Huntington National Bank 2008 Annual Report Download - page 44

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inherent in these types of loans. Franklin originated nonprime loans through its wholly owned subsidiary, Tribeca Lending Corp.,
and has generally held for investment the loans acquired and a significant portion of the loans originated.
Loans to Franklin are funded by a bank group, of which we are the lead bank and largest participant. The loans participated to
other banks have no recourse to Huntington. The term debt exposure is secured by approximately 30,000 individual first- and
second-priority lien residential mortgages. In addition, pursuant to an exclusive lockbox arrangement, we receive substantially all
payments made to Franklin on these individual mortgages.
Through the 2008 third quarter, the Franklin relationship continued to perform and accrue interest. While the cash flow generated
by the underlying collateral declined slightly, it continued to exceed the requirements of the restructuring agreement. However,
during the 2008 fourth quarter, the cash flows deteriorated significantly, reflecting a much more rapid than expected deterioration
in the economy. Principal payments continued to contract in the Franklin first mortgage portfolios. In addition, interest collections
declined in the Franklin second mortgage portfolios as delinquencies increased, and proceeds from the sale of foreclosed properties
decreased. These factors, coupled with the fact that the severity of the economic downturn increased in the 2008 fourth quarter
and the likelihood that these trends will continue for the foreseeable future, resulted in a significant deterioration in our
expectations of future cash flows from Franklin’s mortgage loans, which represent the collateral for our loans. As such, the change
in our estimates of the future expected cash flows resulted in the following actions taken during the 2008 fourth quarter:
(a) $423.3 million of our loans to Franklin were charged-off, (b) $9.0 million of interest was reversed as the remaining
$650.2 million of loans were placed on nonaccrual status, (c) $7.3 million of interest swap exposure was written off, and
(d) $438.0 million of provision expense was taken to replenish and increase the remaining specific loan loss reserve.
As a result of these actions, at December 31, 2008, our total loans outstanding to Franklin were $650.2 million, down $538.2 million
from $1,188.4 million at December 31, 2007. As mentioned previously, the outstanding $650.2 million was placed on nonaccrual
status at the end of 2008.
The following table details our loan relationship with Franklin as of December 31, 2008, and changes from December 31, 2007:
Table 20 — Commercial Loans to Franklin
(in thousands) Franklin Tribeca Subtotal
Participated
to others
Previously
charged off
(1)
Huntington
Total
At December 31, 2008
Variable rate, term loan (Facility A) $ 502,436 $ 355,451 $ 857,887 $(144,789) $ (62,873) $650,225
Variable rate, subordinated term loan (Facility B) 314,013 96,226 410,239 (68,149) (342,090) —
Fixed rate, junior subordinated term loan (Facility C) 125,000 — 125,000 (8,224) (116,776) —
Line of credit facility 1,958 — 1,958 — (1,958) —
Other variable rate term loans 40,937 — 40,937 (20,468) (20,469) —
Subtotal 984,344 451,677 1,436,021 $(241,630) $(544,166) $650,225
Participated to others (150,271) (91,359) (241,630)
Total principal owed to Huntington 834,073 360,318 1,194,391
Previously charged off
(1)
(435,097) (109,069) (544,166)
Total book value of loans $ 398,976 $ 251,249 $ 650,225
(1) Includes $4.1 million of interest payments received and applied to reduce the recorded balance.
Our specific ALLL for the Franklin portfolio was $130.0 million, up from $115.3 million at December 31, 2007, and represented
20% of the loan’s book value. Subtracting the specific reserve from total loans outstanding, our total net exposure to Franklin at
December 31, 2008, was $520.2 million. The table below details our probability-of-default and recovery-after-default performance
assumptions for estimating anticipated cash flows from the Franklin loans that were used to determine the appropriate amount of
specific ALLL for the Franklin loans. The calculation of our specific ALLL for the Franklin portfolio is dependent, among other
factors, on the assumptions provided in the table, as well as the current one-month LIBOR rate on the underlying loans to
Franklin. As the one-month LIBOR rate increases, the specific ALLL for the Franklin portfolio could also increase.
Table 21 — Franklin Performance Assumptions
UPB
(1)
Probability of Default Recovery After Default
December 31, 2008
Huntington collateral performance assumptions
Purchased 2
nd
mortgages $ 808 million 90% 2%
Purchased 1
st
mortgages 449 million 75 45
Tribeca originated 1st mortgages 448 million 80 60
Total underlying collateral $1,705 million
(1) As of September 30, 2008, unpaid principal balance (“UPB”) of mortgage collateral supporting total bank debt, including OREO. Data was obtained from the September 30, 2008, 10-Q filing of Franklin.
42
Management’s Discussion and Analysis Huntington Bancshares Incorporated