
(294
|
)
|
|
|
(61.9
|
)
|
|
Total interest and fee income
|
|
|
37,105
|
|
|
|
37,010
|
|
|
|
36,525
|
|
|
|
36,711
|
|
|
|
37,904
|
|
|
|
(799
|
)
|
|
|
(2.1
|
)
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(7,352
|
)
|
|
|
(23,067
|
)
|
|
|
9,255
|
|
|
|
(16,365
|
)
|
|
|
(38,818
|
)
|
|
|
31,466
|
|
|
|
(81.1
|
)
|
|
Interest income after provision (reduction in allowance) for credit losses
|
|
|
44,457
|
|
|
|
60,077
|
|
|
|
27,270
|
|
|
|
53,076
|
|
|
|
76,722
|
|
|
|
(32,265
|
)
|
|
|
(42.1
|
)
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
17
|
|
|
|
18
|
|
|
|
17
|
|
|
|
18
|
|
|
|
17
|
|
|
|
---
|
|
|
|
---
|
|
|
Collateral fees
|
|
|
353
|
|
|
|
371
|
|
|
|
398
|
|
|
|
420
|
|
|
|
446
|
|
|
|
(93
|
)
|
|
|
(20.9
|
)
|
|
Total noninterest income
|
|
|
370
|
|
|
|
389
|
|
|
|
415
|
|
|
|
438
|
|
|
|
463
|
|
|
|
(93
|
)
|
|
|
(20.1
|
)
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing costs
|
|
|
1,689
|
|
|
|
1,732
|
|
|
|
1,750
|
|
|
|
1,787
|
|
|
|
1,851
|
|
|
|
(162
|
)
|
|
|
(8.8
|
)
|
|
Other
|
|
|
181
|
|
|
|
175
|
|
|
|
186
|
|
|
|
164
|
|
|
|
168
|
|
|
|
13
|
|
|
|
7.7
|
|
|
Total noninterest expense
|
|
|
1,870
|
|
|
|
1,907
|
|
|
|
1,936
|
|
|
|
1,951
|
|
|
|
2,019
|
|
|
|
(149
|
)
|
|
|
(7.4
|
)
|
|
Net income
|
|
$
|
42,957
|
|
|
$
|
58,559
|
|
|
$
|
25,749
|
|
|
$
|
51,563
|
|
|
$
|
75,166
|
|
|
$
|
(32,209
|
)
|
|
|
(42.9
|
)%
|
|
Dividends declared on preferred securities
|
|
|
(3,114
|
)
|
|
|
(2,867
|
)
|
|
|
(2,971
|
)
|
|
|
(3,054
|
)
|
|
|
(2,951
|
)
|
|
|
163
|
|
|
|
5.5
|
|
|
Net income applicable to common shares
(1)
|
|
$
|
39,843
|
|
|
$
|
55,692
|
|
|
$
|
22,778
|
|
|
$
|
48,509
|
|
|
$
|
72,215
|
|
|
$
|
(32,372
|
)
|
|
|
(44.8
|
)%
|
(1) All of our common stock is owned by HPCII and Holdings
and therefore, net income (loss) per share is not presented.
Net income for the 2011 fourth quarter
was $43.0 million, down $32.2 million, or 43%, from the year-ago quarter. Net income applicable to common shares was $39.8 million
for the 2011 fourth quarter, a decrease of $32.4 million, or 45%, from the year-ago quarter. Dividend declarations on preferred
stock increased by 6% in the most recent quarter to $3.1 million compared with $3.0 million for the 2010 fourth quarter, due to
nominally higher three-month LIBOR rates on which payments on Class B and Class E preferred securities are based.
Interest and fee income for the recent
quarter was $37.1 million, which was down from $37.9 million for the prior year quarter, due to lower loan participation balances,
offset by higher yields. The yield on earning assets increased to 3.86% from 3.63% for the same respective quarterly periods.
Total assets decreased to $3.8 billion
at December 31, 2011, from $4.1 billion at December 31, 2010. The decrease is primarily related to lower cash and interest-bearing
balances.
The reduction in the allowance for credit
losses was $7.4 million in the 2011 fourth quarter, compared with a reduction of $23.1 million in the 2011 third quarter and a
reduction of $38.8 million in the 2010 fourth quarter.
NPAs decreased to $51.6 million at December
31, 2011, compared with $60.9 million at September 30, 2011, and $58.7 million at December 31, 2010. The decreases primarily reflected
the positive impacts of NCO activity and problem credit resolutions relating to CRE NPAs.
The ACL decreased to 2.37% of total
loan participation interests at December 31, 2011, from 2.64% at September 30, 2011, and from 3.18% at December 31, 2010. The decreases
primarily reflected the improved credit quality in the loan portfolios including lower NCOs and NPAs.
NCOs in the 2011 fourth quarter were
$10.0 million compared with $9.1 million in the 2011 third quarter and $12.0 million in the 2010 fourth quarter. This represented
1.11%, 1.00%, and 1.36% of average loan participations for the same respective periods.
Noninterest income decreased to $0.4
million in the 2011 fourth quarter, compared with $0.5 million in the 2010 fourth quarter.
Noninterest expense included servicing
fees of $1.7 million and $1.9 million for the fourth quarters of 2011 and 2010, respectively.
Item 7A: Quantitative and Qualitative Disclosures about Market
Risk
Information required by this item is set forth
in the Market Risk section, which is incorporated by reference into this item.
Item 8: Financial Statements and Supplementary Data
Information required by this item is
set forth in the Report of Independent Registered Public Accounting Firm, Financial Statements and Notes, and Selected Quarterly
Income Statements, which is incorporated by reference into this item.
Report of Management
The Management of HPCI is responsible for the financial information
and representations contained in the financial statements and other sections of this report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the United States. In all material respects, they reflect
the substance of transactions that should be included based on informed judgments, estimates, and currently available information.
Management maintains a system of internal accounting controls, which includes the careful selection and training of qualified personnel,
appropriate segregation of responsibilities, communication of written policies and procedures, and a broad program of internal
audits. The costs of the controls are balanced against the expected benefits. During 2011, the audit committee of the board of
directors met regularly with Management, HPCI’s internal auditors, and the independent registered public accounting firm,
Deloitte & Touche LLP, to review the scope of the audits and to discuss the evaluation of internal accounting controls and
financial reporting matters. The independent registered public accounting firm and the internal auditors have free access to, and
meet confidentially with, the audit committee to discuss appropriate matters. Also, HPCI maintains a disclosure review committee.
This committee’s purpose is to design and maintain disclosure controls and procedures to ensure that material information
relating to the financial and operating condition of HPCI is properly reported to its chief executive officer, chief financial
officer, internal auditors, and the audit committee of the board of directors in connection with the preparation and filing of
periodic reports and the certification of those reports by the chief executive officer and the chief financial officer.
Report of Management’s Assessment
of Internal Control Over Financial Reporting
Management is responsible for establishing
and maintaining adequate internal control over financial reporting for the Company, including accounting and other internal control
systems that, in the opinion of Management, provide reasonable assurance that (1) transactions are properly authorized, (2) the
assets are properly safeguarded, and (3) transactions are properly recorded and reported to permit the preparation of the financial
statements in conformity with accounting principles generally accepted in the United States. HPCI’s management assessed the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal
Control—Integrated Framework
. Based on that assessment, Management believes that, as of December 31, 2011, the Company’s
internal control over financial reporting is effective based on those criteria. The Company’s internal control over financial
reporting as of December 31, 2011 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm,
as stated in their report appearing on the next page.
_______________________________________
Donald R. Kimble
President
(Principal Executive Officer)
_______________________________________
David S. Anderson
Vice President
(Principal Financial and Accounting Officer)
March 9, 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Huntington Preferred Capital, Inc.
Columbus, Ohio
We have audited the internal control over financial reporting
of Huntington Preferred Capital, Inc. (the “Company”) as of December 31, 2011, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying Report of Management’s Assessment of Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is
a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the financial statements as of and for the year ended December 31,
2011 of the Company and our report dated March 9, 2012 expressed an unqualified opinion on those financial statements.
Columbus, Ohio
March 9, 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Huntington Preferred Capital, Inc.
Columbus, Ohio
We have audited the accompanying balance sheets of Huntington
Preferred Capital, Inc. (the "Company") as of December 31, 2011 and 2010, and the related statements of income, changes
in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly,
in all material respects, the financial position of Huntington Preferred Capital, Inc. as of December 31, 2011 and 2010, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity
with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December
31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 9, 2012 expressed an unqualified opinion on the Company's internal
control over financial reporting.
Columbus, Ohio
March 9, 2012
|
Huntington Preferred Capital, Inc.
|
|
|
|
|
|
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
(dollar amounts in thousands, except share data)
|
|
2011
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and interest-bearing deposits with The Huntington National Bank
|
|
$
|
228,958
|
|
|
$
|
638,220
|
|
|
Due from The Huntington National Bank
|
|
|
40,376
|
|
|
|
61,816
|
|
|
Loan participation interests:
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
3,149,330
|
|
|
|
2,949,711
|
|
|
Consumer and residential real estate
|
|
|
434,272
|
|
|
|
563,407
|
|
|
Total loan participation interests
|
|
|
3,583,602
|
|
|
|
3,513,118
|
|
|
Allowance for loan participation losses
|
|
|
(83,772
|
)
|
|
|
(110,103
|
)
|
|
Net loan participation interests
|
|
|
3,499,830
|
|
|
|
3,403,015
|
|
|
Accrued income and other assets
|
|
|
9,887
|
|
|
|
9,739
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,779,051
|
|
|
$
|
4,112,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan participation commitments
|
|
$
|
1,035
|
|
|
$
|
1,598
|
|
|
Dividends and distributions payable
|
|
|
---
|
|
|
|
500,000
|
|
|
Other liabilities
|
|
|
78
|
|
|
|
76
|
|
|
Total liabilities
|
|
|
1,113
|
|
|
|
501,674
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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
|
|
|
Preferred securities, Class C, 7.875% noncumulative and
|
|
|
|
|
|
|
|
|
|
conditionally exchangeable; $25 par and liquidation
|
|
|
|
|
|
|
|
|
|
value; 2,000,000 shares authorized, issued, and outstanding
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Preferred securities, Class E, variable-rate noncumulative and
|
|
|
|
|
|
|
|
|
|
conditionally exchangeable; $250 par and liquidation
|
|
|
|
|
|
|
|
|
|
value; 1,400,000 shares authorized, issued, and outstanding
|
|
|
350,000
|
|
|
|
350,000
|
|
|
Preferred securities, $25 par, 10,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized; no shares issued or outstanding
|
|
|
---
|
|
|
|
---
|
|
|
Common stock - without par value; 14,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
issued and outstanding
|
|
|
2,810,116
|
|
|
|
2,810,116
|
|
|
Retained earnings
|
|
|
166,822
|
|
|
|
---
|
|
|
Total shareholders' equity
|
|
|
3,777,938
|
|
|
|
3,611,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
3,779,051
|
|
|
$
|
4,112,790
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
|
Huntington Preferred Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
(dollar amounts in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Interest and fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loan participation interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
112,997
|
|
|
$
|
108,200
|
|
|
$
|
109,293
|
|
|
Consumer and residential real estate
|
|
|
32,318
|
|
|
|
42,536
|
|
|
|
55,722
|
|
|
Total loan participation interest income
|
|
|
145,315
|
|
|
|
150,736
|
|
|
|
165,015
|
|
|
Fees from loan participation interests
|
|
|
1,382
|
|
|
|
1,496
|
|
|
|
1,235
|
|
|
Interest on deposits with The Huntington National Bank
|
|
|
654
|
|
|
|
1,289
|
|
|
|
1,235
|
|
|
Total interest and fee income
|
|
|
147,351
|
|
|
|
153,521
|
|
|
|
167,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(37,529
|
)
|
|
|
(43,350
|
)
|
|
|
171,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (loss) after provision (reduction in allowance) for credit losses
|
|
|
184,880
|
|
|
|
196,871
|
|
|
|
(4,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
70
|
|
|
|
69
|
|
|
|
65
|
|
|
Collateral fees
|
|
|
1,542
|
|
|
|
2,037
|
|
|
|
2,504
|
|
|
Total noninterest income
|
|
|
1,612
|
|
|
|
2,106
|
|
|
|
2,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing costs
|
|
|
6,958
|
|
|
|
7,937
|
|
|
|
9,382
|
|
|
Other
|
|
|
706
|
|
|
|
685
|
|
|
|
734
|
|
|
Total noninterest expense
|
|
|
7,664
|
|
|
|
8,622
|
|
|
|
10,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
178,828
|
|
|
$
|
190,355
|
|
|
$
|
(11,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on preferred securities
|
|
|
12,006
|
|
|
|
12,273
|
|
|
|
16,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
(1)
|
|
$
|
166,822
|
|
|
$
|
178,082
|
|
|
$
|
(28,183
|
)
|
|
(1) All of HPCI’s common stock is owned by HPCII and Holdings and therefore, net income (loss) per share is not presented.
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements
.
|
Huntington Preferred Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
Statements of Changes in Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred,
Class A
|
|
|
Preferred,
Class B
|
|
|
Preferred,
Class C
|
|
|
(all amounts
in thousands)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance, January 1, 2009
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
|
|
Preferred,
Class D
|
|
|
Preferred,
Class E
|
|
|
Preferred
|
|
|
Common
|
|
|
Retained
|
|
|
|
|
|
(all amounts
in thousands)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009
|
|
|
14,000
|
|
|
$
|
350,000
|
|
|
|
---
|
|
|
$
|
---
|
|
|
|
---
|
|
|
$
|
---
|
|
|
|
14,000
|
|
|
$
|
3,660,217
|
|
|
$
|
---
|
|
|
$
|
4,461,217
|
|
|
Comprehensive (Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,988
|
)
|
|
|
(11,988
|
)
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,988
|
)
|
|
Dividends declared on Class A preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
(80
|
)
|
|
Dividends declared on Class B preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,461
|
)
|
|
|
(3,461
|
)
|
|
Dividends declared on Class C preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,938
|
)
|
|
|
(3,938
|
)
|
|
Dividends declared on Class D preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,716
|
)
|
|
|
(8,716
|
)
|
|
Return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
(500,000
|
)
|
|
Balance, December 31, 2009
|
|
|
14,000
|
|
|
$
|
350,000
|
|
|
|
---
|
|
|
$
|
---
|
|
|
|
---
|
|
|
$
|
---
|
|
|
|
14,000
|
|
|
$
|
3,160,217
|
|
|
$
|
(28,183
|
)
|
|
$
|
3,933,034
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,355
|
|
|
|
190,355
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,355
|
|
|
Dividends declared on Class A preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
(80
|
)
|
|
Dividends declared on Class B preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,369
|
)
|
|
|
(1,369
|
)
|
|
Dividends declared on Class C preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,938
|
)
|
|
|
(3,938
|
)
|
|
Dividends declared on Class D preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,210
|
)
|
|
|
(5,210
|
)
|
|
Dividends declared on Class E preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,676
|
)
|
|
|
(1,676
|
)
|
|
Conversion of shares
|
|
|
(14,000
|
)
|
|
|
(350,000
|
)
|
|
|
1,400
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
---
|
|
|
Dividends declared on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149,899
|
)
|
|
|
(149,899
|
)
|
|
Return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(350,101
|
)
|
|
|
|
|
|
|
(350,101
|
)
|
|
Balance, December 31, 2010
|
|
|
---
|
|
|
$
|
---
|
|
|
|
1,400
|
|
|
$
|
350,000
|
|
|
|
---
|
|
|
$
|
---
|
|
|
|
14,000
|
|
|
$
|
2,810,116
|
|
|
$
|
---
|
|
|
$
|
3,611,116
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,828
|
|
|
|
178,828
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,828
|
|
|
Dividends declared on Class
A preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
(80
|
)
|
|
Dividends declared on Class
B preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,227
|
)
|
|
|
(1,227
|
)
|
|
Dividends declared on Class
C preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,938
|
)
|
|
|
(3,938
|
)
|
|
Dividends declared on Class
E preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,761
|
)
|
|
|
(6,761
|
)
|
|
Dividends declared on common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
---
|
|
|
|
---
|
|
|
Return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
---
|
|
|
|
|
|
|
|
---
|
|
|
Balance, December 31, 2011
|
|
|
---
|
|
|
$
|
---
|
|
|
|
1,400
|
|
|
$
|
350,000
|
|
|
|
---
|
|
|
$
|
---
|
|
|
|
14,000
|
|
|
$
|
2,810,116
|
|
|
$
|
166,822
|
|
|
$
|
3,777,938
|
|
See notes to financial statements.
|
Huntington Preferred Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
(dollar amounts in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
178,828
|
|
|
$
|
190,355
|
|
|
$
|
(11,988
|
)
|
|
Adjustments to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(37,529
|
)
|
|
|
(43,350
|
)
|
|
|
171,926
|
|
|
Change in due to/from The Huntington National Bank
|
|
|
(2
|
)
|
|
|
726
|
|
|
|
5,927
|
|
|
Other, net
|
|
|
1,240
|
|
|
|
1,985
|
|
|
|
4,069
|
|
|
Net cash provided by (used for) operating
activities
|
|
|
142,537
|
|
|
|
149,716
|
|
|
|
169,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net participation interests acquired
|
|
|
(2,232,647
|
)
|
|
|
(1,729,981
|
)
|
|
|
(1,538,238
|
)
|
|
Sales and repayments of loans underlying participation interests
|
|
|
2,192,854
|
|
|
|
2,015,095
|
|
|
|
2,032,153
|
|
|
Net cash provided by (used for) investing
activities
|
|
|
(39,793
|
)
|
|
|
285,114
|
|
|
|
493,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred securities
|
|
|
(12,006
|
)
|
|
|
(12,273
|
)
|
|
|
(16,195
|
)
|
|
Dividends paid on common stock
|
|
|
(149,899
|
)
|
|
|
---
|
|
|
|
(224,258
|
)
|
|
Return of capital to common shareholders
|
|
|
(350,101
|
)
|
|
|
(500,000
|
)
|
|
|
(742
|
)
|
|
Net cash provided by (used for) financing
activities
|
|
|
(512,006
|
)
|
|
|
(512,273
|
)
|
|
|
(241,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(409,262
|
)
|
|
|
(77,443
|
)
|
|
|
422,654
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
638,220
|
|
|
|
715,663
|
|
|
|
293,009
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
228,958
|
|
|
$
|
638,220
|
|
|
$
|
715,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and distributions declared, not paid
|
|
$
|
---
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
Non-cash change in loan participation activity with The Huntington National Bank
|
|
|
(21,442
|
)
|
|
|
71,182
|
|
|
|
(41,136
|
)
|
See notes to financial statements.
Huntington Preferred Capital, Inc.
Notes to the Financial Statements
Note 1 -
Significant Accounting Policies
Basis of Presentation:
The financial
statements of
HPCI
are presented in conformity with GAAP. The financial statements reflect all
adjustments, consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation
of the financial position, results of operations, and cash flows for the periods presented.
Business:
HPCI was organized under Ohio law in 1992,
and designated as a REIT in 1998. 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. Two related parties own HPCI’s
common stock: HPCII and Holdings.
HPCII and Holdings are direct and indirect subsidiaries of the Bank,
a national banking association organized under the laws of the United States and headquartered in Columbus, Ohio. The Bank is a
wholly-owned subsidiary of Huntington. Huntington is a multi-state diversified financial holding company organized under Maryland
law and headquartered in Columbus, Ohio. At December 31, 2011, the Bank, on a consolidated basis with its subsidiaries, accounted
for over 99% of Huntington’s consolidated total assets and 97% of the net income. Thus, for purposes of presenting consolidated
financial statements for the Bank, Management considers information for the Bank and for Huntington to be substantially the same.
The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results
could differ from those estimates.
In preparing these financial statements, subsequent events were
evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely
distributed to all shareholders and other financial statement users, or filed with the SEC. In conjunction with applicable accounting
standards, all material subsequent events have been either recognized in the financial statements or disclosed in the Notes to
the Financial Statements.
Due from/to The Huntington National Bank
:
HPCI’s
due from/to The Huntington National Bank primarily consists of the net settlement amounts due to, or from, the Bank for the last
month of the reporting period’s activity. Principal and interest payments on loan participations remitted by customers are
due from the Bank, while new loan participation purchases are due to the Bank. The amounts are settled with the Bank within the
first few days of the following month.
Loan participation interests:
Loan participation interests
are purchased from the Bank either directly or through Holdings by HPCI at the Bank’s carrying value, which is the principal
amount outstanding plus accrued interest, net of unearned income, if any, less an allowance for loan losses. The purchase price
paid approximates fair value on the date the loan participations are purchased. Participation interests are categorized based on
the collateral securing the underlying loan. HPCI does not purchase loan participation interests in loans made to directors or
executive officers of HPCI or Huntington.
ACL:
See Note 3 of the Notes to Financial Statements.
NPAs and Past Due Loan Participations:
See Note 3
of the Notes to Financial Statements.
Charge-off of Uncollectible Loan Participations:
See
Note 3 of the Notes to Financial Statements.
Impaired Loan Participations:
See Note 3 of the Notes
to Financial Statements.
Net Income per Share:
HPCII and Holdings own
all of HPCI’s common stock and, therefore, net income per common share information is not presented.
Income Taxes:
HPCI has elected to be treated
as a REIT for federal income tax purposes and intends to comply with the provisions of the IRC. Accordingly, HPCI will not be subject
to federal income tax to the extent it distributes its earnings, excluding capital gains, to stockholders and as long as certain
asset, income, and stock ownership tests are met in accordance with the IRC.
Statement of Cash Flows:
Cash, cash equivalents,
and interest-bearing deposits are defined as cash and cash equivalents.
Note 2 - Accounting Standards Update
ASU 2011-02 — Receivables (Topic 310), A Creditor’s
Determination of Whether a Restructuring Is a Troubled Debt Restructuring
. The ASU amends Subtopic 310-40 to clarify existing
guidance related to a creditor’s evaluation of whether a restructuring of debt is considered a TDR. The amendments add additional
clarity in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties.
The updated guidance and related disclosure requirements are effective for financial statements issued for the first interim or
annual period beginning on or after June 15, 2011, and should be applied retroactively to the beginning of the annual period of
adoption. The amendment was adopted during the 2011 third quarter and did not have a material impact on HPCI’s Financial
Statements (See Note 3).
ASU 2011-04 — Fair Value Measurement (Topic 820),
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
The ASU amends Topic
820 to add both additional clarifications to existing fair value measurement and disclosure requirements and changes to existing
principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement
of an instrument classified in an entity’s shareholder’s equity and disclosure of quantitative information about the
unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of
financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional
disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued
for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively. Early adoption is
permitted. Management does not believe the principle amendments will have a material impact on HPCI’s Financial Statements.
ASU 2011-05 — Other Comprehensive Income (Topic 220), Presentation
of Comprehensive Income.
The ASU amends Topic 220 to require an entity the option to present the total of comprehensive income,
the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. An entity is also required to present on the face of the financial statements
reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s)
where the components of net income and the components of other comprehensive income are presented. The amendments do not change
items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to
net income, only the format for presentation. The updated guidance and requirements are effective for financial statements issued
for the fiscal years, and the interim periods within those years, beginning after December 15, 2011. The amendments should be applied
retrospectively. Early adoption is permitted. Management does not believe the amendment will have a material impact on HPCI’s
Financial Statements.
ASU 2011-12 — Comprehensive Income (Topic 220):
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive
Income in Accounting Standards Update No. 2011-05.
The ASU defers the effective date pertaining to reclassification adjustments
out of accumulated other comprehensive income in ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income,
until the Board is able to redeliberate the matter. Management does not believe the deferral will have a material impact on HPCI’s
Financial Statements.
Note 3 - Loan Participation Interests and Allowance For Credit
Losses
Loan Participation Interest Portfolio Composition
Loan participation interests are categorized
based on the collateral underlying the loan. At December 31, 2011 and 2010, loan participation interests were comprised of the
following:
|
(dollar amounts in thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,149,330
|
|
|
$
|
2,949,711
|
|
|
Consumer and residential real estate
|
|
|
434,272
|
|
|
|
563,407
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan participation interests
|
|
$
|
3,583,602
|
|
|
$
|
3,513,118
|
|
As shown in the table above, the Company’s
primary loan participation interest portfolios are: CRE and consumer and residential real estate. Classes are generally disaggregations
of a portfolio. The classes within the CRE portfolio are: retail properties, multi family, office, industrial and warehouse, and
other CRE. The classes within the consumer and residential real estate portfolio are: first-lien loan participation interests and
second-lien loan participation interests.
Other than the credit risk concentration described
above, there were no other underlying loans outstanding that would be considered a concentration of lending in any particular industry,
group of industries, or business activity. Underlying loans were, however, generally collateralized by real estate. Loans made
to borrowers in the five states of Ohio, Michigan, Indiana, Kentucky, and Pennsylvania, comprised approximately 93% and 96% of
the portfolio at December 31, 2011 and 2010, respectively.
Loan Participation Interest Purchases and Sales
The following table summarizes significant
portfolio purchase activity during the years ended December 31, 2011 and 2010:
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Total
|
|
|
Portfolio loan participation interests purchased during the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
$
|
2,197,034
|
|
|
$
|
---
|
|
|
$
|
2,197,034
|
|
|
Year ended December 31, 2010
|
|
|
1,735,177
|
|
|
|
---
|
|
|
|
1,735,177
|
|
There were no significant portfolio loan participation
interest sales during either of the years ended December 31, 2011 and 2010.
NPAs and Past Due Loan Participation Interests
Loan participation interests are considered
past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual
due date.
Any loan participation interest in either portfolio
may be placed on nonaccrual status prior to policies described below when collection of principal or interest is in doubt.
Loan participation interests in all classes
within the CRE portfolio are placed on nonaccrual status at 90-days past due. First-lien and second-lien consumer and residential
real estate loan participation interests are placed on nonaccrual status at 150-days past due and 120-days past due, respectively.
For all classes within all portfolios, when a loan participation interest is placed on nonaccrual status, any accrued interest
income is reversed with current year accruals charged to interest income, and prior year amounts charged-off as a credit loss.
For all classes within all portfolios, cash
receipts received on NPAs are applied entirely against principal until the loan has been collected in full, after which time any
additional cash receipts are recognized as interest income.
The amount of interest that would have
been recorded under the original terms for participations in loans classified as nonaccrual was $4.8 million for 2011, $6.1 million
for 2010, and $7.3 million for 2009. Amounts actually collected and recorded as interest income for these participations totaled
$0.6 million, $0.4 million, and $0.6 million in the same respective years.
Regarding all classes within CRE portfolio,
the determination of a borrower’s ability to make the required principal and interest payments is based on an examination
of the borrower’s current financial statements, industry, management capabilities, and other qualitative measures. For all
classes within the consumer and residential real estate portfolio, the determination of a borrower’s ability to make the
required principal and interest payments is based on multiple factors, including number of days past due and, in some instances,
an evaluation of the borrower’s financial condition. When, in Management’s judgment, the borrower’s ability to
make required principal and interest payments resumes and collectability is no longer in doubt, the loan participation interest
is returned to accrual status. For these loan participation interests that have been returned to accrual status, cash receipts
are applied according to the contractual terms of the loan.
The following table presents NPAs by loan class
for the years ended December 31, 2011 and 2010:
|
(dollar amounts in
thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
15,346
|
|
|
$
|
6,628
|
|
|
Retail properties
|
|
|
8,107
|
|
|
|
14,155
|
|
|
Office
|
|
|
8,476
|
|
|
|
2,875
|
|
|
Multi family
|
|
|
1,248
|
|
|
|
1,381
|
|
|
Other commercial real estate
|
|
|
12,308
|
|
|
|
28,914
|
|
|
Total commercial real estate
|
|
$
|
45,485
|
|
|
$
|
53,953
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
5,387
|
|
|
$
|
4,362
|
|
|
Secured by second-lien
|
|
|
710
|
|
|
|
428
|
|
|
Total consumer and residential real estate
|
|
$
|
6,097
|
|
|
$
|
4,790
|
|
|
Total nonperforming assets
|
|
$
|
51,582
|
|
|
$
|
58,743
|
|
The following table presents an aging analysis
of loan participation interests, including past due loan participation interests, for the years ended December 31, 2011 and 2010
(1):
|
December
31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loan
|
|
|
90 or more days
|
|
|
(dollar amounts in thousands)
|
|
Past Due
|
|
|
|
|
|
Participation
|
|
|
past due and
|
|
|
|
|
30-59
days
|
|
|
60-89
days
|
|
|
90
or more days
|
|
|
Total
|
|
|
Current
|
|
|
Interests
|
|
|
accruing
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and
warehouse
|
|
$
|
395
|
|
|
$
|
10
|
|
|
$
|
14,952
|
|
|
$
|
15,357
|
|
|
$
|
727,251
|
|
|
$
|
742,608
|
|
|
$
|
---
|
|
|
Retail properties
|
|
|
782
|
|
|
|
613
|
|
|
|
6,067
|
|
|
|
7,462
|
|
|
|
662,450
|
|
|
|
669,912
|
|
|
|
---
|
|
|
Office
|
|
|
296
|
|
|
|
196
|
|
|
|
7,922
|
|
|
|
8,414
|
|
|
|
515,784
|
|
|
|
524,198
|
|
|
|
---
|
|
|
Multi family
|
|
|
---
|
|
|
|
13
|
|
|
|
1,236
|
|
|
|
1,249
|
|
|
|
216,803
|
|
|
|
218,052
|
|
|
|
---
|
|
|
Other
commercial real estate
|
|
|
847
|
|
|
|
596
|
|
|
|
11,304
|
|
|
|
12,747
|
|
|
|
981,813
|
|
|
|
994,560
|
|
|
|
---
|
|
|
Total commercial real estate
|
|
$
|
2,320
|
|
|
$
|
1,428
|
|
|
$
|
41,481
|
|
|
$
|
45,229
|
|
|
$
|
3,104,101
|
|
|
$
|
3,149,330
|
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
5,590
|
|
|
$
|
2,143
|
|
|
$
|
9,112
|
|
|
$
|
16,845
|
|
|
$
|
303,750
|
|
|
$
|
320,595
|
|
|
$
|
3,725
|
|
|
Secured
by second-lien
|
|
|
2,831
|
|
|
|
1,212
|
|
|
|
1,192
|
|
|
|
5,235
|
|
|
|
108,442
|
|
|
|
113,677
|
|
|
|
483
|
|
|
Total consumer and residential real estate
|
|
$
|
8,421
|
|
|
$
|
3,355
|
|
|
$
|
10,304
|
|
|
$
|
22,080
|
|
|
$
|
412,192
|
|
|
$
|
434,272
|
|
|
$
|
4,208
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loan
|
|
|
90 or more days
|
|
|
(dollar amounts in thousands)
|
|
Past Due
|
|
|
|
|
|
Participation
|
|
|
past due and
|
|
|
|
|
30-59 days
|
|
|
60-89 days
|
|
|
90 or more days
|
|
|
Total
|
|
|
Current
|
|
|
Interests
|
|
|
accruing
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and
warehouse
|
|
$
|
4,845
|
|
|
$
|
646
|
|
|
$
|
4,710
|
|
|
$
|
10,201
|
|
|
$
|
641,580
|
|
|
$
|
651,781
|
|
|
$
|
---
|
|
|
Retail properties
|
|
|
735
|
|
|
|
670
|
|
|
|
13,273
|
|
|
|
14,678
|
|
|
|
544,922
|
|
|
|
559,600
|
|
|
|
---
|
|
|
Office
|
|
|
9,394
|
|
|
|
516
|
|
|
|
2,471
|
|
|
|
12,381
|
|
|
|
533,042
|
|
|
|
545,423
|
|
|
|
---
|
|
|
Multi family
|
|
|
---
|
|
|
|
---
|
|
|
|
1,370
|
|
|
|
1,370
|
|
|
|
241,091
|
|
|
|
242,461
|
|
|
|
---
|
|
|
Other
commercial real estate
|
|
|
16,507
|
|
|
|
2,863
|
|
|
|
15,727
|
|
|
|
35,097
|
|
|
|
915,349
|
|
|
|
950,446
|
|
|
|
---
|
|
|
Total commercial real estate
|
|
$
|
31,481
|
|
|
$
|
4,695
|
|
|
$
|
37,551
|
|
|
$
|
73,727
|
|
|
$
|
2,875,984
|
|
|
$
|
2,949,711
|
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
6,737
|
|
|
$
|
1,901
|
|
|
$
|
7,760
|
|
|
$
|
16,398
|
|
|
$
|
384,925
|
|
|
$
|
401,323
|
|
|
$
|
3,400
|
|
|
Secured
by second-lien
|
|
|
3,079
|
|
|
|
1,655
|
|
|
|
1,830
|
|
|
|
6,564
|
|
|
|
155,520
|
|
|
|
162,084
|
|
|
|
1,402
|
|
|
Total consumer and residential real estate
|
|
$
|
9,816
|
|
|
$
|
3,556
|
|
|
$
|
9,590
|
|
|
$
|
22,962
|
|
|
$
|
540,445
|
|
|
$
|
563,407
|
|
|
$
|
4,802
|
|
|
(1)
|
NPAs are included in this aging analysis based on the loan participation interest's past due status.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses
The
ACL is comprised of the ALPL
and the AULPC, and reflects Management’s judgment regarding the appropriate level necessary to absorb credit losses inherent
in the loan participation interest portfolio. It is HPCI’s policy to utilize the Bank’s analysis as of the end of each
reporting date to estimate the required level of the ALPL and AULPC. The determination of the ACL requires significant estimates,
including the timing and amounts of expected future cash flows on impaired loan participation interests, consideration of economic
conditions, and historical loss experience pertaining to pools of homogeneous loan participation interests, all of which may be
susceptible to change.
The appropriateness
of the ACL is based on Management’s current judgments about the credit quality of the loan participation interests portfolio.
These judgments consider on-going evaluations of the loan participation interests portfolio, including such factors as the differing
economic risks associated with each loan participation interests category, the financial condition of specific borrowers, the level
of delinquent loan participation interests, the value of any collateral and, where applicable, the existence of any guarantees
or other documented support.
Further, Management evaluates the impact of changes in interest rates and overall economic
conditions on the ability of borrowers to meet their financial obligations when quantifying the exposure to credit losses and assessing
the appropriateness of the ACL at each reporting date. In addition to general economic conditions and the other factors described
above, additional factors also considered include: the impact of declining residential real estate values; the diversification
of commercial real estate loan participation interests; and the amount of loan participation interests to businesses in areas of
Ohio and Michigan that have historically experienced less economic growth compared with Pennsylvania, Indiana, and Kentucky. Also,
the ACL assessment includes the on-going assessment of credit quality metrics, and a comparison of certain ACL benchmarks to current
performance.
ALPL is transferred to HPCI either directly
or through Holdings from the Bank on loan participation interests underlying the participation interests at the time the participation
interests are acquired. This transfer of ALPL is reflected as ALPL acquired, rather than HPCI recording provision for credit losses.
Based on Management’s quarterly evaluation of the factors previously mentioned, the ALPL may either be increased through
a provision for credit losses, net of recoveries, charged to earnings or lowered through a reduction in allowance for credit losses,
net of recoveries, credited to earnings. Credit losses are charged against the ALPL when Management believes the loan participation
interest balance, or a portion thereof, is uncollectible.
The ALPL consists of two components: (1) the
transaction reserve, which includes specific reserves related to loan participation interests considered to be impaired and loan
participation interests involved in TDRs, and (2) the general reserve. The transaction reserve component includes both (1) an estimate
of loss based on pools of commercial and consumer loan participation interests with similar characteristics and (2) an estimate
of loss based on an impairment review of each CRE loan participation interest greater than $1 million. For the CRE portfolio, the
estimate of loss based on pools of loan participation interests with similar characteristics is made by applying a PD factor and
a LGD factor to each individual loan based on a continuously updated loan grade, using a standardized loan grading system. The
PD and LGD factors are determined for each loan grade using statistical models based on historical performance data. The PD factor
considers on-going reviews of the financial performance of the specific borrower, including cash flow, debt-service coverage ratio,
earnings power, debt level, and equity position, in conjunction with an assessment of the borrower’s industry and future
prospects. The LGD factor considers analysis of the type of collateral and the relative LTV ratio. These reserve factors are developed
based on credit migration models that track historical movements of loan participation interests between loan ratings over time
and a combination of long-term average loss experience of our own portfolio and external industry data using a 24-month emergence
period.
In the case of more homogeneous portfolios,
such as the consumer and residential real estate portfolio, the determination of the transaction reserve also incorporates PD and
LGD factors, however, the estimate of loss is based on pools of loan participation interests with similar characteristics. The
PD factor considers current credit scores unless the account is delinquent, in which case a higher PD factor is used. The credit
score provides a basis of understanding the borrowers past and current payment performance, and this information is used to estimate
expected losses over the subsequent 12-month period. The performance of first-lien loans ahead of second-lien loans is available
to use as part of the updated score process. The LGD factor considers analysis of the type of collateral and the relative LTV ratio.
Credit scores, models, analyses, and other factors used to determine both the PD and LGD factors are updated frequently to capture
the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination
strategies, and adjustments to the allowance factors are made as needed.
The general reserve consists of economic reserve
and risk-profile reserve components. The economic reserve component considers the potential impact of changing market and economic
conditions on portfolio performance. The risk-profile component considers items unique to our structure, policies, processes, and
portfolio composition, as well as qualitative measurements and assessments of the portfolios including, but not limited to, management
quality, concentrations, portfolio composition, industry comparisons, and internal review functions.
The estimate for the AULPC is determined using
the same procedures and methodologies as used for the ALPL. The loss factors used in the AULPC are the same as the loss factors
used in the ALPL while also considering a historical utilization of unused commitments. The AULPC is reflected as a liability in
the Balance Sheets.
The ACL is increased through a provision for
credit losses that is charged to earnings, based on Management’s quarterly evaluation of the factors previously mentioned,
and is reduced by charge-offs, net of recoveries. A summary of the transactions in the ACL, as well as summary information regarding
impaired loan participation interests, follows for the three years ended December 31, 2011, 2010, and 2009:
|
(dollar amounts in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
ALPL balance, beginning of year
|
|
$
|
110,103
|
|
|
$
|
156,431
|
|
|
$
|
65,456
|
|
|
Allowance related to loan participations acquired
|
|
|
46,205
|
|
|
|
57,040
|
|
|
|
33,632
|
|
|
Net loan losses
|
|
|
(35,570
|
)
|
|
|
(60,027
|
)
|
|
|
(115,277
|
)
|
|
Provision for (reduction in) ALPL
|
|
|
(36,966
|
)
|
|
|
(43,341
|
)
|
|
|
172,620
|
|
|
ALPL balance, end of year
|
|
$
|
83,772
|
|
|
$
|
110,103
|
|
|
$
|
156,431
|
|
|
AULPC balance, beginning of year
|
|
$
|
1,598
|
|
|
$
|
1,607
|
|
|
$
|
2,301
|
|
|
Provision for (reduction in) AULPC
|
|
|
(563
|
)
|
|
|
(9
|
)
|
|
|
(694
|
)
|
|
AULPC balance, end of year
|
|
$
|
1,035
|
|
|
$
|
1,598
|
|
|
$
|
1,607
|
|
|
Total ACL
|
|
$
|
84,807
|
|
|
$
|
111,701
|
|
|
$
|
158,038
|
|
|
Balance of impaired loan participations, at end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With specific reserves assigned to the loan participation balances
|
|
$
|
39,196
|
|
|
$
|
22,568
|
|
|
$
|
82,255
|
|
|
With no specific reserves assigned to the loan participation balances
|
|
|
---
|
|
|
|
6,190
|
|
|
|
47,834
|
|
|
Total
|
|
$
|
39,196
|
|
|
$
|
28,758
|
|
|
$
|
130,089
|
|
|
Allowance for loan participation losses on impaired loans
|
|
$
|
3,805
|
|
|
$
|
8,271
|
|
|
$
|
17,761
|
|
|
Average balance of impaired loan participations for the year
|
|
|
38,988
|
|
|
|
78,458
|
|
|
|
124,057
|
|
The following table presents ACL activity by
portfolio segment for the years ended December 31, 2011 and 2010:
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential Real
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Estate
|
|
|
Total
|
|
|
Allowance for Credit Losses:
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period:
|
|
$
|
97,920
|
|
|
$
|
12,183
|
|
|
$
|
110,103
|
|
|
Allowance related to loan participations acquired
|
|
|
46,205
|
|
|
|
---
|
|
|
|
46,205
|
|
|
Loan participation charge-offs
|
|
|
(29,697
|
)
|
|
|
(10,291
|
)
|
|
|
(39,988
|
)
|
|
Recoveries of loan participations previously charged-off
|
|
|
3,394
|
|
|
|
1,024
|
|
|
|
4,418
|
|
|
Provision for (reduction in) loan participation losses
|
|
|
(46,267
|
)
|
|
|
9,301
|
|
|
|
(36,966
|
)
|
|
ALPL balance, end of period:
|
|
$
|
71,555
|
|
|
$
|
12,217
|
|
|
$
|
83,772
|
|
|
AULPC balance, beginning of period:
|
|
$
|
1,598
|
|
|
$
|
---
|
|
|
$
|
1,598
|
|
|
Provision for (reduction in) AULPC
|
|
|
(563
|
)
|
|
|
---
|
|
|
|
(563
|
)
|
|
AULPC balance, end of period:
|
|
$
|
1,035
|
|
|
$
|
---
|
|
|
$
|
1,035
|
|
|
ACL balance, end of period:
|
|
$
|
72,590
|
|
|
$
|
12,217
|
|
|
$
|
84,807
|
|
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential Real
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Estate
|
|
|
Total
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
147,893
|
|
|
$
|
8,538
|
|
|
$
|
156,431
|
|
|
Allowance related to loan participations acquired
|
|
|
57,040
|
|
|
|
-
|
|
|
|
57,040
|
|
|
Loan participation charge-offs
|
|
|
(52,474
|
)
|
|
|
(13,468
|
)
|
|
|
(65,942
|
)
|
|
Recoveries of loan participations previously charged-off
|
|
|
5,160
|
|
|
|
755
|
|
|
|
5,915
|
|
|
Provision for (reduction in) loan participation losses
|
|
|
(59,699
|
)
|
|
|
16,358
|
|
|
|
(43,341
|
)
|
|
ALPL balance, end of period
|
|
$
|
97,920
|
|
|
$
|
12,183
|
|
|
$
|
110,103
|
|
|
AULPC balance, beginning of period
|
|
$
|
1,607
|
|
|
$
|
---
|
|
|
$
|
1,607
|
|
|
Provision for (reduction in) AULPC
|
|
|
(9
|
)
|
|
|
---
|
|
|
|
(9
|
)
|
|
AULPC balance, end of period
|
|
$
|
1,598
|
|
|
$
|
---
|
|
|
$
|
1,598
|
|
|
ACL balance, end of period
|
|
$
|
99,518
|
|
|
$
|
12,183
|
|
|
$
|
111,701
|
|
Any loan participation interest in any portfolio
may be charged-off prior to the policies described below if a loss confirming event has occurred. Loss confirming events include,
but are not limited to, bankruptcy (unsecured), continued delinquency, foreclosure, or receipt of an asset valuation indicating
a collateral deficiency and that asset is the sole source of repayment.
CRE loan participation interests are either
charged-off or written down to net realizable value at 90-days past due. First-lien and second-lien consumer and residential real
estate loan participation interests are charged-off to the estimated fair value of the collateral at 150-days past due and 120-days
past due, respectively.
Credit Quality Indicators
To facilitate the monitoring of credit quality
for CRE loan participation interests, and for purposes of determining an appropriate ACL level for these loan participation interests,
the following categories of credit grades are utilized:
Pass = Higher quality loan participation interests that
do not fit any of the other categories described below.
OLEM = Potentially weak loan participation interests.
The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses
are not monitored or mitigated, the asset may weaken or inadequately protect the Company’s position in the future.
Substandard = Inadequately protected loan participation
interests by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan participation interest.
These loan participation interests have identified weaknesses that could hinder normal repayment or collection of the debt. It
is likely that the Company will sustain some loss if any identified weaknesses are not mitigated.
Doubtful = Loan participation interests that have all
of the weaknesses inherent in those loan participation interests classified as Substandard, with the added elements of the full
collection of the loan participation interest is improbable and that the possibility of loss is high.
The categories above, which are derived from
standard regulatory rating definitions, are assigned upon initial approval of the loan and subsequently updated as appropriate.
Commercial loan participation interests categorized
as OLEM, Substandard, or Doubtful are considered Criticized loan participation interests. Commercial loan participation interests
categorized as Substandard or Doubtful are considered Classified loan participation interests.
For all classes within the consumer
and residential real estate portfolio, each loan participation interest is assigned a specific PD factor that is generally based
on the borrower’s most recent credit bureau score (FICO), which is updated quarterly. A
FICO
credit bureau score
is a
credit score
developed by Fair Isaac Corporation based on
data provided by the credit bureaus. The FICO credit bureau score is widely accepted as the standard measure of consumer credit
risk used by lenders, regulators, rating agencies, and consumers. The higher the FICO credit bureau score, the higher likelihood
of repayment and therefore, an indicator of lower credit risk.
The following table presents each loan participation
class by credit quality indicator for the years ended December 31, 2011 and 2010:
|
|
|
December 31, 2011
|
|
|
|
|
Credit Risk Profile by UCS classification
|
|
|
(dollar amounts in thousands)
|
|
Pass
|
|
|
OLEM
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
703,043
|
|
|
$
|
11,698
|
|
|
$
|
27,867
|
|
|
$
|
---
|
|
|
$
|
742,608
|
|
|
Retail properties
|
|
|
606,479
|
|
|
|
46,779
|
|
|
|
16,654
|
|
|
|
---
|
|
|
|
669,912
|
|
|
Office
|
|
|
494,932
|
|
|
|
15,041
|
|
|
|
14,140
|
|
|
|
85
|
|
|
|
524,198
|
|
|
Multi family
|
|
|
204,221
|
|
|
|
2,943
|
|
|
|
10,888
|
|
|
|
---
|
|
|
|
218,052
|
|
|
Other commercial real estate
|
|
|
927,974
|
|
|
|
38,368
|
|
|
|
28,218
|
|
|
|
---
|
|
|
|
994,560
|
|
|
Total commercial real estate
|
|
$
|
2,936,649
|
|
|
$
|
114,829
|
|
|
$
|
97,767
|
|
|
$
|
85
|
|
|
$
|
3,149,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by FICO score (1)
|
|
|
|
|
|
750+
|
|
|
|
650-749
|
|
|
|
<650
|
|
|
|
Other
|
|
|
|
Total
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
142,627
|
|
|
$
|
111,308
|
|
|
$
|
66,660
|
|
|
$
|
---
|
|
|
$
|
320,595
|
|
|
Secured by second-lien
|
|
|
38,997
|
|
|
|
42,069
|
|
|
|
32,611
|
|
|
|
---
|
|
|
|
113,677
|
|
|
Total consumer and residential real estate
|
|
$
|
181,624
|
|
|
$
|
153,377
|
|
|
$
|
99,271
|
|
|
$
|
---
|
|
|
$
|
434,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
Credit Risk Profile by UCS classification
|
|
|
|
(dollar amounts in thousands)
|
|
|
Pass
|
|
|
|
OLEM
|
|
|
|
Substandard
|
|
|
|
Doubtful
|
|
|
|
Total
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
585,662
|
|
|
$
|
27,126
|
|
|
$
|
38,959
|
|
|
$
|
34
|
|
|
$
|
651,781
|
|
|
Retail properties
|
|
|
520,974
|
|
|
|
15,618
|
|
|
|
23,008
|
|
|
|
---
|
|
|
|
559,600
|
|
|
Office
|
|
|
495,171
|
|
|
|
24,170
|
|
|
|
25,998
|
|
|
|
84
|
|
|
|
545,423
|
|
|
Multi family
|
|
|
225,498
|
|
|
|
4,317
|
|
|
|
12,646
|
|
|
|
---
|
|
|
|
242,461
|
|
|
Other commercial real estate
|
|
|
875,022
|
|
|
|
16,521
|
|
|
|
58,842
|
|
|
|
61
|
|
|
|
950,446
|
|
|
Total commercial real estate
|
|
$
|
2,702,327
|
|
|
$
|
87,752
|
|
|
$
|
159,453
|
|
|
$
|
179
|
|
|
$
|
2,949,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Profile by FICO score (1)
|
|
|
|
|
|
750+
|
|
|
|
650-749
|
|
|
|
<650
|
|
|
|
Other
|
|
|
|
Total
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
190,339
|
|
|
$
|
137,888
|
|
|
$
|
72,778
|
|
|
$
|
318
|
|
|
$
|
401,323
|
|
|
Secured by second-lien
|
|
|
60,887
|
|
|
|
59,251
|
|
|
|
41,946
|
|
|
|
---
|
|
|
|
162,084
|
|
|
Total consumer and residential real estate
|
|
$
|
251,226
|
|
|
$
|
197,139
|
|
|
$
|
114,724
|
|
|
$
|
318
|
|
|
$
|
563,407
|
|
(1)
Reflects currently updated customer credit scores.
Impaired Loans
For all classes within the CRE portfolio, all
loan participation interests with an outstanding balance of greater than $1 million are considered for individual impairment evaluation
on a quarterly basis. Generally, consumer loan participation interests within any class are not individually evaluated on a regular
basis for impairment. Additionally, all TDRs, regardless of the outstanding balance amount, are also considered to be impaired.
Once a loan participation interest has been
identified for an assessment of impairment, the loan participation interest is considered impaired when, based on current information
and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected.
This determination requires significant judgment and use of estimates, and the eventual outcome may differ significantly from those
estimates.
When a loan participation interest in any class
has been determined to be impaired, t
he amount of the impairment is measured using the present value
of expected future cash flows discounted at the loan participation interest’s effective interest rate or, as a practical
expedient, the observable market price of the loan participation interest, or the fair value of the collateral if the loan participation
interest is collateral-dependent. When the present value of expected future cash flows is used, the effective interest rate is
the original contractual interest rate of the loan participation interest adjusted for any premium or discount. When the contractual
interest rate is variable, the effective interest rate of the loan participation interest changes over time. A specific reserve
is established as a component of the ALPL when a loan participation interest has been determined to be impaired.
Subsequent
to the initial measurement of impairment, if there is a significant change to the impaired loan participation interest's expected
future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, the impairment
is recalculated and the specific reserve is appropriately adjusted. Similarly, if impairment is measured based on the observable
market price of an impaired loan participation interest or the fair value of the collateral of an impaired collateral-dependent
loan participation interest, the specific reserve is adjusted.
When a loan participation interest within any
class is impaired, interest income is discontinued unless the receipt of principal and interest is no longer in doubt. Interest
income on TDRs is accrued when all principal and interest is expected to be collected under the post-modification terms. Cash receipts
received on nonaccrual impaired loan participation interests within any class are generally applied entirely against principal
until the loan participation interest has been collected in full, after which time any additional cash receipts are recognized
as interest income. Cash receipts received on accruing impaired loan participation interests within any class are applied in the
same manner as accruing loan participation interests that are not considered impaired.
The following tables present the balance of
the ALPL attributable to loans by portfolio segment individually and collectively evaluated for impairment and the related loan
participation interest balance for the years ended December 31, 2011 and 2010 (1):
|
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Total
|
|
|
ALPL at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Portion of ending balance:
|
|
|
|
|
|
|
|
|
|
|
Attributable to loan participation interests individually evaluated for impairment
|
|
$
|
3,274
|
|
|
$
|
531
|
|
|
$
|
3,805
|
|
|
Attributable to loan participation interests collectively evaluated for impairment
|
|
|
68,281
|
|
|
|
11,686
|
|
|
|
79,967
|
|
|
Total ALPL balance
|
|
$
|
71,555
|
|
|
$
|
12,217
|
|
|
$
|
83,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Participation Interests at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
24,597
|
|
|
$
|
14,599
|
|
|
$
|
39,196
|
|
|
Collectively evaluated for impairment
|
|
|
3,124,733
|
|
|
|
419,673
|
|
|
|
3,544,406
|
|
|
Total loan participation interests evaluated for impairment
|
|
$
|
3,149,330
|
|
|
$
|
434,272
|
|
|
$
|
3,583,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ALPL balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to loan participation interests individually evaluated for impairment
|
|
$
|
8,115
|
|
|
$
|
156
|
|
|
$
|
8,271
|
|
|
Attributable to loan participation interests collectively evaluated for impairment
|
|
|
89,805
|
|
|
|
12,027
|
|
|
|
101,832
|
|
|
Total ALPL balance
|
|
$
|
97,920
|
|
|
$
|
12,183
|
|
|
$
|
110,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Participation Interests at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
25,294
|
|
|
$
|
3,464
|
|
|
$
|
28,758
|
|
|
Collectively evaluated for impairment
|
|
|
2,924,417
|
|
|
|
559,943
|
|
|
|
3,484,360
|
|
|
Total loan participation interests evaluated for impairment
|
|
$
|
2,949,711
|
|
|
$
|
563,407
|
|
|
$
|
3,513,118
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the years ended December 31, 2011 and 2010, no loans with deteriorated credit quality were acquired.
|
The following tables present by class the ending,
unpaid principal balance, and the related ALPL, along with the average balance and interest income recognized only for loan participation
interests individually evaluated for impairment for the years ended December 31, 2011 and 2010 (1), (2):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December
31, 2011
|
|
|
December 31, 2011
|
|
|
|
|
Unpaid
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
Principal
|
|
|
Related
|
|
|
Average
|
|
|
Income
|
|
|
(dollar amounts in thousands)
|
|
Balance
|
|
|
Balance (4)
|
|
|
Allowance
|
|
|
Balance
|
|
|
Recognized
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
539
|
|
|
$
|
15
|
|
|
Retail properties
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
3,282
|
|
|
|
---
|
|
|
Office
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Multi family
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Other commercial real estate
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
70
|
|
|
|
---
|
|
|
Total commercial real estate
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
3,891
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
Secured by second-lien
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Total consumer and residential real estate
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
14,544
|
|
|
$
|
22,484
|
|
|
$
|
1,370
|
|
|
$
|
10,555
|
|
|
$
|
20
|
|
|
Retail properties
|
|
|
1,755
|
|
|
|
3,278
|
|
|
|
488
|
|
|
|
726
|
|
|
|
---
|
|
|
Office
|
|
|
5,100
|
|
|
|
11,822
|
|
|
|
645
|
|
|
|
3,836
|
|
|
|
---
|
|
|
Multi family
|
|
|
2,042
|
|
|
|
2,225
|
|
|
|
189
|
|
|
|
1,547
|
|
|
|
2
|
|
|
Other commercial real estate
|
|
|
1,156
|
|
|
|
2,345
|
|
|
|
582
|
|
|
|
6,167
|
|
|
|
15
|
|
|
Total commercial real estate
|
|
$
|
24,597
|
|
|
$
|
42,154
|
|
|
$
|
3,274
|
|
|
$
|
22,831
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
11,901
|
|
|
$
|
12,424
|
|
|
$
|
309
|
|
|
$
|
9,792
|
|
|
$
|
491
|
|
|
Secured by second-lien
|
|
|
2,698
|
|
|
|
2,698
|
|
|
|
222
|
|
|
|
2,474
|
|
|
|
201
|
|
|
Total consumer and residential real estate
|
|
$
|
14,599
|
|
|
$
|
15,122
|
|
|
$
|
531
|
|
|
$
|
12,266
|
|
|
$
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December
31, 2010
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Ending
|
|
|
Unpaid Principal
|
|
|
Related
|
|
|
Average
|
|
|
Income
|
|
|
(dollar amounts
in thousands)
|
|
Balance
|
|
|
Balance
(4)
|
|
|
Allowance
|
|
|
Balance
|
|
|
Recognized
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
Retail properties
|
|
|
6,066
|
|
|
|
20,320
|
|
|
|
---
|
|
|
|
5,354
|
|
|
|
---
|
|
|
Office
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Multi family
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Other
commercial real estate
|
|
|
124
|
|
|
|
124
|
|
|
|
---
|
|
|
|
1,421
|
|
|
|
1
|
|
|
Total commercial real estate
|
|
$
|
6,190
|
|
|
$
|
20,444
|
|
|
$
|
---
|
|
|
$
|
6,775
|
|
|
$
|
1
|
|
|
Consumer and residential real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
Secured
by second-lien
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Total consumer and residential
real estate
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
15,751
|
|
|
$
|
---
|
|
|
Retail properties
|
|
|
3,696
|
|
|
|
4,400
|
|
|
|
1,103
|
|
|
|
19,962
|
|
|
|
---
|
|
|
Office
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
7,228
|
|
|
|
---
|
|
|
Multi family
|
|
|
1,370
|
|
|
|
1,436
|
|
|
|
675
|
|
|
|
6,267
|
|
|
|
---
|
|
|
Other
commercial real estate
|
|
|
14,039
|
|
|
|
23,364
|
|
|
|
6,336
|
|
|
|
19,436
|
|
|
|
---
|
|
|
Total commercial real estate
|
|
$
|
19,105
|
|
|
$
|
29,200
|
|
|
$
|
8,114
|
|
|
$
|
68,644
|
|
|
$
|
---
|
|
|
Consumer and residential real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
3,464
|
|
|
$
|
3,952
|
|
|
$
|
156
|
|
|
$
|
3,039
|
|
|
$
|
151
|
|
|
Secured
by second-lien
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Total consumer and residential
real estate
|
|
$
|
3,464
|
|
|
$
|
3,952
|
|
|
$
|
156
|
|
|
$
|
3,039
|
|
|
$
|
151
|
|
|
|
(1)
|
These tables do not include loans fully charged-off.
|
|
|
(2)
|
All consumer and residential real estate impaired loans
are considered impaired due to their status as a TDR.
|
|
|
(3)
|
At December 31, 2011, $82 thousand of the $24,597 thousand
commercial real estate loan participation interests with an allowance recorded were considered impaired due to their status as
a TDR.
|
|
|
(4)
|
The differences between the ending balance and unpaid
principal balance amounts represent partial charge-offs.
|
TDR Loan Participation Interests
TDRs are modified loan participation interests
where a concession was provided to a borrower experiencing financial difficulties. Loan participation interest modifications are
considered TDRs when the concessions provided are not available to the borrower through either the Bank’s normal channels
or other sources. However, not all loan participation interest modifications are TDRs.
TDR Concession Types
The Bank’s standards relating to loan
modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations.
Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific
circumstances at a point in time. Commercial loan modifications, including those classified as TDRs, are reviewed and approved
by the Bank’s SAD. The types of concessions provided to borrowers include:
|
|
·
|
Interest rate reduction: A reduction of the stated
interest rate to a nonmarket rate for the remaining original life of the debt.
|
|
|
·
|
Amortization or maturity date change beyond what the
collateral supports, including any of the following:
|
|
|
(1)
|
Lengthens the amortization period of the amortized
principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment
at the end of the term of the loan. Principal is generally not forgiven.
|
|
|
(2)
|
Reduces the amount of loan principal to be amortized.
This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term
of the loan. Principal is generally not forgiven.
|
|
|
(3)
|
Extends the maturity date or dates of the debt beyond
what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the
loan.
|
|
|
·
|
Other: A concession that is not categorized as one
of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions,
covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession
type. However, the aggregate amount of principal forgiven as a result of loans modified as TDRs during the year ended December
31, 2011, was not significant.
|
TDRs by Loan Participation Interest Type
The following is a description of TDRs by loan
participation interest type:
Commercial real estate loan participation interest
TDRs
– CRE accruing TDRs often result from loan participation interests receiving a concession with terms that are
not considered a market transaction to the Bank. The TDR remains in accruing status as long as the customer is less than 90-days
past due on payments per the restructured loan participation interest terms and no loss is expected.
CRE nonaccrual TDRs result from
either: (1) an accruing CRE TDR being placed on nonaccrual status, or (2) a workout where an existing CRE NAL is restructured and
a concession was given. At times, these workouts restructure the NAL so that two or more new notes are created. The primary note
is underwritten based upon the Bank’s normal underwriting standards and is sized so projected cash flows are sufficient to
repay contractual principal and interest. The terms on the secondary note(s) vary by situation, and may include notes that defer
principal and interest payments until after the primary note is repaid. Creating two or more notes often allows the borrower to
continue a project or weather a temporary economic downturn and allows the Bank to right-size a loan based upon the current expectations
for a borrower’s or project’s performance.
Our strategy involving TDR borrowers
includes working with these borrowers to allow them to refinance elsewhere as well as allow them time to improve their financial
position and remain our customer through refinancing their notes according to market terms and conditions in the future. A refinancing
or modification of a loan occurs when either the loan matures according to the terms of the TDR-modified agreement or the borrower
requests a change to the loan agreements. At that time, the loan is evaluated to determine if it is creditworthy. It is subjected
to the Bank’s normal underwriting standards and process for similar credit extensions, both new and existing.
In accordance with ASC 310-20-35,
the refinanced note is evaluated to determine if it is considered a new loan or a continuation of the prior loan. A new loan is
considered for removal of the TDR designation, whereas a continuation of the prior note requires a continuation of the TDR designation.
In order for the TDR designation to be removed, the borrower must no longer be experiencing financial difficulties and the terms
of the refinanced loan must not represent a concession.
Consumer and residential real estate loan participation
interest TDRs
– Consumer and residential real estate TDRs represent loan modifications associated with traditional
first-lien mortgage loans, as well as first-lien and second-lien home equity loans, in which a concession has been provided to
the borrower. The primary concessions given to these borrowers are amortization or maturity date changes and interest rate reductions.
Consumer and residential real estate loans identified as TDRs include borrowers unable to refinance their mortgages through the
Bank’s normal mortgage origination channels or through other independent sources. Some, but not all, of the loans may be
delinquent.
TDR Impact on Credit Quality
The ALPL is largely driven by updated risk
ratings assigned to CRE loan participation interests, updated borrower credit scores on consumer and residential real estate, and
borrower delinquency history in both portfolios. As such, the provision for credit losses is impacted primarily by changes in borrower
payment performance rather than the TDR classification. TDRs can be classified as either accrual or nonaccrual loan participation
interests. Nonaccrual TDRs are included in NPAs whereas accruing TDRs are excluded from NPAs as it is probable that all contractual
principal and interest due under the restructured terms will be collected.
TDR concessions and classification may reduce
the ALPL within certain classes, specifically the CRE portfolio. The reduction is derived from the type of concessions given to
the borrowers and the resulting application of the transaction reserve calculation within the ALPL. Generally, the Company’s
concessions on TDR loans involve an increase in interest rate and extension of maturity. The transaction reserve for non-TDR
loans is calculated based upon several estimated probability factors, such as PD and LGD, both of which were previously discussed
above. Upon the occurrence of a TDR, the transaction reserve is measured based on the estimation of the probable discounted
future cash flows expected to be collected on the modified loan. The resulting TDR ALPL calculation often results in a minimal
or zero ALPL amount because (1) it is probable all cash flows will be collected and, (2) due to the rate increase, the discounting
of the cash flows on the modified loan participation interest, using the pre-modification interest rate, exceeds the carrying value
of the loan participation interest.
However, TDR concessions and classification
may increase the ALPL to certain loan participation interests, such as consumer and residential real estate loans. The concessions
made to these loan participation interests often include interest rate reductions and therefore the TDR ALPL calculation results
in a greater ALPL compared with the non-TDR calculation.
Commercial real estate loan participation
interest TDRs
– In instances where the Bank substantiates that it will collect the outstanding balance in full, the
note is considered for return to accrual status upon the borrower sustaining sufficient cash flows for a six-month period of time.
This six-month period could extend before or after the restructure date. If a charge-off was taken as part of the restructuring,
any interest or principal payments received on that note are applied to first reduce the outstanding book balance and then to recoveries
of charged-off principal, unpaid interest, and/or fee expenses.
Consumer and residential real estate
loan participation interest TDRs
– Modified loans identified as TDRs are aggregated into pools for analysis. Cash
flows and weighted average interest rates are used to calculate impairment at the pooled-loan level. Once the loans are aggregated
into the pool, they continue to be classified as TDRs until contractually repaid or charged-off.
The following table presents by class and by
the reason for the modification the number of contracts, post-modification outstanding balance, and the net change in ALPL resulting
from the TDR modification for the year ended December 31, 2011:
|
|
|
New Troubled Debt Restructurings During The
|
|
|
|
|
Year Ended December 31, 2011
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-modification
|
|
|
Net change in
|
|
|
(dollar amounts in thousands)
|
|
Number of
|
|
|
Outstanding
|
|
|
ALPL resulting
|
|
|
|
|
Contracts
|
|
|
Balance (2)
|
|
|
from modification
|
|
|
CRE - Industrial and warehouse:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
1
|
|
|
$
|
2,165
|
|
|
$
|
(299
|
)
|
|
Amortization or maturity date change
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Other
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Total CRE - Industrial and Warehouse
|
|
|
1
|
|
|
$
|
2,165
|
|
|
$
|
(299
|
)
|
|
Consumer and residential real estate secured by first-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
22
|
|
|
$
|
2,651
|
|
|
$
|
(157
|
)
|
|
Amortization or maturity date change
|
|
|
41
|
|
|
|
11,799
|
|
|
|
233
|
|
|
Other
|
|
|
3
|
|
|
|
1,996
|
|
|
|
45
|
|
|
Total consumer and residential real estate secured by first-lien
|
|
|
66
|
|
|
$
|
16,446
|
|
|
$
|
121
|
|
|
Consumer and residential real estate secured by second-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
18
|
|
|
$
|
696
|
|
|
$
|
(114
|
)
|
|
Amortization or maturity date change
|
|
|
15
|
|
|
|
135
|
|
|
|
(8
|
)
|
|
Other
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Total consumer and residential real estate secured by second-lien
|
|
|
33
|
|
|
$
|
831
|
|
|
$
|
(122
|
)
|
|
|
(1)
|
For the year ended December 31, 2011, there were no new
troubled debt restructurings for the following classes: CRE - Retail Properties, CRE - Multi family, CRE - Office, and CRE
- Other CRE.
|
|
|
(2)
|
Post-modification balances approximate pre-modification
balances. The aggregate amount of charge-offs as a result of a restructuring are not significant.
|
All classes within the CRE portfolios
are considered as redefaulted at 90-days past due. First-lien and second-lien consumer and residential real estate loan participation
interests are considered as redefaulted at 150-days past due and 120-days past due, respectively.
The following table presents TDRs
modified within the previous twelve months that have subsequently redefaulted during the year ended December 31, 2011:
|
|
|
Troubled Debt
Restructurings Within The Previous Twelve
|
|
|
|
|
Months That
Have Subsequently Redefaulted During The
|
|
|
|
|
Year
Ended December 31, 2011
(1), (2)
|
|
|
|
|
Number of
|
|
|
Ending
|
|
|
(dollar amounts in thousands)
|
|
Contracts
|
|
|
Balance
|
|
|
Consumer and residential real
estate secured by first-lien:
|
|
|
|
|
|
|
|
|
|
Interest rate
reduction
|
|
|
1
|
|
|
$
|
555
|
|
|
Amortization or maturity date
change
|
|
|
9
|
|
|
|
1,193
|
|
|
Other
|
|
|
---
|
|
|
|
---
|
|
|
Total consumer and residential real estate secured
by first-lien
|
|
|
10
|
|
|
$
|
1,748
|
|
|
Consumer and residential real
estate secured by second-lien:
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
1
|
|
|
$
|
14
|
|
|
Amortization or maturity date
change
|
|
|
4
|
|
|
|
247
|
|
|
Other
|
|
|
---
|
|
|
|
---
|
|
|
Total consumer and residential real estate secured
by second-lien
|
|
|
5
|
|
|
$
|
261
|
|
|
|
(1)
|
Subsequent default is defined as a payment redefault
within 12 months of the restructuring date.
|
|
|
(2)
|
For year ended December 31, 2011, there were no troubled
debt restructurings within the previous twelve months that have subsequently redefaulted for the following classes: CRE - Industrial
and warehouse, CRE - Retail properties, CRE - Office, CRE - Multi family, and CRE - Other commercial real estate.
|
Note 4 – Dividends
Holders
of Class A preferred securities, a majority of which are held by Holdings and the remainder by current and past employees of the
Bank, 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 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 nonbank 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 in December and are noncumulative. No dividend, except payable in
common shares, may be declared or paid on Class B preferred securities unless dividend obligations are satisfied on the Class A,
Class C, and Class E 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 E preferred securities, Tower Hill Securities, Inc., 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 three-month LIBOR published on the first day of each calendar quarter, 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 E 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
E 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:
|
(dollar amounts in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A preferred securities
|
|
$
|
80
|
|
|
$
|
80
|
|
|
$
|
80
|
|
|
Class B preferred securities
|
|
|
1,227
|
|
|
|
1,369
|
|
|
|
3,461
|
|
|
Class C preferred securities
|
|
|
3,938
|
|
|
|
3,938
|
|
|
|
3,938
|
|
|
Class D preferred securities
|
|
|
---
|
|
|
|
5,210
|
|
|
|
8,716
|
|
|
Class E preferred securities
|
|
|
6,761
|
|
|
|
1,676
|
|
|
|
---
|
|
|
Total preferred dividends declared
|
|
$
|
12,006
|
|
|
$
|
12,273
|
|
|
$
|
16,195
|
|
As
of December 31, 2011 and 2010, all declared dividends on preferred securities were paid to shareholders
.
Regulatory
approval is required prior to the Bank’s declaration of any dividends in excess of available retained earnings. The amount
of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year
and retained net income for the preceding two years, less any required transfers to surplus or common stock. Based on these regulatory
dividend limitations, the Bank could not have declared and paid a dividend at December 31, 2011, without regulatory approval. As
a subsidiary of the Bank, HPCI is also restricted from declaring or paying dividends to non-bank subsidiaries or outside shareholders
without regulatory approval. The OCC has approved the payment of HPCI's dividends on its preferred securities throughout 2010 and
2011. For the foreseeable future, Management intends to request approval for any future dividend; however, there can be no assurance
that the OCC will approve future dividends.
For HPCI to meet its statutory requirement
for a REIT to distribute 90% of its taxable income, excluding capital gains, to its shareholders, the holders of common shares
received dividends declared by the board of directors, subject to any preferential dividend rights of the outstanding preferred
securities. There were no dividends or return of capital distributions on common stock for the year ended December 31, 2011. The
2010 distributions made in January 2011 met the 2011 REIT distribution requirements. Dividends and return of capital distributions
on common stock declared for each of the years ended December 31, 2010 and 2009 were $500.0 million, and $500.0 million, respectively.
HPCI’s policy is to reinvest the proceeds
of our assets in other interest-earning assets such that our FFO, which represents cash flows from operations, over any period
of four fiscal quarters will equal or exceed 150% of the amount required to pay annual dividends on the Class A, Class C, Class
D, and Class E preferred securities, except as may be necessary to maintain our status as a REIT. FFO is equal to net cash
provided by operating activities as reflected in our statements of cash flows. For the years ended December 31, 2011, 2010,
and 2009, our FFO were $142.5 million, $149.7 million, and $169.9 million, respectively. These amounts exceeded the minimum
requirement of 150% of dividends on Class A, Class C, Class D, and Class E securities of $16.2 million, $16.4 million, and $19.1
million, for the same periods, respectively. HPCI’s Articles of Incorporation provide that we cannot amend or change
this policy with respect to the reinvestment of proceeds without the consent or affirmative vote of the holders of at least two-thirds
of the Class C preferred securities and two-thirds of the Class E preferred securities, voting as separate classes.
Note 5 - Related Party Transactions
The Bank is required, under the Agreements,
to service HPCI’s loan participation interest portfolio in a manner substantially the same as for similar work for transactions
on its own behalf. The Bank collects and remits principal and interest payments, maintains perfected collateral positions, and
submits and pursues insurance claims. In addition, the Bank provides accounting and reporting services to HPCI. The Bank is required
to adhere to HPCI’s policies relating to the relationship between HPCI and the Bank and to pay all expenses related to the
performance of the Bank’s duties under the participation and subparticipation agreements. All of these participation interests
to date were acquired directly or indirectly from the Bank.
The Bank performs the servicing of the
commercial real estate, consumer, and residential real estate loans underlying the participations held by HPCI in accordance with
normal industry practice under the amended participation and subparticipation agreements. In its capacity as servicer, the Bank
collects and holds the loan payments received on behalf of HPCI until the end of each month. Servicing costs incurred by the Bank
totaled $7.0 million, $7.9 million, and $9.4 million for the respective years ended 2011, 2010, and 2009.
In 2011, 2010 and 2009, the annual servicing
rates the Bank charged with respect to outstanding principal balances were:
|
|
|
January 1, 2009
|
|
|
|
|
through
|
|
|
|
|
December 31, 2011
|
|
|
Commercial and commercial real estate
|
|
|
0.125%
|
|
|
Consumer
|
|
|
0.650
|
|
|
Residential real estate
|
|
|
0.267
|
|
Pursuant
to the Agreements, the amount and terms of the loan servicing fee between the Bank and HPCI are determined by mutual agreement
from time-to-time during the terms of the Agreements. In lieu of paying higher servicing costs to the Bank with respect to CRE
loans, HPCI has waived its right to receive any origination fees associated with participation interests in CRE loans. The Bank
and HPCI performed a review of loan servicing fees in 2011, and have agreed to retain current servicing rates for all loan participation
categories, including the continued waiver by HPCI of its right to origination fees, until such time as servicing fees are reviewed
in 2012.
Huntington’s
and the Bank’s personnel 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 pays the Bank and Huntington for the cost related to the time spent
by employees for performing these functions. These personnel costs totaled $0.4 million, $0.4 million, and $0.4 million for each
of the years ended December 31, 2011 and 2010 and 2009, respectively and are recorded in other noninterest expense.
The following table represents the ownership
of HPCI’s outstanding common and preferred securities as of December 31, 2011:
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Number of Preferred Securities
|
|
|
Shareholder:
|
|
Shares
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class E
|
|
|
Held by related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HPCII
|
|
|
11,130,000
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Holdings
|
|
|
2,870,000
|
|
|
|
895
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Tower Hill Securities, Inc.
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,400,000
|
|
|
HPC Holdings-II, Inc.
|
|
|
---
|
|
|
|
---
|
|
|
|
400,000
|
|
|
|
---
|
|
|
|
---
|
|
|
Total held by related parties
|
|
|
14,000,000
|
|
|
|
895
|
|
|
|
400,000
|
|
|
|
---
|
|
|
|
1,400,000
|
|
|
Other shareholders
|
|
|
---
|
|
|
|
105
|
|
|
|
---
|
|
|
|
2,000,000
|
|
|
|
---
|
|
|
Total shares outstanding
|
|
|
14,000,000
|
|
|
|
1,000
|
|
|
|
400,000
|
|
|
|
2,000,000
|
|
|
|
1,400,000
|
|
As
of December 31, 2011, 10.5% of the Class A preferred securities were owned by current and past employees of Huntington and its
subsidiaries in addition to the 89.5% owned by Holdings. 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 December 31, 2011, HPCI board members and executive officers beneficially
owned, in the aggregate, a total of 5,871 shares, or less than 1%, of the HPCI Class C preferred securities. All of the Class E
preferred securities are owned by Tower Hill Securities, Inc. In the event HPCI redeems its Class C or Class E preferred securities,
holders of such securities will be entitled to receive $25.00 per share for Class C shares, $250.00 per share for Class E shares,
plus any accrued and unpaid dividends on such shares. The redemption amount may be significantly lower than the then current market
price of the Class C preferred securities.
Both
the Class C and Class E preferred securities are entitled to one-tenth of one vote per share on all matters submitted to HPCI shareholders.
If the Bank becomes under-capitalized, or is placed in conservatorship or receivership, the OCC may require the exchange of Class
C and Class E Preferred securities for preferred securities of the Bank with substantially equivalent terms. The Class E preferred
securities are currently redeemable and Class C preferred securities are redeemable at HPCI’s option on or after December
31, 2021, with prior consent of the OCC.
As
only related parties hold HPCI’s common stock, there is no established public trading market for this class of stock.
HPCI
had a noninterest-bearing receivable due from the Bank of $40.4 million at December 31, 2011, and $61.8 million at December 31,
2010. The balances represent the net settlement amounts due to, or from, the Bank for the last month of the period’s activity.
Principal and interest payments on loan participations remitted by customers are due from the Bank, while new loan participation
purchases are due to the Bank. The amounts are settled with the Bank within the first few days of the following month.
HPCI
has assets pledged in association with the Bank’s advances from the FHLB. For further information regarding this, see Note
7.
HPCI
maintains and transacts all of its cash activity through the Bank. Typically, cash is invested with the Bank in an interest-bearing
account. These interest-bearing balances are invested overnight or may be invested in Eurodollar deposits with the Bank for a term
of not more than 30 days at market rates.
Note 6 - Fair Value of Financial
Instruments
Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements
are classified within one of three levels in a valuation hierarchy based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable
and significant to the fair value measurement.
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Certain assets and liabilities may be
required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets
and liabilities are not measured at fair value on an on-going basis; however, they are subject to fair value adjustments in certain
circumstances, such as when there is evidence of impairment.
Periodically, HPCI records nonrecurring
adjustments of collateral-dependent loan participation interests measured for impairment when establishing the ACL. Such amounts
are generally based on the fair value of the underlying collateral supporting the loan. Appraisals are generally obtained to support
the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and cost of construction.
HPCI considers these fair values Level 3. In cases where the carrying value exceeds the fair value of the collateral less costs
to sell, an impairment charge is recognized.
For the year ended December 31, 2011,
HPCI identified the following loan participation interests where the carrying value exceeded the fair value of the underlying collateral
for the loan. The fair value impairment was recorded within the provision for credit losses.
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active
|
|
|
|
Significant
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
|
Other
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Identical Assets
|
|
|
|
Observable Inputs
|
|
|
|
Unobservable Inputs
|
|
|
|
Total Gains/
|
|
|
(dollar amounts in millions)
|
|
|
December 31,
|
|
|
|
(Level 1)
|
|
|
|
(Level 2)
|
|
|
|
(Level 3)
|
|
|
|
(Losses)
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan participation interests
|
|
$
|
31.8
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
31.8
|
|
|
$
|
(12.0
|
)
|
There were no changes in the valuation techniques or related
inputs used to measure similar assets in prior periods.
Fair Value of Financial Instruments
The following methods and assumptions
were used by HPCI to estimate the fair value of the classes of financial instruments:
Cash and interest-bearing deposits, and due from The Huntington
National Bank
- The carrying value approximates the fair value based on its highly liquid nature.
Loan participation interests
– Underlying variable
rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for
other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with
similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating
costs, and profit. This value is also reduced by an estimate of probable losses and the credit risk associated in the loan portfolio.
As of December 31, 2011, the net carrying amount of $3.5 billion corresponded to a fair value of $3.2 billion. As of December 31,
2010, the net carrying amount of $3.4 billion corresponded to a fair value of $2.8 billion. At December 31, 2011, t
he valuation
of the loan portfolio reflected discounts that HPCI believed are consistent with transactions occurring in the market place.
Note 7 - Commitments and Contingencies
The
Bank is eligible to obtain collateralized advances from various federal and government-sponsored agencies such as the FHLB. 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 all or a portion of 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 the FHLB 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.
Currently,
HPCI’s assets have been used to collateralize only one such facility. The Bank has a line of credit from the FHLB, limited
to $3.4 billion as of December 31, 2011, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had borrowings
of $0.4 billion under the facility.
HPCI
has entered into an Amended and Restated Agreement with the Bank with respect to the pledge of HPCI’s assets to collateralize
the Bank’s borrowings from the FHLB. The agreement provides that the Bank will not place at risk HPCI’s assets in excess
of an aggregate dollar amount or aggregate percentage of such assets established from time-to-time by HPCI’s board of directors,
including a majority of HPCI’s independent directors.
The pledge limit was established by HPCI’s board at 25%
of total assets, or approximately $0.9 billion as of December 31, 2011, as reflected in HPCI’s month-end management report.
This pledge limit may be changed in the future by the board of directors, including a majority of HPCI’s independent directors.
The amount of HPCI’s participation interests pledged was $0.4 billion at December 31, 2011. In 2011, the loans pledged
consisted of the 1-4 family residential mortgage loans.
The
agreement also provides that the Bank will pay HPCI a monthly fee based upon the total loans pledged by HPCI.
The Bank paid
HPCI a total of $1.5 million, $2.0 million, and $2.5 million in the respective annual periods ended December 31, 2011, 2010, and
2009 as compensation for making such assets available to the Bank.
Under
the terms of the participation and subparticipation agreements, HPCI is obligated to make funds or credit available to the Bank,
either directly or indirectly through Holdings so that the Bank may extend credit to any borrowers, or pay letters-of-credit issued
for the account of any borrowers, to the extent provided in the loan agreements underlying HPCI’s participation interests.
As of December 31, 2011 and 2010, the unfunded loan commitments totaled $233.4 million and $195.7 million, respectively.
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.
Note
9 – Income Taxes
HPCI
accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. As of December 31, 2011, there were no unrecognized
tax benefits. HPCI does not anticipate the total amount of unrecognized tax benefits to significantly change within the next twelve
months.
The
federal tax returns for years ended 2008 and after are open for review by the IRS.
HPCI recognizes interest and penalties
on tax assessments or tax refunds in the financial statements as a component of its provision for income taxes. There were no amounts
recognized for interest and penalties for the years ended December 31, 2011, 2010, and 2009 and no amounts accrued at December
31, 2011 and 2010.
Note
10 - Quarterly Results of Operations (
Unaudited
)
The following is a summary of the unaudited
quarterly results of operations for the years ended December 31:
|
(dollar amounts in thousands)
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
37,105
|
|
|
$
|
37,010
|
|
|
$
|
36,525
|
|
|
$
|
36,711
|
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(7,352
|
)
|
|
|
(23,067
|
)
|
|
|
9,255
|
|
|
|
(16,365
|
)
|
|
Noninterest income
|
|
|
370
|
|
|
|
389
|
|
|
|
415
|
|
|
|
438
|
|
|
Noninterest expense
|
|
|
1,870
|
|
|
|
1,907
|
|
|
|
1,936
|
|
|
|
1,951
|
|
|
Net income
|
|
|
42,957
|
|
|
|
58,559
|
|
|
|
25,749
|
|
|
|
51,563
|
|
|
Dividends declared on preferred securities
|
|
|
(3,114
|
)
|
|
|
(2,867
|
)
|
|
|
(2,971
|
)
|
|
|
(3,054
|
)
|
|
Net income applicable to common shares
|
|
$
|
39,843
|
|
|
$
|
55,692
|
|
|
$
|
22,778
|
|
|
$
|
48,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
37,904
|
|
|
$
|
38,250
|
|
|
$
|
38,550
|
|
|
$
|
38,817
|
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(38,818
|
)
|
|
|
(3,957
|
)
|
|
|
(1,182
|
)
|
|
|
607
|
|
|
Noninterest income
|
|
|
463
|
|
|
|
529
|
|
|
|
541
|
|
|
|
573
|
|
|
Noninterest expense
|
|
|
2,019
|
|
|
|
2,119
|
|
|
|
2,204
|
|
|
|
2,280
|
|
|
Net income
|
|
|
75,166
|
|
|
|
40,617
|
|
|
|
38,069
|
|
|
|
36,503
|
|
|
Dividends declared on preferred securities
|
|
|
(2,951
|
)
|
|
|
(3,406
|
)
|
|
|
(2,953
|
)
|
|
|
(2,963
|
)
|
|
Net income applicable to common shares
|
|
$
|
72,215
|
|
|
$
|
37,211
|
|
|
$
|
35,116
|
|
|
$
|
33,540
|
|
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None
Item 9A: Controls and Procedures.
Disclosure Controls and Procedures
HPCI
maintains disclosure controls and procedures designed to ensure that the information required to be disclosed in the reports that
it files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within
the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files
or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
HPCI's management, with the participation of its President (principal executive officer)
and the Vice President (principal financial officer)
, evaluated the effectiveness of our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.
Based upon such evaluation, HPCI's President and Vice President have concluded that, as of the end of
such period, HPCI's disclosure controls and procedures are effective.
Internal Controls Over Financial Reporting
Information
required by this item is set forth in Report of Management and Report of Independent Registered Public Accounting Firm, which is
incorporated by reference into this item.
Changes in Internal Control Over Financial
Reporting
There
have not been any changes in HPCI’s internal control over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2011 to which this report relates that have materially
affected, or are reasonably likely to materially affect, internal control over financial reporting.
Item 9B: Other Information.
Not applicable.
Part III
Item 10: Directors, Executive Officers and Corporate Governance.
Information required by this item is
set forth under the caption Election of Directors and under the caption Section 16(a) Beneficial Ownership Reporting Compliance
of HPCI’s 2012 Information Statement, which is incorporated by reference into this item
.
Item 11: Executive Compensation.
Information
required by this item is set forth under the caption Compensation of Directors and Executive Officers of HPCI’s 2012 Information
Statement, which is incorporated by reference into this item.
Item 12: Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
No HPCI securities were issued under
equity compensation plans. Additional information required by this item is set forth under the caption Ownership of Voting Stock
of HPCI’s 2012 Information Statement, which is incorporated by reference into this item.
Item 13: Certain Relationships and Related Transactions, and
Director Independence.
Information required by this item is
set forth under the caption Transactions with Directors, Executive Officers and Certain Beneficial Owners of HPCI’s 2012
Information Statement, which is incorporated by reference into this item.
Item 14: Principal Accountant Fees and Services.
Information required by this item is
set forth under the caption Proposal to Ratify the Appointment of Independent Registered Public Accounting Firm of HPCI’s
2012 Information Statement, which is incorporated by reference into this item.
Part IV
Item 15: Exhibits and Financial Statement
Schedules.
(a) The following documents
are filed as part of this report:
|
|
(1)
|
The report of independent
registered public accounting firm and financial statements appearing in Item 8.
|
|
|
(2)
|
HPCI is not filing
separately financial statement schedules because of the absence of conditions under which they are required or because the required
information is included in the financial statements or the notes thereto.
|
|
|
(3)
|
The exhibits required
by this item are listed in the Exhibit Index of this Form 10-K.
|
(b) The exhibits
to this Form 10-K begin on page 56.
(c) See Item
15 (a) (2) above.
Signatures
Pursuant to the requirements of Section 13
or 15(d) 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, on the 9th day of March, 2012
.
HUNTINGTON PREFERRED CAPITAL, INC.
(Registrant)
|
|
|
|
|
|
|
By:
|
/s/ Donald R. Kimble
|
|
By:
|
/s/ David S. Anderson
|
|
|
Donald R. Kimble
|
|
|
David S. Anderson
|
|
|
President and Director
|
|
|
Vice President and Director
|
|
|
(Principal Executive Officer)
|
|
|
(Principal Financial and Accounting Officer)
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated on the 9th day of March, 2012.
|
Timothy R. Barber *
|
|
Director
|
|
Timothy R. Barber
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Cheap *
|
|
Director
|
|
Richard A. Cheap
|
|
|
|
|
|
|
|
|
|
|
|
Reginald D. Dickson*
|
|
Director
|
|
Reginald D. Dickson
|
|
|
|
|
|
|
|
|
|
|
|
Harry V. Farver *
|
|
Director
|
|
Harry V. Farver
|
|
|
|
|
|
|
|
|
|
|
|
Edward J. Kane *
|
|
Director
|
|
Edward J. Kane
|
|
|
|
|
|
|
|
|
|
|
|
Roger E. Kephart *
|
|
Director
|
|
Roger E. Kephart
|
|
|
|
|
|
|
|
|
|
|
|
James D. Robbins *
|
|
Director
|
|
James D. Robbins
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Donald R. Kimble
|
|
|
|
Donald R. Kimble
|
|
|
* Attorney-in-fact for each of the persons
indicated.
Exhibit Index
This
document incorporates by reference certain documents listed below that HPCI has previously filed with the SEC (file number 000-33243).
The documents incorporated by reference may be read and copied at the Public Reference Room of the SEC at 100 F Street N.E., Washington,
D.C. 20549. The SEC also maintains an internet worldwide web site that contains reports, proxy statements, and other information
about issuers, like HPCI, who file electronically with the SEC. The address of the site is http://www.sec.gov.
|
|
3.1.
|
Second Amended and Restated Articles of Incorporation (previously filed as Exhibit
3.1 to Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2010, and incorporated herein
by reference).
|
|
|
3.2.
|
Code of Regulations (previously filed as Exhibit 3(b) to the Registrant's Registration Statement of Form S-11 (File No. 333-61182),
filed with the Securities and Exchange Commission on May 17, 2001, and incorporated herein by reference).
|
|
|
4.1.
|
Specimen of certificate representing Class C preferred securities, previously filed as Exhibit 4 to the Registrant's Amendment
No. 1 to Registration Statement of Form S-11 (File No. 333-61182), filed with the Securities and Exchange Commission on May 31,
2001, and incorporated herein by reference.
|
|
|
10.1.
|
Third Amended and Restated Loan Participation Agreement, dated May 12, 2005, between
The Huntington National Bank and Huntington Preferred Capital Holdings, Inc. (previously filed as Exhibit 10(a) to Quarterly Report
on Form 10-Q for the quarter ended March 31, 2005, and incorporated herein by reference).
|
|
|
10.2.
|
Third Amended and Restated Loan Subparticipation Agreement, dated May 12, 2005, between
Huntington Preferred Capital Holdings, Inc. and Huntington Preferred Capital, Inc. (previously filed as Exhibit 10(b) to Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005, and incorporated herein by reference).
|
|
|
10.3.
|
Second Amended and Restated Loan Participation Agreement, dated May 12, 2005, between
The Huntington National Bank and Huntington Preferred Capital, Inc. (previously filed as Exhibit 10(c) to Quarterly Report on Form
10-Q for the quarter ended March 31, 2005, and incorporated herein by reference).
|
|
|
10.4.
|
Subscription Agreement, dated October 15, 2001, for the Class C preferred securities
between Huntington Preferred Capital, Inc., The Huntington National Bank, and Huntington Preferred Capital Holdings, Inc. (previously
filed as Exhibit 10(f) to Annual Report on Form 10-K for the year ended December 31, 2001, and incorporated herein by reference).
|
|
|
10.5.
|
Amended and Restated Agreement dated June 1, 2005, between Huntington Preferred Capital Inc. and Huntington National Bank to
govern the terms on which Huntington Preferred Capital Inc. may pledge certain of its assets as collateral for the Huntington National
Bank’s borrowings from the Federal Home Loan Bank of Cincinnati under a secured revolving loan facility (previously filed
as Exhibit 99.1 to Form 8-K dated June 1, 2005, and incorporated herein by reference).
|
|
|
10.6.
|
Limited Waiver of Contract Provision, dated August 13, 2007, with Huntington Preferred Capital Holdings, Inc., Huntington Preferred
Capital, Inc., and The Huntington National Bank (previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007, and incorporated herein by reference).
|
|
|
12.1.
|
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
|
|
|
14.1.
|
Code of Business Conduct and Ethics and Financial Code of Ethics for Chief Executive Officer and Senior Financial Officers,
as applicable to all of its affiliated companies and ratified by HPCI's Board of Directors, are available on Huntington Bancshares
Incorporated’s website at http://www.investquest.com/iq/h/hban/main/cg/cg.htm.
|
|
|
31
.1.
|
Rule 13a-14(a) Certification – Chief Executive
Officer.
|
|
|
31.2.
|
Rule 13a-14(a) Certification – Chief Financial
Officer.
|
|
|
32.1.
|
Section 1350 Certification – Chief Executive Officer.
|
|
|
32.2.
|
Section 1350 Certification – Chief Financial Officer.
|
|
|
99.1.
|
Consolidated Financial Statements of Huntington Bancshares Incorporated as of December 31, 2011 and 2010 and for the years
ended December 31, 2011, 2010, and 2009.
|
|
|
101**
|
The following material from HPCI’s Form 10-K Report
for the year-ended December 31, 2011, formatted in XBRL: (i) Balance Sheets, (ii) Statements of Income, (iii) Statement of Changes
in Shareholders’ Equity, (iv) Statements of Cash Flows, and (v) the Notes to Financial Statements.
|
** Furnished, not filed.
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