UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED
September 30,
2012
Commission File Number
000-33243
Huntington Preferred Capital, Inc.
Ohio
|
31-1356967
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
41 South High Street, Columbus, Ohio
43287
Registrant's telephone number
(614) 480-8300
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the registrant 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).
x
Yes
¨
No
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):
|
Large accelerated filer
¨
|
Accelerated filer
¨
|
|
Non-accelerated filer
x
(Do not check if a smaller reporting company)
|
Smaller reporting company
¨
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
x
No
As of October 31, 2012, 14,000,000 shares of common stock without
par value were outstanding, all of which were held by affiliates of the registrant.
HUNTINGTON PREFERRED CAPITAL, INC.
INDEX
PART 1.
|
FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item 1.
|
Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
Condensed Balance Sheets at September 30, 2012 and December 31, 2011
|
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4
|
|
|
|
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Condensed Statements of Comprehensive Income for the three-months and nine-months ended September 30, 2012 and 2011
|
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5
|
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Condensed Statements of Changes in Shareholders' Equity for the nine-months ended September 30, 2012 and 2011
|
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6
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|
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|
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Condensed Statements of Cash Flows for the nine-months ended September 30, 2012 and 2011
|
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7
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|
|
|
|
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Notes to Unaudited Condensed Financial Statements
|
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8
|
|
|
|
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
|
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28
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|
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|
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
|
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41
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|
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Item 4.
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Controls and Procedures
|
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41
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|
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PART II.
|
OTHER INFORMATION
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|
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Item 6.
|
Exhibits
|
|
42
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|
|
|
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Signatures
|
|
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43
|
Glossary of Acronyms and Terms
The following listing provides a comprehensive
reference of common acronyms and terms used throughout the document:
ACL
|
|
Allowance for Credit Losses
|
Agreements
|
|
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
|
ALPL
|
|
Allowance for Loan Participation Losses
|
ASC
|
|
Accounting Standards Codification
|
ASU
|
|
Accounting Standards Update
|
AULPC
|
|
Allowance for Unfunded Loan Participation Commitments
|
Bank
|
|
The Huntington National Bank
|
CFPB
|
|
Consumer Financial Protection Bureau
|
the Company
|
|
(see HPCI)
|
CRE
|
|
Commercial Real Estate
|
Dodd-Frank Act
|
|
Dodd-Frank Wall Street Reform and Consumer Protection Act
|
Exchange Act
|
|
Securities Exchange Act of 1934, as amended
|
FDIC
|
|
Federal Deposit Insurance Corporation
|
FHLB
|
|
Federal Home Loan Bank
|
FICO
|
|
Fair Isaac Corporation
|
Form 10-K
|
|
HPCI's Annual Report on Form 10-K for the year ended December 31, 2011
|
FRB
|
|
Federal Reserve Bank
|
GAAP
|
|
Generally Accepted Accounting Principles in the United States of America
|
Holdings
|
|
Huntington Preferred Capital Holdings, Inc.
|
HPCI
|
|
Huntington Preferred Capital, Inc.
|
HPCII
|
|
Huntington Preferred Capital II, Inc.
|
Huntington
|
|
Huntington Bancshares Incorporated
|
IRC
|
|
Internal Revenue Code
|
LGD
|
|
Loss Given Default
|
LTV
|
|
Loan to Value
|
MD&A
|
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
NCO
|
|
Net Charge-off
|
NPAs
|
|
Nonperforming Assets
|
NPR
|
|
Notice of Proposed Rulemaking
|
N.R.
|
|
Not relevant. Denominator of calculation is a gain in the current period compared with a
loss in the prior period, or vice-versa.
|
OCC
|
|
Office of the Comptroller of the Currency
|
OLEM
|
|
Other Loans Especially Mentioned
|
PD
|
|
Probability of Default
|
Problem loans
|
|
Includes nonperforming assets (Table 6), accruing loan participation interests past due
90 days or more (aging analysis section of Footnote 3), commercial Criticized real estate loan participation interests
(credit quality indicators section of Footnote 3), and troubled debt restructured loan participation interests (TDR loan participation interests section of Footnote 3).
|
REIT
|
|
Real Estate Investment Trust
|
SAD
|
|
Special Assets Division
|
SEC
|
|
Securities and Exchange Commission
|
TDR
|
|
Troubled Debt Restructuring
|
UCS
|
|
Uniform Classification System
|
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Huntington Preferred Capital, Inc.
Condensed Balance Sheets
(Unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
(dollar amounts in thousands, except share data)
|
|
2012
|
|
|
2011
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and interest-bearing deposits with The Huntington National Bank
|
|
$
|
542,527
|
|
|
$
|
228,958
|
|
Due from The Huntington National Bank
|
|
|
41,615
|
|
|
|
40,376
|
|
Loan participation interests:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
3,010,669
|
|
|
|
3,149,330
|
|
Consumer and residential real estate
|
|
|
352,639
|
|
|
|
434,272
|
|
Total loan participation interests
|
|
|
3,363,308
|
|
|
|
3,583,602
|
|
Allowance for loan participation losses
|
|
|
(62,063
|
)
|
|
|
(83,772
|
)
|
Net loan participation interests
|
|
|
3,301,245
|
|
|
|
3,499,830
|
|
Accrued income and other assets
|
|
|
9,034
|
|
|
|
9,887
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,894,421
|
|
|
$
|
3,779,051
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan participation commitments
|
|
$
|
1,322
|
|
|
$
|
1,035
|
|
Dividends and distributions payable
|
|
|
3,416
|
|
|
|
—
|
|
Other liabilities
|
|
|
847
|
|
|
|
78
|
|
Total liabilities
|
|
|
5,585
|
|
|
|
1,113
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
277,720
|
|
|
|
166,822
|
|
Total shareholders' equity
|
|
|
3,888,836
|
|
|
|
3,777,938
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
3,894,421
|
|
|
$
|
3,779,051
|
|
See notes to unaudited condensed financial statements.
Huntington Preferred Capital, Inc.
Condensed Statements of Comprehensive Income
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Interest and fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loan participation interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
27,517
|
|
|
$
|
28,732
|
|
|
$
|
83,975
|
|
|
$
|
83,862
|
|
Consumer and residential real estate
|
|
|
5,691
|
|
|
|
7,833
|
|
|
|
18,487
|
|
|
|
24,925
|
|
Total loan participation interest income
|
|
|
33,208
|
|
|
|
36,565
|
|
|
|
102,462
|
|
|
|
108,787
|
|
Fees from loan participation interests
|
|
|
196
|
|
|
|
297
|
|
|
|
650
|
|
|
|
986
|
|
Interest on deposits with The Huntington National Bank
|
|
|
327
|
|
|
|
148
|
|
|
|
761
|
|
|
|
473
|
|
Total interest and fee income
|
|
|
33,731
|
|
|
|
37,010
|
|
|
|
103,873
|
|
|
|
110,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (reduction in allowance) for credit losses
|
|
|
5,117
|
|
|
|
(23,067
|
)
|
|
|
(22,266
|
)
|
|
|
(30,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income after provision (reduction in allowance) for credit losses
|
|
|
28,614
|
|
|
|
60,077
|
|
|
|
126,139
|
|
|
|
140,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
18
|
|
|
|
18
|
|
|
|
54
|
|
|
|
53
|
|
Collateral fees
|
|
|
291
|
|
|
|
371
|
|
|
|
916
|
|
|
|
1,189
|
|
Total noninterest income
|
|
|
309
|
|
|
|
389
|
|
|
|
970
|
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing costs
|
|
|
1,528
|
|
|
|
1,732
|
|
|
|
4,752
|
|
|
|
5,269
|
|
Franchise tax
|
|
|
555
|
|
|
|
—
|
|
|
|
555
|
|
|
|
—
|
|
Other
|
|
|
240
|
|
|
|
175
|
|
|
|
588
|
|
|
|
525
|
|
Total noninterest expense
|
|
|
2,323
|
|
|
|
1,907
|
|
|
|
5,895
|
|
|
|
5,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
26,600
|
|
|
|
58,559
|
|
|
|
121,214
|
|
|
|
135,871
|
|
Provision for income taxes
|
|
|
182
|
|
|
|
—
|
|
|
|
182
|
|
|
|
—
|
|
Net income
|
|
$
|
26,418
|
|
|
$
|
58,559
|
|
|
$
|
121,032
|
|
|
$
|
135,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
26,418
|
|
|
$
|
58,559
|
|
|
$
|
121,032
|
|
|
$
|
135,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on preferred securities
|
|
|
3,272
|
|
|
|
2,867
|
|
|
|
10,134
|
|
|
|
8,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
23,146
|
|
|
$
|
55,692
|
|
|
$
|
110,898
|
|
|
$
|
126,979
|
|
(1)
All of HPCI’s common stock is owned by HPCII
and Holdings and, therefore, net income per share is not presented.
See notes to unaudited condensed financial statements.
Huntington Preferred Capital, Inc.
Condensed Statements of Changes in Shareholders' Equity
(Unaudited)
|
|
Preferred, Class A
|
|
|
Preferred, Class B
|
|
|
Preferred, Class C
|
|
(all amounts in thousands)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class A preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class B preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class C preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class E preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class A preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class B preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class C preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class E preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1
|
|
|
$
|
1,000
|
|
|
|
400
|
|
|
$
|
400,000
|
|
|
|
2,000
|
|
|
$
|
50,000
|
|
|
|
Preferred,
Class E
|
|
Preferred
|
|
Common
|
|
|
Retained
|
|
|
|
|
(all amounts in
thousands)
|
|
Shares
|
|
|
Amount
|
|
Shares
|
|
|
Amount
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
1,400
|
|
|
$
|
350,000
|
|
|
—
|
|
|
$
|
—
|
|
|
14,000
|
|
|
$
|
2,810,116
|
|
|
$
|
—
|
|
|
$
|
3,611,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,871
|
|
|
|
135,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class A preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
(80
|
)
|
Dividends declared on Class B preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
|
|
(850
|
)
|
Dividends declared on Class C preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,953
|
)
|
|
|
(2,953
|
)
|
Dividends declared on Class E preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,009
|
)
|
|
|
(5,009
|
)
|
Balance, end of period
|
|
|
1,400
|
|
|
$
|
350,000
|
|
|
—
|
|
|
$
|
—
|
|
|
14,000
|
|
|
$
|
2,810,116
|
|
|
$
|
126,979
|
|
|
$
|
3,738,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
1,400
|
|
|
$
|
350,000
|
|
|
—
|
|
|
$
|
—
|
|
|
14,000
|
|
|
$
|
2,810,116
|
|
|
$
|
166,822
|
|
|
$
|
3,777,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,032
|
|
|
|
121,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on Class A preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
|
|
(80
|
)
|
Dividends declared on Class B preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,511
|
)
|
|
|
(1,511
|
)
|
Dividends declared on Class C preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,953
|
)
|
|
|
(2,953
|
)
|
Dividends declared on Class E preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,590
|
)
|
|
|
(5,590
|
)
|
Balance, end of period
|
|
|
1,400
|
|
|
$
|
350,000
|
|
|
—
|
|
|
$
|
—
|
|
|
14,000
|
|
|
$
|
2,810,116
|
|
|
$
|
277,720
|
|
|
$
|
3,888,836
|
|
See notes to unaudited condensed financial statements.
Huntington Preferred Capital, Inc.
Condensed Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
121,032
|
|
|
$
|
135,871
|
|
Adjustments to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision (reduction in allowance) for credit losses
|
|
|
(22,266
|
)
|
|
|
(30,177
|
)
|
Change in due to/from The Huntington National Bank
|
|
|
1,503
|
|
|
|
(33
|
)
|
Other, net
|
|
|
3,276
|
|
|
|
1,160
|
|
Net cash provided by (used for) operating activities
|
|
|
103,545
|
|
|
|
106,821
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Net participation interests acquired
|
|
|
(1,404,315
|
)
|
|
|
(1,718,496
|
)
|
Sales and repayments of loans underlying participation interests
|
|
|
1,621,057
|
|
|
|
1,701,323
|
|
Net cash provided by (used for) investing activities
|
|
|
216,742
|
|
|
|
(17,173
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Dividends paid on preferred securities
|
|
|
(6,718
|
)
|
|
|
(7,962
|
)
|
Dividends paid on common stock
|
|
|
—
|
|
|
|
(149,899
|
)
|
Return of capital to common shareholders
|
|
|
—
|
|
|
|
(350,101
|
)
|
Net cash provided by (used for) financing activities
|
|
|
(6,718
|
)
|
|
|
(507,962
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
313,569
|
|
|
|
(418,314
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
228,958
|
|
|
|
638,220
|
|
Cash and cash equivalents at end of period
|
|
$
|
542,527
|
|
|
$
|
219,906
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Dividends and distributions declared, not paid
|
|
$
|
3,416
|
|
|
$
|
930
|
|
Non-cash change in loan participation activity with The Huntington National Bank
|
|
|
2,742
|
|
|
|
(11,455
|
)
|
See notes to unaudited condensed financial statements.
Huntington Preferred Capital, Inc.
Notes to Unaudited Condensed Financial
Statements
Note 1 - Organization
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 September 30, 2012, the Bank, on a consolidated basis with its subsidiaries,
accounted for over 99% of Huntington’s consolidated total assets and 99% of the year-to-date 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.
Note 2 - Basis of Presentation and New Accounting Pronouncements
The accompanying unaudited condensed financial
statements of HPCI reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary
for a fair presentation of the financial position, the results of operations, and cash flows for the periods presented. These unaudited
condensed financial statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information
and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. 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. Cash and cash equivalents used in the Condensed
Statements of Cash Flows is defined as “Cash and interest-bearing deposits with The Huntington National Bank.” In conjunction
with applicable accounting standards, all material subsequent events have been either recognized in the Unaudited Condensed Financial
Statements or disclosed in the Notes to Unaudited Condensed Financial Statements. The Notes to the Financial Statements appearing
in HPCI’s Annual Report on Form 10-K for the year ended December 31, 2011 (Form 10-K), include descriptions of significant
accounting policies, as updated by the information contained in this report, and should be read in conjunction with these interim
financial statements. All of HPCI’s common stock is owned by affiliates; therefore, net income per common share information
is not presented.
HPCI elected to be treated
as a REIT for federal income tax purposes and intends to maintain compliance with the provisions of the Internal Revenue Code and,
therefore, was not subject to federal income taxes. HPCI is also included in certain of Huntington’s unitary and combined
state income and franchise tax returns. On March 8, 2012, HPCI’s board of directors adopted Huntington’s Policy Statement
on Intercorporate State Tax Allocation, dated January 1, 2012. As a result, beginning in 2012, Huntington’s unitary and combined
state income and franchise tax provision was allocated to each member of the unitary and combined group based on the filing group’s
effective tax rate. Under the intercompany state tax allocation agreement with Huntington, HPCI provided and remitted state income
and franchise taxes to Huntington.
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. The amendments did not have a material
impact on HPCI’s Unaudited Condensed 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. The amendment did not have a material impact on HPCI’s Unaudited Condensed Financial Statements.
Note 3 – Loan Participation
Interests and Allowance for Credit Losses
Loan participation interests are categorized
based on the collateral underlying the loan. At September 30, 2012, and December 31, 2011, loan participation interests were comprised
of the following:
|
|
September 30,
|
|
|
December 31,
|
|
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,010,669
|
|
|
$
|
3,149,330
|
|
Consumer and residential real estate
|
|
|
352,639
|
|
|
|
434,272
|
|
Total loan participation interests
|
|
|
3,363,308
|
|
|
|
3,583,602
|
|
Allowance for loan participation losses
|
|
|
(62,063
|
)
|
|
|
(83,772
|
)
|
Net loan participation interests
|
|
$
|
3,301,245
|
|
|
$
|
3,499,830
|
|
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
junior-lien loan participation interests.
As defined by regulatory guidance, there
were no underlying loans outstanding that would be considered a concentration of lending in any particular industry, group of industries,
or business activity. Underlying loans were, however, generally collateralized by real estate. Loans made to borrowers in the five
states of Ohio, Michigan, Indiana, Pennsylvania, and Kentucky comprised approximately 95% and 93% of the portfolio at September
30, 2012, and December 31, 2011, respectively.
Loan Participation Interest Purchases and Sales
The following table summarizes significant
portfolio purchase activity during the three-month and nine-month periods ended September 30, 2012 and 2011:
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
(dollar amounts in thousands)
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Total
|
|
Portfolio loan participation interests purchased during the:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period ended September 30, 2012
|
|
$
|
396,204
|
|
|
$
|
—
|
|
|
$
|
396,204
|
|
Three-month period ended September 30, 2011
|
|
|
629,550
|
|
|
|
—
|
|
|
|
629,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended September 30, 2012
|
|
|
1,351,609
|
|
|
|
—
|
|
|
|
1,351,609
|
|
Nine-month period ended September 30, 2011
|
|
|
1,689,327
|
|
|
|
—
|
|
|
|
1,689,327
|
|
There were no significant portfolio loan
participation interest sales during either the three-month or nine-month periods ended September 30, 2012 and 2011.
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 any
portfolio may be placed on nonaccrual status prior to the 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 consumer and residential real estate loan
participation interests are placed on nonaccrual status at 150-days past due. Junior-lien consumer and residential real estate
loan participation interests are placed on nonaccrual status at the earlier of 120-days past due or when the related first-lien
loan has been identified as nonaccrual. Beginning in the 2012 third quarter, when a loan participation interest with discharged
non-reaffirmed debt in a Chapter 7 bankruptcy filing is identified, and the loan participation interest is determined to be collateral
dependent, the consumer and residential real estate loan participation interest is placed on nonaccrual status. This change increased
NPAs by $0.8 million.
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 against principal until the loan has been collected in full, after which time any additional
cash receipts are recognized as interest income.
Regarding all classes within all portfolios,
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 at September 30, 2012, and December 31, 2011:
|
|
2012
|
|
|
2011
|
|
(dollar amounts in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
1,451
|
|
|
$
|
15,346
|
|
Retail properties
|
|
|
7,667
|
|
|
|
8,107
|
|
Office
|
|
|
8,142
|
|
|
|
8,476
|
|
Multi family
|
|
|
1,168
|
|
|
|
1,248
|
|
Other commercial real estate
|
|
|
6,537
|
|
|
|
12,308
|
|
Total commercial real estate
|
|
$
|
24,965
|
|
|
$
|
45,485
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
6,811
|
|
|
$
|
5,387
|
|
Secured by junior-lien
|
|
|
774
|
|
|
|
710
|
|
Total consumer and residential real estate
|
|
$
|
7,585
|
|
|
$
|
6,097
|
|
Total nonperforming assets
|
|
$
|
32,550
|
|
|
$
|
51,582
|
|
The following table presents an aging analysis
of loan participation interests, including past due loan participation interests, by loan class at September 30, 2012, and December
31, 2011: (1)
|
|
September 30, 2012
|
|
|
|
Past Due
|
|
|
|
|
|
Total Loan
|
|
|
90 or More
|
|
|
|
|
|
|
|
|
|
90 or
|
|
|
|
|
|
|
|
|
Participation
|
|
|
Days Past Due
|
|
(dollar amounts in thousands)
|
|
30-59 days
|
|
|
60-89 days
|
|
|
more days
|
|
|
Total
|
|
|
Current
|
|
|
Interests
|
|
|
and Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
81
|
|
|
$
|
—
|
|
|
$
|
1,359
|
|
|
$
|
1,440
|
|
|
$
|
710,168
|
|
|
$
|
711,608
|
|
|
$
|
—
|
|
Retail properties
|
|
|
153
|
|
|
|
630
|
|
|
|
7,256
|
|
|
|
8,039
|
|
|
|
595,466
|
|
|
|
603,505
|
|
|
|
—
|
|
Office
|
|
|
6,454
|
|
|
|
270
|
|
|
|
8,142
|
|
|
|
14,866
|
|
|
|
475,498
|
|
|
|
490,364
|
|
|
|
—
|
|
Multi family
|
|
|
210
|
|
|
|
—
|
|
|
|
1,168
|
|
|
|
1,378
|
|
|
|
265,802
|
|
|
|
267,180
|
|
|
|
—
|
|
Other commercial real estate
|
|
|
1,882
|
|
|
|
1,080
|
|
|
|
6,017
|
|
|
|
8,979
|
|
|
|
929,033
|
|
|
|
938,012
|
|
|
|
—
|
|
Total commercial real estate
|
|
$
|
8,780
|
|
|
$
|
1,980
|
|
|
$
|
23,942
|
|
|
$
|
34,702
|
|
|
$
|
2,975,967
|
|
|
$
|
3,010,669
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
3,382
|
|
|
$
|
2,772
|
|
|
$
|
8,204
|
|
|
$
|
14,358
|
|
|
$
|
247,459
|
|
|
$
|
261,817
|
|
|
$
|
2,143
|
|
Secured by junior-lien
|
|
|
2,496
|
|
|
|
651
|
|
|
|
1,398
|
|
|
|
4,545
|
|
|
|
86,277
|
|
|
|
90,822
|
|
|
|
624
|
|
Total consumer and residential real estate
|
|
$
|
5,878
|
|
|
$
|
3,423
|
|
|
$
|
9,602
|
|
|
$
|
18,903
|
|
|
$
|
333,736
|
|
|
$
|
352,639
|
|
|
$
|
2,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan participation interests
|
|
$
|
14,658
|
|
|
$
|
5,403
|
|
|
$
|
33,544
|
|
|
$
|
53,605
|
|
|
$
|
3,309,703
|
|
|
$
|
3,363,308
|
|
|
$
|
2,767
|
|
|
|
December 31, 2011
|
|
|
|
Past Due
|
|
|
|
|
|
Total Loan
|
|
|
90 or More
|
|
|
|
|
|
|
|
|
|
90 or
|
|
|
|
|
|
|
|
|
Participation
|
|
|
Days Past Due
|
|
(dollar amounts in thousands)
|
|
30-59 days
|
|
|
60-89 days
|
|
|
more days
|
|
|
Total
|
|
|
Current
|
|
|
Interests
|
|
|
and 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 junior-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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan participation interests
|
|
$
|
10,741
|
|
|
$
|
4,783
|
|
|
$
|
51,785
|
|
|
$
|
67,309
|
|
|
$
|
3,516,293
|
|
|
$
|
3,583,602
|
|
|
$
|
4,208
|
|
(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 are 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 and the diversification
of commercial real estate loan participation interests. 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 directly from
the Bank on loans 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, and charged to earnings or lowered through a reduction in allowance for credit losses, net of recoveries, and 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 an allocation per ASC 310-10, specific reserves related to loan participation interests
considered to be impaired, and loan participation interests involved in TDRs allocated per ASC 310-40, 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 $1.0 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 and 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 required. Models utilized in the ALPL estimation process are subject
to the Bank’s model validation policies.
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.
Effective with the 2012 third quarter,
certain loan participation interests within the consumer portfolio were identified that met the definition of collateral dependent
as defined by regulatory guidance as the borrowers had not reaffirmed their debt discharged in a Chapter 7 bankruptcy filing.
The bankruptcy court’s discharge of the borrower’s discharged debt is considered a concession when the debt is not
reaffirmed, and as such, the loan participation interests were classified as TDRs, placed on nonaccrual status, and written down
to collateral value, less anticipated selling costs. Previously, the charge-off was recorded when the loan reached 60-days
past due and we did not classify these loan participation interests as TDRs. Many of these loan participation interests were
current, with many borrowers having paid according to the contractual terms for several years. This change increased NCOs
by $3.4 million, NPAs by $0.8 million, TDRs by $2.3 million, and provision for credit losses by $4.3 million across the consumer
and residential real estate portfolio. The appropriate accounting treatment of subsequent customer payments on these Chapter 7
bankruptcy NPAs is being evaluated.
No substantial changes to any material
aspect of the overall approach in the determination of either the ALPL or AULPC were made during the current quarter, and there
were no material changes in assumptions or estimation techniques compared with prior periods that impacted the determination of
the current period’s ALPL and AULPC.
The following table presents ALPL and AULPC
activity by portfolio segment for the three-month and nine-month periods ended September 30, 2012 and 2011:
|
|
Commercial
|
|
|
Consumer and
|
|
|
|
|
|
|
Real Estate
|
|
|
Residential Real Estate
|
|
|
Total
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
50,667
|
|
|
$
|
10,842
|
|
|
$
|
61,509
|
|
ALPL for loan participation interests acquired
|
|
|
5,787
|
|
|
|
—
|
|
|
|
5,787
|
|
Loan participation interest charge-offs
|
|
|
(4,857
|
)
|
|
|
(6,202
|
)
|
|
|
(11,059
|
)
|
Recoveries of loan participation interests previously charged-off
|
|
|
859
|
|
|
|
275
|
|
|
|
1,134
|
|
(Reduction in) Provision for loan participation interest losses
|
|
|
(318
|
)
|
|
|
5,010
|
|
|
|
4,692
|
|
ALPL balance, end of period
|
|
$
|
52,138
|
|
|
$
|
9,925
|
|
|
$
|
62,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AULPC balance, beginning of period
|
|
$
|
897
|
|
|
$
|
—
|
|
|
$
|
897
|
|
Provision for unfunded loan participation commitment losses
|
|
|
425
|
|
|
|
—
|
|
|
|
425
|
|
AULPC balance, end of period
|
|
$
|
1,322
|
|
|
$
|
—
|
|
|
$
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL balance, end of period
|
|
$
|
53,460
|
|
|
$
|
9,925
|
|
|
$
|
63,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
71,555
|
|
|
$
|
12,217
|
|
|
$
|
83,772
|
|
ALPL for loan participation interests acquired
|
|
|
17,404
|
|
|
|
—
|
|
|
|
17,404
|
|
Loan participation interest charge-offs
|
|
|
(12,605
|
)
|
|
|
(10,337
|
)
|
|
|
(22,942
|
)
|
Recoveries of loan participation interests previously charged-off
|
|
|
5,489
|
|
|
|
893
|
|
|
|
6,382
|
|
(Reduction in) Provision for loan participation interest losses
|
|
|
(29,705
|
)
|
|
|
7,152
|
|
|
|
(22,553
|
)
|
ALPL balance, end of period
|
|
$
|
52,138
|
|
|
$
|
9,925
|
|
|
$
|
62,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AULPC balance, beginning of period
|
|
$
|
1,035
|
|
|
$
|
—
|
|
|
$
|
1,035
|
|
Provision for allowance for unfunded loan participation commitment losses
|
|
|
287
|
|
|
|
—
|
|
|
|
287
|
|
AULPC balance, end of period
|
|
$
|
1,322
|
|
|
$
|
—
|
|
|
$
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL balance, end of period
|
|
$
|
53,460
|
|
|
$
|
9,925
|
|
|
$
|
63,385
|
|
|
|
Commercial
|
|
|
Consumer and
|
|
|
|
|
|
|
Real Estate
|
|
|
Residential Real Estate
|
|
|
Total
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
100,124
|
|
|
$
|
12,390
|
|
|
$
|
112,514
|
|
ALPL for loan participation interests acquired
|
|
|
12,705
|
|
|
|
—
|
|
|
|
12,705
|
|
Loan participation interest charge-offs
|
|
|
(6,656
|
)
|
|
|
(3,115
|
)
|
|
|
(9,771
|
)
|
Recoveries of loan participation interests previously charged-off
|
|
|
405
|
|
|
|
279
|
|
|
|
684
|
|
(Reduction in) Provision for loan participation interest losses
|
|
|
(25,737
|
)
|
|
|
2,504
|
|
|
|
(23,233
|
)
|
ALPL balance, end of period
|
|
$
|
80,841
|
|
|
$
|
12,058
|
|
|
$
|
92,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AULPC balance, beginning of period
|
|
$
|
834
|
|
|
$
|
—
|
|
|
$
|
834
|
|
Reduction in allowance for unfunded loan participation commitment losses
|
|
|
166
|
|
|
|
—
|
|
|
|
166
|
|
AULPC balance, end of period
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL balance, end of period
|
|
$
|
81,841
|
|
|
$
|
12,058
|
|
|
$
|
93,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month period ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
97,920
|
|
|
$
|
12,183
|
|
|
$
|
110,103
|
|
ALPL for loan participation interests acquired
|
|
|
37,913
|
|
|
|
—
|
|
|
|
37,913
|
|
Loan participation interest charge-offs
|
|
|
(20,908
|
)
|
|
|
(8,105
|
)
|
|
|
(29,013
|
)
|
Recoveries of loan participation interests previously charged-off
|
|
|
2,718
|
|
|
|
757
|
|
|
|
3,475
|
|
(Reduction in) Provision for loan participation interest losses
|
|
|
(36,802
|
)
|
|
|
7,223
|
|
|
|
(29,579
|
)
|
ALPL balance, end of period
|
|
$
|
80,841
|
|
|
$
|
12,058
|
|
|
$
|
92,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AULPC balance, beginning of period
|
|
$
|
1,598
|
|
|
$
|
—
|
|
|
$
|
1,598
|
|
Reduction in allowance for unfunded loan participation commitment losses
|
|
|
(598
|
)
|
|
|
—
|
|
|
|
(598
|
)
|
AULPC balance, end of period
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL balance, end of period
|
|
$
|
81,841
|
|
|
$
|
12,058
|
|
|
$
|
93,899
|
|
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. Additionally, discharged, collateral dependent non-reaffirmed
debt in Chapter 7 bankruptcy filings are charged-off to estimated collateral value, less anticipated selling costs.
CRE loan participation interests are either
charged-off or written down to net realizable value at 90-days past due. First-lien consumer and residential real estate loan participation
interests are charged-off to the estimated fair value of the collateral, less anticipated selling costs at 150-days past due. Junior-lien
consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the collateral,
less anticipated selling costs at 120-days past due.
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 = 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 the collateral may be inadequate to protect the Company’s position in the future. For these reasons, the loan participation
interests are considered to be potential problem loan participation interests.
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 participation interest 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 higher credit quality.
The following table presents loan participation
interest balances by credit quality indicator as of September 30, 2012, and December 31, 2011:
|
|
September 30, 2012
|
|
|
|
Credit Risk Profile by UCS classification
|
|
(dollar amounts in thousands)
|
|
Pass
|
|
|
OLEM
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
684,842
|
|
|
$
|
9,105
|
|
|
$
|
17,661
|
|
|
$
|
—
|
|
|
$
|
711,608
|
|
Retail properties
|
|
|
589,171
|
|
|
|
3,619
|
|
|
|
10,715
|
|
|
|
—
|
|
|
|
603,505
|
|
Office
|
|
|
468,442
|
|
|
|
4,763
|
|
|
|
17,159
|
|
|
|
—
|
|
|
|
490,364
|
|
Multi family
|
|
|
262,899
|
|
|
|
1,188
|
|
|
|
3,093
|
|
|
|
—
|
|
|
|
267,180
|
|
Other commercial real estate
|
|
|
908,700
|
|
|
|
11,377
|
|
|
|
17,935
|
|
|
|
—
|
|
|
|
938,012
|
|
Total commercial real estate
|
|
$
|
2,914,054
|
|
|
$
|
30,052
|
|
|
$
|
66,563
|
|
|
$
|
—
|
|
|
$
|
3,010,669
|
|
|
|
Credit Risk Profile by FICO score (1)
|
|
|
|
750+
|
|
|
650-749
|
|
|
<650
|
|
|
Total
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
110,467
|
|
|
$
|
91,656
|
|
|
$
|
59,694
|
|
|
$
|
261,817
|
|
Secured by junior-lien
|
|
|
30,512
|
|
|
|
34,391
|
|
|
|
25,919
|
|
|
|
90,822
|
|
Total consumer and residential real estate
|
|
$
|
140,979
|
|
|
$
|
126,047
|
|
|
$
|
85,613
|
|
|
$
|
352,639
|
|
|
|
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
|
|
|
Total
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
142,627
|
|
|
$
|
111,308
|
|
|
$
|
66,660
|
|
|
$
|
320,595
|
|
Secured by junior-lien
|
|
|
38,997
|
|
|
|
42,069
|
|
|
|
32,611
|
|
|
|
113,677
|
|
Total consumer and residential real estate
|
|
$
|
181,624
|
|
|
$
|
153,377
|
|
|
$
|
99,271
|
|
|
$
|
434,272
|
|
(1)
|
Reflects currently updated customer credit scores.
|
Impaired Loan Participation Interests
For all classes within the CRE portfolio,
all loan participation interests with an outstanding balance of greater than $1.0 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 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, the accrual of 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 applied 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 at September 30, 2012, and December 31, 2011: (1)
|
|
|
|
|
Consumer and
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Real
Estate
|
|
|
Real Estate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
ALPL at September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to loan participation
interests individually evaluated for impairment
|
|
$
|
1,610
|
|
|
$
|
504
|
|
|
$
|
2,114
|
|
Attributable to loan
participation interests collectively evaluated for impairment
|
|
|
50,528
|
|
|
|
9,421
|
|
|
|
59,949
|
|
Total ALPL balance
|
|
$
|
52,138
|
|
|
$
|
9,925
|
|
|
$
|
62,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Participation Interests
at September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
15,793
|
|
|
$
|
29,643
|
|
|
$
|
45,436
|
|
Collectively evaluated
for impairment
|
|
|
2,994,876
|
|
|
|
322,996
|
|
|
|
3,317,872
|
|
Total loan participation
interests evaluated for impairment
|
|
$
|
3,010,669
|
|
|
$
|
352,639
|
|
|
$
|
3,363,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of ALPL 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan 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
|
|
(1)
|
No loans with deteriorated credit quality, as defined by ASC 310-30, have been 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 at September 30, 2012, and December 31, 2011: (1), (2)
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2012
|
|
|
September 30, 2012
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Ending
|
|
|
Principal
|
|
|
Related
|
|
|
Average
|
|
|
Income
|
|
|
Average
|
|
|
Income
|
|
|
|
Balance
|
|
|
Balance (4)
|
|
|
Allowance
|
|
|
Balance
|
|
|
Recognized
|
|
|
Balance
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
2,028
|
|
|
$
|
2,028
|
|
|
$
|
—
|
|
|
$
|
676
|
|
|
$
|
5
|
|
|
$
|
225
|
|
|
$
|
5
|
|
Retail properties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Office
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Multi family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other commercial real
estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial real estate
|
|
$
|
2,028
|
|
|
$
|
2,028
|
|
|
$
|
—
|
|
|
$
|
676
|
|
|
$
|
5
|
|
|
$
|
225
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Secured by junior-lien
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,361
|
|
|
$
|
10
|
|
|
$
|
3,456
|
|
|
$
|
39
|
|
Retail properties
|
|
|
5,714
|
|
|
|
7,417
|
|
|
|
272
|
|
|
|
6,176
|
|
|
|
—
|
|
|
|
5,300
|
|
|
|
—
|
|
Office
|
|
|
5,323
|
|
|
|
8,332
|
|
|
|
582
|
|
|
|
1,774
|
|
|
|
—
|
|
|
|
3,327
|
|
|
|
—
|
|
Multi family
|
|
|
951
|
|
|
|
951
|
|
|
|
115
|
|
|
|
1,019
|
|
|
|
2
|
|
|
|
1,268
|
|
|
|
6
|
|
Other commercial real
estate
|
|
|
1,777
|
|
|
|
2,967
|
|
|
|
641
|
|
|
|
1,628
|
|
|
|
9
|
|
|
|
1,391
|
|
|
|
15
|
|
Total commercial real estate
|
|
$
|
13,765
|
|
|
$
|
19,667
|
|
|
$
|
1,610
|
|
|
$
|
11,958
|
|
|
$
|
21
|
|
|
$
|
14,742
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
25,957
|
|
|
$
|
28,554
|
|
|
$
|
317
|
|
|
$
|
23,218
|
|
|
$
|
260
|
|
|
$
|
18,820
|
|
|
$
|
653
|
|
Secured by junior-lien
|
|
|
3,686
|
|
|
|
5,007
|
|
|
|
187
|
|
|
|
3,158
|
|
|
|
48
|
|
|
|
2,900
|
|
|
|
133
|
|
Total consumer and residential real estate
|
|
$
|
29,643
|
|
|
$
|
33,561
|
|
|
$
|
504
|
|
|
$
|
26,376
|
|
|
$
|
308
|
|
|
$
|
21,720
|
|
|
$
|
786
|
|
(dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
Unpaid Principal
|
|
|
Related
|
|
|
|
Balance
|
|
|
Balance (4)
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
14,544
|
|
|
$
|
22,484
|
|
|
$
|
1,370
|
|
Retail properties
|
|
|
1,755
|
|
|
|
3,278
|
|
|
|
488
|
|
Office
|
|
|
5,100
|
|
|
|
11,822
|
|
|
|
645
|
|
Multi family
|
|
|
2,042
|
|
|
|
2,225
|
|
|
|
189
|
|
Other commercial real estate
|
|
|
1,156
|
|
|
|
2,345
|
|
|
|
582
|
|
Total commercial real estate
|
|
$
|
24,597
|
|
|
$
|
42,154
|
|
|
$
|
3,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by first-lien
|
|
$
|
11,901
|
|
|
$
|
12,424
|
|
|
$
|
309
|
|
Secured by junior-lien
|
|
|
2,698
|
|
|
|
2,698
|
|
|
|
222
|
|
Total consumer and residential real estate
|
|
$
|
14,599
|
|
|
$
|
15,122
|
|
|
$
|
531
|
|
(1)
|
These tables do not include loan participation interests which are fully charged-off.
|
(2)
|
All consumer and residential real estate impaired loan participation interests are considered impaired due to their status as a TDR.
|
(3)
|
At September 30, 2012, $699 thousand of the $13,765 thousand of 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.
|
(5)
|
At December 31, 2011, there were no impaired loan participation interests without an related allowance recorded.
|
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. All loan modifications, including those classified as TDRs, are reviewed and approved by the
Bank’s Special Assets Division. 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.
|
|
·
|
Chapter 7 bankruptcy: A bankruptcy court’s discharge of a borrower’s debt
is considered
a concession when the borrower does not reaffirm the discharged debt.
|
|
·
|
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
loan participation interests modified as TDRs during the three-month and nine-month periods ended September 30, 2012 and 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 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 junior-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. These updated risk ratings and credit scores consider the default history of the
borrower, including redefaults. 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.
TDRs may include multiple concessions and
the disclosure classifications are presented based on the primary concession provided to the borrower. The majority of concessions
for the CRE portfolio are the extension of the maturity date coupled with an increase in the interest rate. In these instances,
the primary concession is the maturity date extension.
TDR concessions may also result in the
reduction of the ALPL within the CRE portfolio. This reduction is from payments and the resulting application of the reserve calculation
within the ALPL. 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 in the CRE portfolio, the
reserve is measured based on discounted expected cash flows of the modified loan in accordance with ASC 310-10. The resulting
TDR ALPL calculation often results in a lower ALPL amount because: (1) the discounted expected cash flows indicate a lower estimated
loss, (2) if the modification includes a 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, or (3) payments may occur
as part of the modification. The ALPL for CRE loan participation interests may increase as a result of the modification, as discounted
cash flow analysis may indicate additional reserves are required.
TDR concessions on consumer and residential
real estate loans may increase the ALPL. The concessions made to these borrowers often include interest rate reductions and,
therefore, the TDR ALPL calculation results in a greater ALPL compared with the non-TDR calculation as the reserve is measured
based on the estimation of the discounted expected cash flows on the modified loan in accordance with ASC 310-10. The resulting
TDR ALPL calculation often results in a higher ALPL amount because (1) the discounted expected cash flows indicate a higher estimated
loss or, (2) due to the rate decrease, the discounting of the cash flows on the modified loan participation interest, using the
pre-modification interest rate, indicates a reduction in the expected cash flows. In certain instances, the ALPL may decrease as
a result of payments made in connection with the modification.
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 the reason for the modification, the number of contracts, post-modification outstanding balance, and the financial effects
of the modification for the three-month and nine-month periods ended September 30, 2012 and 2011:
|
|
New Troubled Debt Restructurings During The Three-Month Period Ended (1), (2)
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
|
|
|
Post-modification
|
|
|
|
|
|
|
|
|
Post-modification
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
(dollar amounts in thousands)
|
|
Number of
|
|
|
Ending
|
|
|
Financial effects
|
|
|
Number of
|
|
|
Ending
|
|
|
Financial effects
|
|
|
|
Contracts
|
|
|
Balance
|
|
|
of modification
(3)
|
|
|
Contracts
|
|
|
Balance
|
|
|
of modification
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Multi family:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
42
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Multi family
|
|
|
1
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Other commercial real estate:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
303
|
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Other commercial real estate
|
|
|
1
|
|
|
$
|
303
|
|
|
$
|
27
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by first-lien:
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
33
|
|
|
$
|
4,558
|
|
|
$
|
836
|
|
|
|
4
|
|
|
$
|
396
|
|
|
$
|
(123
|
)
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
21
|
|
|
|
—
|
|
|
|
7
|
|
|
|
2,523
|
|
|
|
34
|
|
Chapter 7 bankruptcy
|
|
|
54
|
|
|
|
1,810
|
|
|
|
2,094
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by first-lien
|
|
|
88
|
|
|
$
|
6,389
|
|
|
$
|
2,930
|
|
|
|
11
|
|
|
$
|
2,919
|
|
|
$
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by junior-lien:
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
7
|
|
|
$
|
648
|
|
|
$
|
107
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
3
|
|
|
|
—
|
|
|
|
5
|
|
|
|
68
|
|
|
|
(7
|
)
|
Chapter 7 bankruptcy
|
|
|
93
|
|
|
|
509
|
|
|
|
1,259
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by junior-lien
|
|
|
101
|
|
|
$
|
1,160
|
|
|
$
|
1,366
|
|
|
|
5
|
|
|
$
|
68
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new troubled debt restructurings
|
|
|
189
|
|
|
$
|
7,549
|
|
|
$
|
4,296
|
|
|
|
16
|
|
|
$
|
2,987
|
|
|
$
|
(96
|
)
|
|
|
New Troubled Debt Restructurings During The Nine-Month Period Ended (1), (2)
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
|
|
|
Post-modification
|
|
|
|
|
|
|
|
|
Post-modification
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
(dollar amounts in thousands)
|
|
Number of
|
|
|
Ending
|
|
|
Financial effects
|
|
|
Number of
|
|
|
Ending
|
|
|
Financial effects
|
|
|
|
Contracts
|
|
|
Balance
|
|
|
of modification
(3)
|
|
|
Contracts
|
|
|
Balance
|
|
|
of modification
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Industrial and warehouse:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
2,165
|
|
|
$
|
(299
|
)
|
Amortization or maturity date change
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Industrial and warehouse
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
2,165
|
|
|
$
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Retail properties:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
1
|
|
|
$
|
892
|
|
|
$
|
(2
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Retail properties
|
|
|
1
|
|
|
$
|
892
|
|
|
$
|
(2
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Multi family:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
42
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Multi family
|
|
|
1
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE - Other commercial real estate:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
303
|
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total CRE - Other commercial real estate
|
|
|
1
|
|
|
$
|
303
|
|
|
$
|
27
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by first-lien:
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
102
|
|
|
$
|
12,842
|
|
|
$
|
2,116
|
|
|
|
14
|
|
|
$
|
1,646
|
|
|
$
|
(336
|
)
|
Amortization or maturity date change
|
|
|
6
|
|
|
|
632
|
|
|
|
1
|
|
|
|
33
|
|
|
|
9,231
|
|
|
|
91
|
|
Chapter 7 bankruptcy
|
|
|
54
|
|
|
|
1,810
|
|
|
|
2,094
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
1,996
|
|
|
|
45
|
|
Total consumer and residential real estate secured by first-lien
|
|
|
162
|
|
|
$
|
15,284
|
|
|
$
|
4,211
|
|
|
|
50
|
|
|
$
|
12,873
|
|
|
$
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by junior-lien:
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
15
|
|
|
$
|
876
|
|
|
$
|
143
|
|
|
|
15
|
|
|
$
|
610
|
|
|
$
|
(124
|
)
|
Amortization or maturity date change
|
|
|
4
|
|
|
|
51
|
|
|
|
(2
|
)
|
|
|
14
|
|
|
|
125
|
|
|
|
(8
|
)
|
Chapter 7 bankruptcy
|
|
|
93
|
|
|
|
509
|
|
|
|
1,259
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by junior-lien
|
|
|
112
|
|
|
$
|
1,436
|
|
|
$
|
1,400
|
|
|
|
29
|
|
|
$
|
735
|
|
|
$
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new troubled debt restructurings
|
|
|
277
|
|
|
$
|
17,957
|
|
|
$
|
5,636
|
|
|
|
80
|
|
|
$
|
15,773
|
|
|
$
|
(631
|
)
|
(1)
|
For the three-month periods ended September 30, 2012 and 2011, there were no new troubled debt restructurings for the following classes: CRE - Industrial and warehouse, CRE - Retail properties, and CRE - Office. For the nine-month periods ended September 30, 2012 and 2011, there were no new troubled debt restructurings for the CRE - Office class.
|
(2)
|
TDRs may include multiple concessions and the disclosure classifications are based on the primary concession provided to the borrower.
|
(3)
|
Amounts represent the financial impact via provision for loan participation losses as a result of the modification.
|
(4)
|
Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of a restructuring are not significant.
|
(5)
|
Chapter 7 bankruptcy pre-modification balances were impacted by $2.1 million of charge-offs.
|
(6)
|
Chapter 7 bankruptcy pre-modification balances were impacted by $1.3 million of charge-offs.
|
Any loan participation interest within
any portfolio or class is considered as payment redefaulted at 90-days past due.
The following tables present TDRs modified
within the previous twelve months that have subsequently redefaulted during the three-month and nine-month periods ended September
30, 2012 and 2011:
|
|
Troubled Debt Restructurings That Redefaulted Within One Year Of Modification During The
|
|
|
|
Three Months Ended September 30, 2012
|
|
|
Three Months Ended September 30, 2011
(1), (2)
|
|
(dollar amounts in thousands)
|
|
Number of
|
|
|
Ending
|
|
|
Number of
|
|
|
Ending
|
|
|
|
Contracts
|
|
|
Balance
|
|
|
Contracts
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by first-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
4
|
|
|
|
489
|
|
|
|
2
|
|
|
|
77
|
|
Chapter 7 bankruptcy
|
|
|
1
|
|
|
|
34
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by first-lien
|
|
|
5
|
|
|
$
|
523
|
|
|
|
2
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by junior-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by junior-lien
|
|
|
1
|
|
|
$
|
20
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings with subsequent redefault
|
|
|
6
|
|
|
$
|
543
|
|
|
|
2
|
|
|
$
|
77
|
|
|
|
Troubled Debt Restructurings That Redefaulted Within One Year Of Modification During The
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
Nine Months Ended September 30, 2011
(1), (2)
|
|
(dollar amounts in thousands)
|
|
Number of
|
|
|
Ending
|
|
|
Number of
|
|
|
Ending
|
|
|
|
Contracts
|
|
|
Balance
|
|
|
Contracts
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by first-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Amortization or maturity date change
|
|
|
4
|
|
|
|
489
|
|
|
|
3
|
|
|
|
115
|
|
Chapter 7 bankruptcy
|
|
|
1
|
|
|
|
34
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by first-lien
|
|
|
5
|
|
|
$
|
523
|
|
|
|
3
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and residential real estate secured by junior-lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate reduction
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
14
|
|
Amortization or maturity date change
|
|
|
1
|
|
|
|
20
|
|
|
|
2
|
|
|
|
79
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consumer and residential real estate secured by junior-lien
|
|
|
1
|
|
|
$
|
20
|
|
|
|
3
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings with subsequent redefault
|
|
|
6
|
|
|
$
|
543
|
|
|
|
6
|
|
|
$
|
208
|
|
(1)
|
Subsequent redefault is defined as a payment redefault within 12 months of the restructuring date. Payment redefault is defined as 90-days past due for any loan participation interest in any portfolio or class. Any loan participation interest in any portfolio or class may be considered in payment redefault prior to the guidelines noted above when collection of principal or interest is in doubt.
|
(2)
|
During the three-month and nine-month periods ended September 30, 2012 and 2011, there were no troubled debt restructurings within the previous twelve months that have subsequently defaulted for the following classes: CRE - Industrial and warehouse, CRE - Retail properties, CRE - Office, CRE - Multi family, CRE - Other commercial real estate.
|
Note 4 - 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. Loan servicing costs totaled $1.5
million and $1.7 million for the three-month periods ended September 30, 2012 and 2011, respectively. For the nine-month periods
ended September 30, 2012 and 2011, the costs were $4.8 million and $5.3 million, respectively.
In 2012 and 2011, the
annual servicing rates the Bank charged with respect to outstanding principal balances were:
|
|
January 1, 2011
|
|
|
|
through
|
|
|
|
September 30, 2012
|
|
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 2012, 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 2013.
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 $0.1 million for each of the three-month periods ended September 30, 2012 and 2011,
and are included in other noninterest expense. Personnel costs for each of the respective nine-month periods, was $0.3 million.
The following table represents the ownership
of HPCI’s outstanding common and preferred securities as of September 30, 2012:
|
|
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 September 30, 2012, 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 September 30, 2012, HPCI board members and executive officers beneficially owned, in the aggregate,
a total of 7,471 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.
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 $41.6 million and $40.4 million at September 30, 2012 and December 31, 2011, respectively. 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 6.
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 5 - Fair Values of Assets and Liabilities
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. Transfers
in and out of Level 1, 2, or 3 are recorded at fair value at the beginning of the reporting period.
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 cost
to sell, an impairment charge is recognized.
At September 30, 2012, 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 for the nine-month period ended September 30, 2012, was recorded within the provision for credit
losses.
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
Significant
|
|
|
Total
|
|
|
|
|
|
|
In Active
|
|
|
Other
|
|
|
Other
|
|
|
Gains/(Losses)
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
For the Nine
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Months Ended
|
|
(dollar amounts in thousands)
|
|
September 30, 2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
September 30, 2012
|
|
Loan participation interests
|
|
$
|
11,460
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,460
|
|
|
$
|
(5,092
|
)
|
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 fair value based on its highly liquid nature. All amounts at September
30, 2012 and December 31, 2011 are classified as Level 1 in the valuation hierarchy.
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 September 30, 2012, the net carrying amount of $3.3 billion corresponded to a fair value of $3.0 billion. As of December
31, 2011, the net carrying value of $3.5 billion corresponded to a fair value of $3.2 billion. All amounts at September 30, 2012
and December 31, 2011 are classified as Level 3 in the valuation hierarchy. At September 30, 2012, the valuation of the loan portfolio
reflected discounts that HPCI believed are consistent with transactions occurring in the marketplace.
Note 6 - Commitments and Contingencies
Class C Preferred Securities Redemption
In June 2012, federal banking agencies,
including the FRB, jointly published notices of proposed rulemaking, which would substantially amend the risk-based capital rules
for banks. The proposed capital rules (Basel III NPR) are intended to implement the Basel III regulatory capital reforms, comply
with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. Based on our interpretation
of Basel III NPR as currently proposed, we believe the HPCI Class C preferred securities would no longer constitute Tier 1 capital
for Huntington or the Bank. It is possible that, following the comment period, the FRB may not adopt the Basel III NPR as proposed,
or may make additional changes to the applicable Tier 1 capital rules prior to final adoption. However, in the event the FRB’s
applicable final rules regarding Tier 1 capital treatment are substantially similar to Basel III NPR as proposed, or otherwise
result in the Class C preferred securities no longer constituting Tier 1 capital for the Bank and we receive an opinion of counsel
to that effect, HPCI would be able to redeem the Class C preferred securities due to a regulatory capital event.
In the event we redeem our Class
C preferred securities, holders of such securities will be entitled to receive the redemption price of $25.00 per share
for Class C securities, plus accrued and unpaid dividends on such shares. The redemption price may differ from the market
price of the Class C preferred Securities.
Pledged Assets
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 $3.8 billion as of September
30, 2012, based on the Bank’s holdings of FHLB stock. As of this same date, the Bank had exposure of $19.6 million 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 $1.0 billion as of September 30, 2012, 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 $0.3 billion at September 30, 2012. In 2012, 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 $0.3 million and $0.4 million for the three-month periods ended September
30, 2012 and 2011, respectively, as compensation for making such assets available to the Bank. The amounts paid to HPCI for the
nine-month periods ended September 30, 2012 and 2011 were $0.9 million and $1.2 million, respectively.
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 September 30, 2012 and December
31, 2011, HPCI’s unfunded loan participation interest commitments totaled $332.8 million and $233.4 million, respectively.
Dividends
Based on a regulatory dividend
limitation the Bank could not have declared and paid a dividend at September 30, 2012, 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 2011 and through
the 2012 fourth quarter. 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.
Note 7 - 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.
Item 2. 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.
The following discussion
and analysis provides information we believe is necessary for understanding the financial condition, changes in financial condition,
results of operations, and cash flows and should be read in conjunction with the financial statements, notes, and other information
contained in this report. The MD&A appearing in our Form 10-K should be read in conjunction with this interim MD&A.
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. Additional factors that could cause results
to differ materially from those described above can be found in our 2011 Form 10-K, and documents subsequently filed by us with
the SEC.
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.
Risk Factors
We are subject to a number of risks that
may adversely affect our financial condition or results of operation, many of which are outside of our direct control, though efforts
are made to manage those risks while optimizing returns. Credit risk related to retail properties is of particular concern in the
current economy. See Credit Risk section of this report. Additionally, more information on risk is set forth under the heading
“Risk Factors” included in Item 1A of Form 10-K, and subsequent filings with the SEC.
Updates to Risk Factors
We may redeem the Class C 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 preferred securities in whole. The occurrence of such an event
will not, however, give a preferred shareholder any right to request that such Class C preferred securities be redeemed. The special
events that would allow us to redeem the Class C preferred securities are:
|
·
|
a tax event which occurs when we receive an opinion of counsel to the effect that, as a result of a judicial decision or administrative
pronouncement, ruling, or other action or as a result of certain changes in the tax laws, regulations, or related interpretations,
there is a significant risk that dividends with respect to our capital stock will not be fully deductible by us or we will be subject
to a significant amount of additional taxes or governmental charges;
|
|
·
|
an investment company event which occurs when we receive an opinion of counsel to the effect that, as a result of certain changes
in the applicable laws, regulations, or related interpretations, there is a significant risk that we will be considered an investment
company under the Investment Company Act of 1940; and
|
|
·
|
a regulatory capital event resulting from certain changes in the applicable laws, regulations, or related interpretations,
or administrative pronouncement, or judicial decision, which, in the opinion of counsel, creates 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).
|
In June 2012, federal banking agencies,
including the FRB, jointly published notices of proposed rulemaking, which would substantially amend the risk-based capital rules
for banks. The proposed capital rules (Basel III NPR) are intended to implement the Basel III regulatory capital reforms, comply
with changes required by the Dodd-Frank Act, and replace the existing Basel I-based capital requirements. Based on our interpretation
of Basel III NPR as currently proposed, we believe the HPCI Class C preferred securities would no longer constitute Tier 1 capital
for Huntington or the Bank. It is possible that, following the comment period, the FRB may not adopt the Basel III NPR as proposed,
or may make additional changes to the applicable Tier 1 capital rules prior to final adoption. However, in the event the FRB’s
applicable final rules regarding Tier 1 capital treatment are substantially similar to Basel III NPR as proposed, or otherwise
result in the Class C preferred securities no longer constituting Tier 1 capital for the Bank and we receive an opinion of counsel
to that effect, HPCI would be able to redeem the Class C preferred securities due to a regulatory capital event.
In the event we redeem our Class C preferred
securities, holders of such securities will be entitled to receive the redemption price of $25.00 per share for Class C securities,
plus accrued and unpaid dividends on such shares. The redemption price may differ from the market price of the Class C preferred
securities.
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 our 2011 Form 10-K as supplemented by this report lists significant
accounting policies used by Management in the development and presentation of our financial statements. This MD&A, 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
was used or if estimates changed from period-to-period. Estimates are made under facts and circumstances at a point in time and
changes in those facts and circumstances could produce actual results that significantly differ from when those estimates were
made.
Our most significant accounting estimates
relate to our ACL. This significant accounting estimate and related application is discussed in our 2011 Form 10-K. The related
fair value measurement on a nonrecurring basis can be found in Note 5 of Notes to the Unaudited Condensed Financial Statements.
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. At September 30, 2012, 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 September 30, 2012, 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.
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.
The following
table details the results of operations for the last five quarters. The $32.1 million, or 55% decrease in net income for the 2012
third quarter, compared with same period in 2011, was primarily the result of higher provision for credit losses. A provision for
credit losses of $5.1 million was recorded in the current quarter compared to a reduction in allowance for credit losses of $23.1
million in the year-ago quarter.
Table 1 - Selected Quarterly Income Statement Data
|
|
2012
|
|
|
2011
|
|
|
3Q12 vs. 3Q11
|
|
(dollar amounts in thousands)
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
$ chg
|
|
|
% chg
|
|
Interest and fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loan participation interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
27,517
|
|
|
$
|
27,875
|
|
|
$
|
28,583
|
|
|
$
|
29,135
|
|
|
$
|
28,732
|
|
|
$
|
(1,215
|
)
|
|
|
(4
|
)%
|
Consumer and residential real estate
|
|
|
5,691
|
|
|
|
6,171
|
|
|
|
6,625
|
|
|
|
7,393
|
|
|
|
7,833
|
|
|
|
(2,142
|
)
|
|
|
(27
|
)
|
Total loan participation
interest income
|
|
|
33,208
|
|
|
|
34,046
|
|
|
|
35,208
|
|
|
|
36,528
|
|
|
|
36,565
|
|
|
|
(3,357
|
)
|
|
|
(9
|
)
|
Fees from loan participation interests
|
|
|
196
|
|
|
|
209
|
|
|
|
245
|
|
|
|
396
|
|
|
|
297
|
|
|
|
(101
|
)
|
|
|
(34
|
)
|
Interest on deposits with
the Bank
|
|
|
327
|
|
|
|
260
|
|
|
|
174
|
|
|
|
181
|
|
|
|
148
|
|
|
|
179
|
|
|
|
121
|
|
Total interest and fee income
|
|
|
33,731
|
|
|
|
34,515
|
|
|
|
35,627
|
|
|
|
37,105
|
|
|
|
37,010
|
|
|
|
(3,279
|
)
|
|
|
(9
|
)
|
Provision (reduction in allowance) for credit
losses
|
|
|
5,117
|
|
|
|
(11,257
|
)
|
|
|
(16,126
|
)
|
|
|
(7,352
|
)
|
|
|
(23,067
|
)
|
|
|
28,184
|
|
|
|
(122
|
)
|
Interest income after provision (reduction
in allowance) for credit losses
|
|
|
28,614
|
|
|
|
45,772
|
|
|
|
51,753
|
|
|
|
44,457
|
|
|
|
60,077
|
|
|
|
(31,463
|
)
|
|
|
(52
|
)
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
18
|
|
|
|
18
|
|
|
|
18
|
|
|
|
17
|
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
Collateral fees
|
|
|
291
|
|
|
|
299
|
|
|
|
326
|
|
|
|
353
|
|
|
|
371
|
|
|
|
(80
|
)
|
|
|
(22
|
)
|
Total noninterest income
|
|
|
309
|
|
|
|
317
|
|
|
|
344
|
|
|
|
370
|
|
|
|
389
|
|
|
|
(80
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing costs
|
|
|
1,528
|
|
|
|
1,579
|
|
|
|
1,645
|
|
|
|
1,689
|
|
|
|
1,732
|
|
|
|
(204
|
)
|
|
|
(12
|
)
|
Franchise tax
|
|
|
555
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
555
|
|
|
|
—
|
|
Other
|
|
|
240
|
|
|
|
189
|
|
|
|
159
|
|
|
|
181
|
|
|
|
175
|
|
|
|
65
|
|
|
|
37
|
|
Total noninterest expense
|
|
|
2,323
|
|
|
|
1,768
|
|
|
|
1,804
|
|
|
|
1,870
|
|
|
|
1,907
|
|
|
|
416
|
|
|
|
22
|
|
Income before provision for income taxes
|
|
$
|
26,600
|
|
|
$
|
44,321
|
|
|
$
|
50,293
|
|
|
$
|
42,957
|
|
|
$
|
58,559
|
|
|
$
|
7,336
|
|
|
|
17
|
|
Provision for income taxes
|
|
|
182
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,418
|
|
|
$
|
44,321
|
|
|
$
|
50,293
|
|
|
$
|
42,957
|
|
|
$
|
58,559
|
|
|
$
|
(32,141
|
)
|
|
|
(55
|
)%
|
Dividends declared on preferred shares
|
|
|
3,272
|
|
|
|
3,284
|
|
|
|
3,578
|
|
|
|
3,114
|
|
|
|
2,867
|
|
|
|
405
|
|
|
|
14
|
|
Net income applicable
to common shares
(1)
|
|
$
|
23,146
|
|
|
$
|
41,037
|
|
|
$
|
46,715
|
|
|
$
|
39,843
|
|
|
$
|
55,692
|
|
|
$
|
(32,546
|
)
|
|
|
(58
|
)%
|
(1)
All of HPCI's common stock is owned by HPCII and
Holdings and, therefore, net income per share is not presented.
The following table details the results
of operations for the nine-month periods ended September 30, 2012 and 2011. The $14.8 million decrease in net income for the first
nine-month period of 2012, compared to the same period in 2011, was primarily the result of a $6.4 million decrease in interest
and fee income and a $7.9 million decrease of the reduction in allowance for credit losses.
Table 2 - Selected Year to Date Income Statement Data
|
|
Nine Months Ended September 30,
|
|
|
Change
|
|
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
Interest and fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loan participation interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
83,975
|
|
|
$
|
83,862
|
|
|
$
|
113
|
|
|
|
—
|
%
|
Consumer and residential real estate
|
|
|
18,487
|
|
|
|
24,925
|
|
|
|
(6,438
|
)
|
|
|
(26
|
)
|
Total loan participation interest income
|
|
|
102,462
|
|
|
|
108,787
|
|
|
|
(6,325
|
)
|
|
|
(6
|
)
|
Fees from loan participation interests
|
|
|
650
|
|
|
|
986
|
|
|
|
(336
|
)
|
|
|
(34
|
)
|
Interest on deposits with the Bank
|
|
|
761
|
|
|
|
473
|
|
|
|
288
|
|
|
|
61
|
|
Total interest and fee income
|
|
|
103,873
|
|
|
|
110,246
|
|
|
|
(6,373
|
)
|
|
|
(6
|
)
|
Reduction in allowance for credit losses
|
|
|
(22,266
|
)
|
|
|
(30,177
|
)
|
|
|
7,911
|
|
|
|
(26
|
)
|
Interest income after reduction in allowance for credit losses
|
|
|
126,139
|
|
|
|
140,423
|
|
|
|
(14,284
|
)
|
|
|
(10
|
)
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
54
|
|
|
|
53
|
|
|
|
1
|
|
|
|
2
|
|
Collateral fees
|
|
|
916
|
|
|
|
1,189
|
|
|
|
(273
|
)
|
|
|
(23
|
)
|
Total noninterest income
|
|
|
970
|
|
|
|
1,242
|
|
|
|
(272
|
)
|
|
|
(22
|
)
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing costs
|
|
|
4,752
|
|
|
|
5,269
|
|
|
|
(517
|
)
|
|
|
(10
|
)
|
Franchise tax
|
|
|
555
|
|
|
|
—
|
|
|
|
555
|
|
|
|
N.R.
|
|
Other
|
|
|
588
|
|
|
|
525
|
|
|
|
63
|
|
|
|
12
|
|
Total noninterest expense
|
|
|
5,895
|
|
|
|
5,794
|
|
|
|
101
|
|
|
|
2
|
|
Income before provision for income taxes
|
|
|
121,214
|
|
|
|
135,871
|
|
|
|
(14,657
|
)
|
|
|
(11
|
)
|
Provision for income taxes
|
|
|
182
|
|
|
|
—
|
|
|
|
182
|
|
|
|
N.R.
|
|
Net income
|
|
$
|
121,032
|
|
|
$
|
135,871
|
|
|
$
|
(14,839
|
)
|
|
|
(11
|
)%
|
Dividends declared on preferred shares
|
|
|
10,134
|
|
|
|
8,892
|
|
|
|
1,242
|
|
|
|
14
|
|
Net income applicable to common shares
(1)
|
|
$
|
110,898
|
|
|
$
|
126,979
|
|
|
$
|
(16,081
|
)
|
|
|
(13
|
)%
|
(1)
All of HPCI's common stock is owned by HPCII and
Holdings therefore net income per share is not presented.
Interest and Fee Income
Our primary source of revenue is interest
and fee income on our participation interests in loans. At
September 30, 2012
and 2011,
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 tables below show our average balances,
interest and fee income, and yields for the three and nine-month periods ended September 30, 2012 and 2011:
Table 3 - Quarterly Interest and Fee Income
|
|
Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
(dollar amounts in millions)
|
|
Average
Balance
|
|
|
Income
(1)
|
|
|
Yield
|
|
|
Average
Balance
|
|
|
Income
(1)
|
|
|
Yield
|
|
Loan participation interests:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,036.8
|
|
|
$
|
27.7
|
|
|
|
3.63
|
%
|
|
$
|
3,104.7
|
|
|
$
|
29.0
|
|
|
|
3.71
|
%
|
Consumer and residential real estate
|
|
|
367.2
|
|
|
|
5.7
|
|
|
|
6.17
|
|
|
|
483.1
|
|
|
|
7.9
|
|
|
|
6.45
|
|
Total loan participation interests
|
|
|
3,404.0
|
|
|
|
33.4
|
|
|
|
3.90
|
|
|
|
3,587.8
|
|
|
|
36.9
|
|
|
|
4.08
|
|
Interest-bearing deposits in the Bank
|
|
|
511.7
|
|
|
|
0.3
|
|
|
|
0.25
|
|
|
|
193.1
|
|
|
|
0.1
|
|
|
|
0.30
|
|
Total
|
|
$
|
3,915.7
|
|
|
$
|
33.7
|
|
|
|
3.43
|
%
|
|
$
|
3,780.9
|
|
|
$
|
37.0
|
|
|
|
3.88
|
%
|
(1)
Income includes interest and fees.
(2)
For the purposes of this analysis, average balances
include nonaccrual loans.
Interest and fee income was $33.7 million for the 2012 third
quarter compared with $37.0 million for the year ago quarter. As shown in Table 3, the decrease in interest and fee income was
primarily the result of a decrease in yields on loan participation interests. In the 2012 third quarter, the loan yield decreased
18 basis points to 3.90%, while average loan participation interest balances decreased $183.8 million, or 5% compared to the year-ago
quarter.
Table 4 - Year-To-Date Interest and Fee Income
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
(dollar amounts in millions)
|
|
Average Balance
|
|
|
Income
(1)
|
|
|
Yield
|
|
|
Average Balance
|
|
|
Income
(1)
|
|
|
Yield
|
|
Loan participation interests: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,080.4
|
|
|
$
|
84.6
|
|
|
|
3.67
|
%
|
|
$
|
3,020.1
|
|
|
$
|
84.8
|
|
|
|
3.75
|
%
|
Consumer and residential real estate
|
|
|
393.1
|
|
|
|
18.5
|
|
|
|
6.29
|
|
|
|
514.2
|
|
|
|
25.0
|
|
|
|
6.50
|
|
Total loan participation interests
|
|
|
3,473.5
|
|
|
|
103.1
|
|
|
|
3.97
|
|
|
|
3,534.3
|
|
|
|
109.8
|
|
|
|
4.15
|
|
Interest-bearing deposits in the Bank
|
|
|
399.9
|
|
|
|
0.8
|
|
|
|
0.25
|
|
|
|
208.0
|
|
|
|
0.4
|
|
|
|
0.30
|
|
Total
|
|
$
|
3,873.4
|
|
|
$
|
103.9
|
|
|
|
3.58
|
%
|
|
$
|
3,742.3
|
|
|
$
|
110.2
|
|
|
|
3.94
|
%
|
(1)
Income includes interest and fees.
(2)
For the purposes of this analysis, average balances
include nonaccrual loans.
For the nine-month periods ended September
30, 2012 and 2011, interest and fee income was $103.9 million and $110.2 million, respectively. As shown in Table 4, the decrease
in interest and fee income was primarily the result of a decrease in yields on loan participation interests. In the first nine-month
period of 2012, the loan yield decreased 18 basis points to 3.97% compared to the year-ago period, while average loan participation
interest balances decreased $60.8 million, or 2% compared to the year-ago period.
At September 30, 2012, and December 31,
2011, approximately 78% and 75%, respectively, of the portfolio was comprised of variable interest rate loan participations.
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 our estimate
of inherent probable losses in the loan portfolio. Loan participations are acquired net of related ALPL. As a result, this ALPL
is transferred to HPCI from the Bank and is reflected as ALPL acquired, rather than HPCI having to record a provision expense for
ALPL. If credit quality deteriorates more than implied by the ALPL acquired, a provision to the ALPL is made. If credit quality
performance is better than implied by the ALPL acquired, an ALPL reduction is recorded. 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 impact to provision for credit losses
relating to Chapter 7 bankrputcy consumer and residential real estate loan participation interests for the three-month and nine-month
periods ended September 30, 2012, was $4.3 million. Given the absolute low level of the provision for credit losses and the uncertain
and uneven nature of the economic recovery, some quarterly volatility is expected.
See ACL discussion within the Credit Quality
section.
Noninterest Income and Noninterest Expense
Noninterest
income for the 2012 third quarter was $0.3 million compared with $0.4 million in the year-ago quarter. Noninterest income for the
nine-month period ended September 30, 2012 was $1.0 million, compared with $1.2 million in the year-ago period. Noninterest income
includes fees from the Bank for use of our assets as collateral for the Bank’s advances from the FHLB.
For the
2012
third quarter
, these fees totaled
$0.3 million, compared with $0.4 million for the prior year
quarter. For the nine-month periods ended September 30, 2012 and 2011, these fees totaled $0.9 million and $1.2 million, respectively.
See Note 6 to the Unaudited Condensed Financial Statements included in this report for more information regarding the use of our
assets as collateral for the Bank’s advances from the FHLB.
Noninterest expense for the
2012
third quarter
was $2.3 million compared with $1.9 million in the year-ago quarter. For the nine-month periods ended September
30, 2012 and 2011, noninterest expense was $5.9 million and $5.8 million, respectively.
HPCI is included in certain of Huntington’s
unitary franchise tax returns. On March 8, 2012, HPCI’s board of directors adopted Huntington’s Policy Statement on
Intercorporate State Tax Allocation, dated January 1, 2012. As a result, beginning in 2012, Huntington’s unitary franchise
tax provision is allocated to each member of the unitary filing group based upon the filing group’s effective tax rate. Under
the intercompany state tax allocation agreement with Huntington, we will provide and remit state franchise tax to or receive a
state franchise tax benefit from the tax paying member.
For the
2012
third quarter
, servicing costs amounted to $1.5 million, compared with $1.7 million for the year-ago quarter. The servicing
costs for the nine-month periods ended September 30, 2012 and 2011, totaled $4.8 million and $5.3 million, respectively. The decrease
in the servicing costs from the comparable periods reflected lower residential real estate and consumer loan balances which have
higher servicing costs. The annual servicing rates the Bank charged with respect to outstanding principal balances in
2012
and
2011
were:
|
|
January 1, 2011
|
|
|
|
through
|
|
|
|
September 30, 2012
|
|
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 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, 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 2012, 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 2013.
Provision for 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 federal income taxes. Thus, we had no provision for federal income taxes for three-month and nine-month periods ended September
30, 2012 and 2011.
HPCI is included in certain of Huntington’s
unitary and combined state income tax returns. On March 8, 2012, HPCI’s board of directors adopted Huntington’s Policy
Statement on Intercorporate State Tax Allocation, dated January 1, 2012. As a result, beginning in 2012, Huntington’s unitary
and combined state income tax provision is allocated to each member of the unitary and combined filing group’s based upon
the filing group’s effective tax rate. Under the intercompany state tax allocation agreement with Huntington, we will provide
and remit state income taxes to or receive a state income tax benefit from the tax paying member. For the nine-month period ended
September 30, 2012, provision for state income taxes was $0.2 million. For the nine-month period ended September 30, 2011, there
was no provision for state income taxes.
RISK MANAGEMENT AND CAPITAL
Risk
awareness, identification and assessment, reporting, and active management are key elements to overall risk management. The Bank
manages risk to an aggregate moderate-to-low risk profile strategy 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
(This section should be read in conjunction with Note 3 of
Notes to the Unaudited Condensed Financial Statements.)
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.
Under the Agreements, the Bank may, in
accordance with our guidelines, dispose of any underlying loan participation interest 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 loan participation
interest 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 September 30, 2012, CRE loan participation
interests were 90% of total loan participation interests
compared with 88% at
December 31, 2011
.
Total consumer and residential real estate loan participation interests were 10% of total
loan participation
interests
at September 30, 2012
, compared with 12% at
December 31, 2011
.
The change in the portfolio mix over the past nine months reflects not purchasing any new consumer and residential real estate
loan participation interests during this period.
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.
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 with 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.
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 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 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. The risk ratings are
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 Unaudited Condensed 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 September 30, 2012, were as follows:
Table 5 - Commercial Real Estate Loan Participation Interests
by Property Type and Borrower Location
|
|
September 30, 2012
|
|
(dollar amounts in thousands)
|
|
Ohio
|
|
|
Michigan
|
|
|
Indiana
|
|
|
Pennsylvania
|
|
|
Kentucky
|
|
|
Other
|
|
|
Total Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and warehouse
|
|
$
|
418,306
|
|
|
$
|
201,841
|
|
|
$
|
41,842
|
|
|
$
|
16,928
|
|
|
$
|
15,784
|
|
|
$
|
16,907
|
|
|
$
|
711,608
|
|
|
|
24
|
%
|
Retail properties
|
|
|
367,494
|
|
|
|
95,284
|
|
|
|
40,611
|
|
|
|
26,234
|
|
|
|
11,600
|
|
|
|
62,282
|
|
|
|
603,505
|
|
|
|
20
|
|
Office
|
|
|
297,772
|
|
|
|
81,409
|
|
|
|
14,601
|
|
|
|
71,564
|
|
|
|
7,915
|
|
|
|
17,103
|
|
|
|
490,364
|
|
|
|
16
|
|
Multi family
|
|
|
131,894
|
|
|
|
27,372
|
|
|
|
60,247
|
|
|
|
12,941
|
|
|
|
19,355
|
|
|
|
15,371
|
|
|
|
267,180
|
|
|
|
9
|
|
Other commercial real estate
|
|
|
579,670
|
|
|
|
212,744
|
|
|
|
33,707
|
|
|
|
34,582
|
|
|
|
35,609
|
|
|
|
41,700
|
|
|
|
938,012
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,795,136
|
|
|
$
|
618,650
|
|
|
$
|
191,008
|
|
|
$
|
162,249
|
|
|
$
|
90,263
|
|
|
$
|
153,363
|
|
|
$
|
3,010,669
|
|
|
|
100
|
%
|
% of total portfolio
|
|
|
60
|
%
|
|
|
21
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
100
|
%
|
|
|
|
|
As shown in
the table above, we had $3.0 billion of CRE loan participation interests at September 30, 2012. 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 and Residential Real Estate 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.
The consumer and residential real estate portfolio is primarily located throughout the Bank’s
geographic footprint.
Effective with the 2012 third quarter,
certain loan participation interests within the consumer portfolio were identified that met the definition of collateral dependent
as defined by regulatory guidance as the borrowers had not reaffirmed their debt discharged in a Chapter 7 bankruptcy filing.
The bankruptcy court’s discharge of the borrower’s discharged debt is considered a concession when the debt is not
reaffirmed, and as such, the loan participation interests were classified as TDRs, placed on nonaccrual status, and written down
to collateral value, less anticipated selling costs. Previously, the charge-off was recorded when the loan reached 60-days
past due and these loan participation interests were not classified as TDRs. Many of these loan participation interests were
current, with many borrowers having paid according to the contractual terms for several years. This change increased NCOs
by $3.4 million, NALs by $0.8 million, TDRs by $2.3 million, and provision for credit losses by $4.3 million across the consumer
and residential real estate portfolio. The appropriate accounting treatment of subsequent customer payments on these Chapter 7
bankruptcy NPAs is being evaluated.
Credit Quality
Credit quality performance during the first
nine-month period of 2012, reflected overall continued improvement. NPAs and commercial Criticized loan participation interests
declined 37% and 55%, respectively, compared to December 31, 2011 and NCOs during the first nine-month period of 2012 were lower
than 2011 levels. Also, the ACL coverage ratio of NPAs increased to 195% at September 30, 2012, compared with 164% at December
31, 2011. Although overall credit quality improved, given the uncertain and uneven nature of the economic recovery and the current
relatively absolute low levels of NCOs, NPAs, and the ACL, some quarterly volatility is expected related to credit quality performance.
NPAs
NPAs consist
of loan 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
loan participation interests are placed on nonaccrual status at 90-days past due. Underlying first-lien loan participation interests
in consumer and
residential real estate loans are placed on nonaccrual status at 150-days past due. Junior-lien loan participation
interests in consumer and residential real estate loans are placed on nonaccrual status at the earlier of 120-days past due or
when the related first-lien loan has been identified as nonaccrual. When a loan with a discharged non-reaffirmed debt in a Chapter
7 bankruptcy filing is identified and the loan is determined to be collateral dependent, the consumer loan participation interest
is placed on nonaccrual status.
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 collectability 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 quarters:
Table 6 - Quarterly Nonperforming Assets
|
|
2012
|
|
|
2011
|
|
(dollar amounts in thousands)
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participation interest in nonaccrual assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
24,965
|
|
|
$
|
22,764
|
|
|
$
|
31,714
|
|
|
$
|
45,485
|
|
|
$
|
54,150
|
|
Consumer and residential
real estate
|
|
|
7,585
|
|
|
|
5,217
|
|
|
|
5,681
|
|
|
|
6,097
|
|
|
|
6,706
|
|
Total nonperforming assets
|
|
$
|
32,550
|
|
|
$
|
27,981
|
|
|
$
|
37,395
|
|
|
$
|
51,582
|
|
|
$
|
60,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loan participation interests past
due 90 days or more
|
|
$
|
2,767
|
|
|
$
|
4,845
|
|
|
$
|
2,318
|
|
|
$
|
4,208
|
|
|
$
|
3,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPAs as a % of total loan participation interests
|
|
|
0.97
|
%
|
|
|
0.82
|
%
|
|
|
1.07
|
%
|
|
|
1.44
|
%
|
|
|
1.71
|
%
|
ALPL as a % of NPAs
|
|
|
191
|
|
|
|
220
|
|
|
|
189
|
|
|
|
162
|
|
|
|
153
|
|
ACL as a % of NPAs
|
|
|
195
|
|
|
|
223
|
|
|
|
191
|
|
|
|
164
|
|
|
|
154
|
|
The $19.0 million, or 37%, decrease in
total NPAs compared with December 31, 2011, was centered in the commercial real estate portfolio and reflects the impacts of NCO
and problem credit resolutions, the sale of one large CRE NPA, and the repayment of another large CRE NPA. This decrease was partially
offset by an increase in the consumer and residential real estate portfolio reflecting the impact of Chapter 7 bankruptcy loan
participation interests as well as continued softness 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 interests portfolio: the ALPL and the AULPC. When summed
together, these reserves constitute the total ACL. Additions to the ALPL and AULPC result primarily from the transfer of the ACL
associated with purchased loan participation interests at Huntington’s carrying value between entities under common control.
The following table shows
the activity in HPCI’s ALPL and AULPC for the last five quarters ended September 30, 2012, and for the nine-month periods
ended September 30, 2012 and 2011:
Table 7 - Allowance for Credit Loss Activity
|
|
2012
|
|
|
2011
|
|
(dollar amounts in thousands)
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL balance, beginning of period
|
|
$
|
61,509
|
|
|
$
|
70,722
|
|
|
$
|
83,772
|
|
|
$
|
92,899
|
|
|
$
|
112,514
|
|
Allowance of loan participation interests acquired
|
|
|
5,787
|
|
|
|
6,675
|
|
|
|
4,942
|
|
|
|
8,292
|
|
|
|
12,705
|
|
Net charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
(3,998
|
)
|
|
|
(2,970
|
)
|
|
|
(148
|
)
|
|
|
(8,113
|
)
|
|
|
(6,251
|
)
|
Consumer and residential real estate
|
|
|
(5,927
|
)
|
|
|
(1,609
|
)
|
|
|
(1,908
|
)
|
|
|
(1,919
|
)
|
|
|
(2,836
|
)
|
Total net charge-offs
|
|
|
(9,925
|
)
|
|
|
(4,579
|
)
|
|
|
(2,056
|
)
|
|
|
(10,032
|
)
|
|
|
(9,087
|
)
|
Provision (reduction in allowance) for loan participation interest losses
|
|
|
4,692
|
|
|
|
(11,309
|
)
|
|
|
(15,936
|
)
|
|
|
(7,387
|
)
|
|
|
(23,233
|
)
|
ALPL balance, end of period
|
|
$
|
62,063
|
|
|
$
|
61,509
|
|
|
$
|
70,722
|
|
|
$
|
83,772
|
|
|
$
|
92,899
|
|
AULPC balance, beginning of period
|
|
$
|
897
|
|
|
$
|
845
|
|
|
$
|
1,035
|
|
|
$
|
1,000
|
|
|
$
|
834
|
|
Provision (reduction in allowance) for unfunded loan participation commitment losses
|
|
|
425
|
|
|
|
52
|
|
|
|
(190
|
)
|
|
|
35
|
|
|
|
166
|
|
AULPC balance, end of period
|
|
$
|
1,322
|
|
|
$
|
897
|
|
|
$
|
845
|
|
|
$
|
1,035
|
|
|
$
|
1,000
|
|
Total allowance for credit losses, end of period
|
|
$
|
63,385
|
|
|
$
|
62,406
|
|
|
$
|
71,567
|
|
|
$
|
84,807
|
|
|
$
|
93,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALPL as a % of total loan participation interests
|
|
|
1.85
|
%
|
|
|
1.79
|
%
|
|
|
2.03
|
%
|
|
|
2.34
|
%
|
|
|
2.61
|
%
|
ACL as a % of total loan participation interests
|
|
|
1.88
|
|
|
|
1.82
|
|
|
|
2.05
|
|
|
|
2.37
|
|
|
|
2.64
|
|
|
|
Nine Months Ended September 30,
|
|
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
ALPL balance, beginning of period
|
|
$
|
83,772
|
|
|
$
|
110,103
|
|
Allowance of loan participation interests acquired
|
|
|
17,404
|
|
|
|
37,913
|
|
Net charge-offs:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
(7,116
|
)
|
|
|
(18,190
|
)
|
Consumer and residential real estate
|
|
|
(9,444
|
)
|
|
|
(7,348
|
)
|
Total net charge-offs
|
|
|
(16,560
|
)
|
|
|
(25,538
|
)
|
Provision for (reduction in) ALPL
|
|
|
(22,553
|
)
|
|
|
(29,579
|
)
|
ALPL balance, end of period
|
|
$
|
62,063
|
|
|
$
|
92,899
|
|
AULPC balance, beginning of period
|
|
$
|
1,035
|
|
|
$
|
1,598
|
|
Provision for (reduction in) AULPC
|
|
|
287
|
|
|
|
(598
|
)
|
AULPC balance, end of period
|
|
$
|
1,322
|
|
|
$
|
1,000
|
|
Total allowance for credit losses, end of period
|
|
$
|
63,385
|
|
|
$
|
93,899
|
|
The ACL decreased $21.4 million to $63.4
million at September 30, 2012, compared with $84.8 million at December 31, 2011. The decrease in the ACL was the result of an improvement
in credit quality in the CRE portfolio, reflecting lower levels of NPAs, NCOs, and commercial Criticized loan participation interests.
The ACL to total loan participation interests
declined to 1.88% at September 30, 2012, compared to 2.37% at December 31, 2011, and it is believed the decline in the ratio is
appropriate given the continued improvement in the risk profile of the loan participation interest portfolio. However, the overall
economic conditions improved only slightly during the first nine-month period of 2012. The overall economic conditions have shown
some recent improvement, but risks to a full recovery remain, including the European economic instability, 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 a continued high unemployment rate and the concern around 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. Given the combination of these noted factors, Management believes that our ACL is appropriate and its coverage
level is reflective of the quality of the 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. Additionally, discharged, collateral dependent non-reaffirmed
debt in Chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value, less selling costs.
CRE loan participation interests are either
charged-off or written down to net realizable value at 90-days past due. First-lien consumer and residential real estate loan participation
interests are charged-off to the estimated fair value of the collateral, less anticipated selling costs, at 150-days past due.
Junior-lien consumer and residential real estate loan participation interests are charged-off to the estimated fair value of the
collateral, less anticipated selling costs, at 120-days past due.
The table below reflects NCO detail for
each of the last five quarters and for the nine-month periods ended September 30, 2012 and 2011:
Table 8 - Net Charge-offs (1)
|
|
2012
|
|
|
2011
|
|
(dollar amounts in thousands)
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,998
|
|
|
|
0.53
|
%
|
|
$
|
2,970
|
|
|
|
0.39
|
%
|
|
$
|
148
|
|
|
|
0.02
|
%
|
|
$
|
8,113
|
|
|
|
1.03
|
%
|
|
$
|
6,251
|
|
|
|
0.80
|
%
|
Consumer and residential real estate
|
|
|
5,927
|
|
|
|
6.46
|
|
|
|
1,609
|
|
|
|
1.64
|
|
|
|
1,908
|
|
|
|
1.81
|
|
|
|
1,919
|
|
|
|
1.68
|
|
|
|
2,836
|
|
|
|
2.33
|
|
Total net charge-offs
|
|
$
|
9,925
|
|
|
|
1.17
|
%
|
|
$
|
4,579
|
|
|
|
0.53
|
%
|
|
$
|
2,056
|
|
|
|
0.23
|
%
|
|
$
|
10,032
|
|
|
|
1.11
|
%
|
|
$
|
9,087
|
|
|
|
1.00
|
%
|
|
|
Nine months ended September 30,
|
|
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
7,116
|
|
|
|
0.31
|
%
|
|
$
|
18,190
|
|
|
|
0.81
|
%
|
Consumer and residential real estate
|
|
|
9,444
|
|
|
|
3.20
|
|
|
|
7,348
|
|
|
|
1.91
|
|
Total net charge-offs
|
|
$
|
16,560
|
|
|
|
0.64
|
%
|
|
$
|
25,538
|
|
|
|
0.97
|
%
|
(1) Percentages represent the annualized percentage of related
average loan participation interests.
2012 third quarter NCOs increased $5.3
million, or 117%, compared to the prior quarter, however declined $9.0 million, or 35%, compared to the first nine-month period
of 2011. The increase from the prior quarter primarily reflected $3.4 million NCOs associated with Chapter 7 bankruptcy loan participation
interests as well as an increase in CRE NCOs primarily reflecting a $3.0 million charge-off on one CRE participation interest.
The decline compared to the year-ago period primarily reflected a decrease in CRE NCOs as a result of improvement in the underlying
credit quality of the portfolio. We expect some quarterly volatility related to NCOs given the absolute low level and the uncertain
and uneven nature of the economic recovery.
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.
Interest Rate Risk
Huntington conducts its monthly interest
rate risk management on a centralized basis and does not manage our interest rate risk separately. We use two approaches to model
interest rate risk: income simulation (known as ISE analysis) and economic value analysis (known as EVE analysis). We use ISE to
measure the sensitivity of forecasted interest sensitive earnings to changes in market rates over a one-year period. We use EVE
to measure the sensitivity of period-end assets and liabilities to changes in market interest rates. We measure EVE on a net tangible
equity basis, excluding ALPL and AULPC reserves. The models used for these measurements assume, among other things, no new loan
participation volume. Additionally, the models used for both ISE and EVE consider prepayment speeds on mortgage loans and consumer
installment loans.
In the following, we discuss the impact
on earnings and equity from changes in interest rates. In recent quarters, due to the absolute low levels of interest rates, the
analysis of the impact from a decline in rates has become less meaningful. The reason for this is that current interest rates are
lower than the modeled impact (usually a gradual or sudden decline in interest rates of 100 and 200 basis points). Accordingly,
where appropriate, we use rate floors in the analysis to ensure that modeled rates do not go below 0%.
The ISE analysis used in the following
table reflects the analysis used monthly by management. It models gradual +/-200 basis point parallel shifts in market interest
rates over the next one-year period, beyond the interest rate change implied by the forward yield curve. We use rate floors in
the analysis so that market interest rates will not fall below 0% for the -200 basis point scenario. The table below shows the
results of these scenarios as of September 30, 2012, and December 31, 2011. The interest income sensitivity reported as of September
30, 2012, for the +200 basis points scenario shows a more asset sensitive interest rate risk position compared with December 31,
2011.
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)
|
|
|
+200
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
-4.3
|
|
|
$
|
18.0
|
|
Percentage change
|
|
|
-4.6
|
%
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
-8.0
|
|
|
$
|
17.4
|
|
Percentage change
|
|
|
-7.7
|
%
|
|
|
16.7
|
%
|
(1) The gradual 200 basis point decline in market rates over
the next 12-month period assumes market interest rates would reach a floor and not fall below 0%.
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 September 30, 2012 results
compared with
December 31,
2011. The economic value sensitivity risk reported as of September 30, 2012, for the +200 basis points scenario shows a lower long-term
liability sensitive position compared with December 31, 2011.
The EVE at risk reported at September 30,
2012, shows that as interest rates increase (decrease) immediately, the value of the net equity position will decrease (increase),
due to the relatively long duration of loan participation interests. When interest rates rise, assets lose economic value; the
longer the duration, the greater the value lost. The opposite is true when interest rates fall. The results for the -200 basis
point scenarios are less meaningful because in many cases market rates are already lower than the amount of the interest rate shock.
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
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
Fair value of loan participation interests
|
|
$
|
4.7
|
|
|
$
|
-26.3
|
|
Percentage change
|
|
|
0.1
|
%
|
|
|
-0.7
|
%
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Fair value of loan participation interests
|
|
$
|
4.3
|
|
|
$
|
-34.1
|
|
Percentage change
|
|
|
0.1
|
%
|
|
|
-0.9
|
%
|
(1) The gradual 200 basis point decline in market rates assumes
market interest rates would reach a floor and not fall below 0%.
Off-Balance Sheet Arrangements
Under the terms of the
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 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 September 30, 2012 and December 31, 2011, HPCI’s unfunded loan participation
interest commitments totaled $332.8 million and $233.4 million, respectively. It is expected that the existing cash balances and
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
September 30, 2012 and December 31, 2011, we maintained cash and interest-bearing balances with the Bank totaling $542.5 million
and $229.0 million, respectively
. We maintain and transact all of our cash activity with the Bank and may invest available
funds in Eurodollar deposits with the Bank for a term of not more than 30 days at market rates.
At
September
30, 2012
, we had no material liabilities or contractual obligations, other than unfunded loan participation interest commitments
of $332.8 million, with a weighted average remaining maturity of 1.90 years. In addition to anticipated cash flows, as noted above,
we have cash and interest bearing balances with the bank totaling $542.5 million to supplement the funding of these liabilities
and contractual commitments.
As of
September
30, 2012
and
December 31, 2011,
shareholders’ equity was $3.9 billion and $3.8 billion,
respectively.
Regulatory approval is
required prior to the Bank’s declaration of any dividends in excess of available retained earnings. Based on a regulatory
dividend limitation, the Bank could not have declared and paid a dividend at
September 30, 2012,
without regulatory approval. As a subsidiary of the Bank, we are also restricted from declaring or paying dividends without regulatory
approval. The OCC has approved the payment of dividends on our Class A, B, and C Preferred securities throughout 2011 and through
the 2012 fourth quarter. 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 Class A, B, and C Preferred dividends.
Regulatory capital ratios are the primary
metrics used by regulators in assessing the safety and soundness of banks. At September 30, 2012, Huntington and the Bank met all
capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions.
The capital ratios for Huntington and the Bank at the end of the most recent five quarters are as follows:
Table 11 - Regulatory Capital Ratios
|
|
2012
|
|
|
2011
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
Tier 1 leverage ratio (5.00% Well-capitalized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington
|
|
|
10.29
|
%
|
|
|
10.34
|
%
|
|
|
10.55
|
%
|
|
|
10.28
|
%
|
|
|
10.24
|
%
|
Bank
|
|
|
8.68
|
|
|
|
8.42
|
|
|
|
8.24
|
|
|
|
7.89
|
|
|
|
7.79
|
|
Tier 1 risk-based capital ratio (6.00% Well-capitalized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington
|
|
|
11.88
|
|
|
|
11.93
|
|
|
|
12.22
|
|
|
|
12.11
|
|
|
|
12.37
|
|
Bank
|
|
|
10.03
|
|
|
|
9.70
|
|
|
|
9.54
|
|
|
|
9.30
|
|
|
|
9.40
|
|
Total risk-based capital ratio (10.00% Well-capitalized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington
|
|
|
14.36
|
|
|
|
14.42
|
|
|
|
14.76
|
|
|
|
14.77
|
|
|
|
15.11
|
|
Bank
|
|
|
12.52
|
|
|
|
12.41
|
|
|
|
12.49
|
|
|
|
12.60
|
|
|
|
13.54
|
|
In June 2012, the FRB, OCC, and FDIC (collectively,
the Agencies) each issued NPRs that would revise and replace the Agencies’ current capital rules to align with the BASEL
III capital standards and meet certain requirements of the Dodd-Frank Act. Certain requirements of the NPRs would establish more
restrictive capital definitions, higher risk-weightings for certain asset classes, capital buffers, and higher minimum capital
ratios.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Quantitative and qualitative disclosures
for the current period can be found in the Market Risk section of this report, which includes material changes in market risk exposures
from disclosures presented in HPCI's Form 10-K.
Item 4. Controls and Procedures
HPCI maintains disclosure controls and
procedures designed to ensure that the information disclosed in its filings with the Securities and Exchange Commission is recorded,
processed, summarized, and reported appropriately and on a timely basis.
HPCI's management, with the
participation of its President (principal executive officer) and the Vice President (principal financial officer), evaluated the
effectiveness of HPCI’s 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.
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 September 30, 2012, to which this report relates, that have materially affected, or are reasonably likely to
materially affect, HPCI's internal control over financial reporting.
PART II. OTHER INFORMATION
In accordance with the instructions to
Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously
reported.
Item 1A: Risk Factors
Information required by this item is set
forth in Part 1 Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report
and incorporated herein by reference.
Item 6. Exhibits
This report incorporates by reference the
documents listed below that HPCI has previously filed with the SEC. The SEC allows incorporation by reference in this document.
The information incorporated by reference is considered to be a part of this document, except for any information that is superseded
by information that is included directly in this document.
This information 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 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
. The reports and other information filed by HPCI with the SEC are also available
at Huntington’s Internet web site. The address of the site is
http://www.huntington.com
. Except as specifically incorporated
by reference into this Quarterly Report on Form 10-Q, information on those web sites is not part of this report. Reports, proxy
statements, and other information about HPCI can also be inspected at the offices of the NASDAQ National Market at 33 Whitehall
Street, New York, New York.
|
3.1.
|
Second Amended and Restated Articles of Incorporation (previously filed as Exhibit 3.1 to Current Report on Form 8-K (File
No. 000-33243), 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.
|
|
31.1.
|
Rule 13a – 14(a) Certification – President (chief
executive officer).
|
|
31.2.
|
Rule 13a – 14(a) Certification – Vice President
(chief financial officer).
|
|
32.1.
|
Section 1350 Certification – President (chief executive
officer).
|
|
32.2.
|
Section 1350 Certification – Vice President (chief financial
officer).
|
|
99.1.
|
Unaudited Condensed Consolidated Financial Statements of Huntington
Bancshares Incorporated as of and for the nine-month periods ended
September 30, 2012 and 2011.
|
|
101**
|
The following material from HPCI’s Form 10-Q Report for the quarterly period ended September 30, 2012, formatted in XBRL:
(i) Unaudited Condensed Balance Sheets, (ii) Unaudited Condensed Statements of Comprehensive Income, (iii) Unaudited Condensed
Statements of Changes in Shareholders’ Equity, (iv) Unaudited Condensed Statements of Cash Flows, and (v) the Notes to Unaudited
Condensed Financial Statements.
|
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 13th day of November, 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)
|
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